Weekend Linkfest

* Posner and Becker on Intelligence Doping

* S&P/Case-Shiller Home Price Index Falls Record 10.7% ~~ Interesting point in this article. Lehman predicts another 10% slide in home prices, predicts new home sales bottom in the middle of this year, existing home sales and housing starts bottom in the third quarter

* Peter Bernstein on The Shape of the Future (via John Mauldin) ~~ This is the same Bernstein that wrote Against the Gods

* Some Cruel Context on the US Housing Market - FT Alphaville

* Walmart and Chicago - Chicago Tribune

* Obama and Big Oil - QandO Blog

I am in Chicago for the time being. After a stop at Notre Dame on Monday I should be back Tuesday. Then I'm off to Dallas for 4 days. I should have an update post on my online brokerage situation very soon.

Is this a Bear Market?

I find this chart striking considering the tremendous negative sentiment coming from all angles. Wouldn't most people argue that the U.S economic condition is worse than abroad? Why is the Fed lowering interest rates at the fastest pace in its history while the ECB has kept rates at current levels? What does the bond market know that the stock market doesn't? These are all extremely interesting questions.

The graph comes courtesy of Bespoke Investment Group and they make the interesting comment that decoupling indeed seems to be playing out but in reverse.

Here are my thoughts:

1. We are in a consolidation/bounce phase of a longer-term downtrend in U.S. equities

2. The ECB will be forced to lower interest rates as recoupling with the U.S. becomes apparent. This is USD positive. Add that to the fact that inflation concerns (one of the main drivers of the USD slide) are overblown. Deflation is a bigger issue in the next 2 to 3 years as housing prices fall 25% from their highs. I haven't double checked but I believe we have seen housing prices fall 11% thus far.

3. China, India, and Hong Kong clearly have had hot, fast money that left. What about Germany, France, Japan, and the U.K.? Why are their markets down significantly more than ours when they are in a comparitively better economic situation?

Interesting questions...Interesting times...

Capital Acquired!

I spent the morning doing administrative work for the newly acquired $25k I will be investing for my father. I also decided today to rollover my Roth IRA from PNC Investments into my own actively managed account. Those savings amount to about $9k.

My Roth IRA rollover has been approved and as of now I'll have to wait a couple days for the transfer of funds to take place. I had to go to PNC Bank today and liquidate the three mutual funds I had my savings invested in. I then sent an authorization form to my new discount broker allowing them to acquire my PNC funds. The remainder of the process should take 3 or 4 days.

My account for the Roth IRA will be a vanilla cash account. Regulations do not allow shorting so I plan on rarely making trades for this account. I'll mostly utilize ETF's and have a very value, long-term oriented approach.


And then there is the $25k investment account. I finished my application today with the same online broker I chose for my Roth IRA. I discussed the possibility of opening this account up with a separate online broker but decided against it after reading online reviews and talking to friends to actively manage money. This account is a margin account with leverage power of 4 to 1 for common stocks and 50 to 1 for foreign exchange. While I feel it is unlikely I utilize margin often I can forsee some potential uses, especially in foreign exchange. You also need a margin account to short stocks and buy puts.


I am excited to start trading. I waited for what seemed like forever telling the CEO of my former investment fund that stocks were expensive and I'd rather short than go long. I waited patiently. Now my worry is that opportunities are passing me by. Take for instance the following:

Last spring I mentioned to a friend of mine who trades equity options for a major Wall Street bank that buying VIX futures might make a good trade. Volatility was at historical lows; the VIX was trading at 12. While he agreed that it might make a good trade he said that VIX futures weren't actively traded enough for it be feasible for him. He had some liquidity issues that prevented it. Those would not have been the case for me. Well, what happened since then? The credit crisis. The VIX has since shot up and stands at 25. And I would not have had those liquidity issues.

That's just one example. Are there still a myriad of opportunities? Certainly. But do I think it's the kind of market where we can have another incident like John Paulson shorting subprime debt and making $2Billion dollars? Probably not. I read in Barrons today that consumer confidence in the economy is at 17 year lows. Even if the broader market is wrong about the extent of how much worse the economy will get there is massive psychological bearish sentiment. You can't bet against something like that and make serious dough.

Rosenberg: Deep Recession

David Rosenberg from Merrill Lynch. Considered to be very bearish by the Street. I read him every day this summer and can't wait until I have access to him again starting in July.

LEH Update

I wrote my last post on Lehman Brothers on Sunday and as of Tuesday we are right around the same level. What a wild ride, though. Gapping lower on Monday and higher on Tuesday. Lehman reported earnings today, beating estimates. They are up about 31% on the day.

I'm not sure whether I would have kept any trade on overnight. I'll be honest and say I probably would have. I still think shorting the financials is a good play.

LEH: Potential Near-Term Short

With news of Bear Stearns being sold to JPMorgan for $2/share, the street will be looking to see which bank is next in line for collapse. The figure of $2/share is pretty stunning considering Bear closed the trading day Friday at $30, albeit down close to 50%. It also means that Bear Stearns was essentially insolvent, not just illiquid.

This brings me to Lehman Brothers (LEH). Lehman Brothers had the second highest levels of toxic ABS/MBS securities on their books after Bear, each bank having twice as much relative to total assets as Goldman and Merrill. They were down 14% Friday as Bear collapsed. I think it's likely that the street will now turn their attention toward LEH as the next pin to possibly fall. In addition, although Bear went donuts over the weekend they closed Friday with a price/book of 0.7. LEH closed with a price to book of 1.15. If the market truly panics over LEH it could have a serious fall.

I have been extremely bearish on the financials for some time now, but I think this Bear situation creates a short-term opportunity to take advantage of the current fears in the market .



Since we are on the topic I thought it would be interesting to note that in January of 2007 Bear's stock was trading close to $170/share. That valued now ex- CEO and chairman Jimmy Cayne's holdings of Bear Stock at right around $1Billion. In a year and two months Cayne's position has been wiped out. Don't feel too sorry for him though. He played bridge and golf throughout this summer as two hedge funds blew up and the market began to panic. He also just closed on a $26 million condo in Manhattan, paying in cash.



1:00AM - 3/17/08 - Update - From the RGE Monitor on Lehman:

• WSJ: Lehman's liqudity position stronger than BS was but weaker than other peers. Lehman learned lesson from 1998 liquidity crunch: less reliance on short-term funding.
  
• Cumberland: Main difference to BS: Lehman generated over 60% of their revenues outside the U.S. in Q4 2007.
• Bloomberg: March 14: Lehman Brothers, largest mortgage underwriter in U.S., obtained a $2 billion, unsecured, three-year credit line from 40 banks. "The unsecured facility replaces an existing credit line"; JPMorgan and Citigroup led the effort.
• Reuters: CDS spreads spiked to 465bp after Bear announcement, most among investment banks.
• Fitch (via RGE): At the beginning of the turmoil Bear Stearns had the highest toxic waste ("residual balance") exposure as percent of adjusted equity on balance sheet: BSC = 54.5%; LEH = 53.3%; GS = 21%; MER = 17.8%; MS = 8.3%.
• Fahey (Fitch): Lehman Brothers reported Level 3 assets-to-equity of 1.68x in 3Q07 (BSC 1.56; GS 1.84; MER 0.70; MS 2.74: gross notional Level 3 asset value, not netted with derivatives hedges in Level 1 or 2 as reported by other banks)
• Hedges on Level 3 assets (i.e. "short their own instruments") produced book gains of $750m at Lehman (largest amount among 5 brokers) but Fitch decided that gains from credit spread widening will not be considered in evaluating operating performance
  --> Gains from structured notes spread widening as percentage of pre tax earnings was 62% at Lehman in Q3; 129% at BS; 7% at GS; -17% at ML; 17% at MS.

Sunday Linkfest

Beyond the Noise on Free Trade - "NO issue divides economists and mere Muggles more than the debate over globalization and international trade. Where the high priests of the dismal science see opportunity through the magic of the market’s invisible hand, Joe Sixpack sees a threat to his livelihood."


Our Uncertain Economy - "In recent times, most economists have pretended that the economy is essentially predictable and understandable..."


A Short History of Troubled Investment Bank Sales - DealBook


We will never have a perfect model of risk - Alan Greenspan via FT