September Stock Talk IV

These closing numbers are wacko.

I didnt see down 777 on the DOW, it must be some market close orders that came through late.

 If it is in cash keep it there, in an insured account and keep a healthy chunk of it in a safe at home.

Short GM. I know, not much to short, but what the hell there is no reason you can't have some fun along the way.

 

 Oh, and do like Jimmy Rogers has been saying for months/years, get out of the USD but NOT into the Euro.

...from the Financial TImes

If one idea caused the subprime meltdown and the subsequent financial emergency, it was the belief that house prices could not fall. Nationally, they had not dropped since the 1930s, it was often pointed out: it simply could not happen. A similar complacency now attends discussion of the fiscal outlook.

“It is assumed that the US can borrow without limit. In fact, the US has a budget constraint – less binding than that of other countries, to be sure, because of the dollar’s reserve currency status and other factors, but there nonetheless. This limit is about to be tested, and if the global capital markets decides enough is enough, the challenges confronting the Treasury and the Federal Reserve will make even last week’s exertions seem mild.

“The next administration’s fiscal options are vanishing before our eyes. Somebody should tell the candidates and the country.”

Vermeer,

I dont get these observations from people.

The crash/meltdown wasnt because of housing price drops alone..that did cool off consumer spending and banks lost on foreclosures, but the big deal is if these companies hadnt margined and leveraged so much, these losses would be so catastrophic and margin calls wouldnt be crashing in.

Leverage caused the housing meltdown, leverage caused the mess we are in.

Wall,

But it was stoked and centered on mortgages, and mortgage backed crap. The no doc  loans, a Fed chairman telling people to get into ARMs when rates were at historic lows, so the only way the adjustment could go was up, fraud on a massive scale in appraising, loan officers throwing money at people who had no jobs etc etc etc...and then sure, lever up and go being the mantra of the day among supposedly sober bankers...

 All of this takes place while ratings and regulatory agencies are giving the thumbs up...and declaring all is well.

  Of course you are right about leverage...is aggravated a seriously sick situation beyond all measure.

I don't think the bill would of help companies holding CDO become more solvent as the CDO assets are way over priced

CDO assets arent overpriced, in fact CDOs are underpriced because the market is illiquid, that is why the margin calls have been raining for the last 6 months.

Vermeer, we have seen real estate drops before and the effect wasnt to cripple the banking system.

Most of the firms we are talking about didnt issue mortgages. Bear didnt go under, Lehman didnt go under, Morgan Stanley wasnt teetering, UBS etc..none of these firms issued mortgages.

Leverage on these instruments is what did it..all aside from the housing drop.

wall, not much of a finance guy but aren't the CDO's illiquid because there's no demand to these assets?

kev,

Those asset markets are frozen because of FEAR in the markets..not because the value of those AAA assets are in question.

I am still making my loan payments, most people are..the market is illiquid because in a short time everyone needed out and nobody wanted in.

Then they started marking to market, which is the BID in most cases and that just adds fuel to the fire and makes things that much worse.

 Wall, as I said, leverage was certainly an exacerbating agent of the present circumstance.

You are not maintaining that the collapse of the housing market and government policy has little to do with the current collapse in the banking system are you?

 I would tend to agree with this summation:

Every time we get ourselves into an economic mess, there’s usually some milestone idiocy we can point back to as the government action that made the meltdown inevitable.

Take the current housing crisis that has now spread to the financial markets in general. The cause was too-easy credit that fueled a massive increase in housing prices as people bought houses they couldn’t afford with mortgages they weren’t able to pay off.

In 1999 there was roughly $5 trillion in total U.S. mortgage debt. That number ballooned to $12 trillion by 2007, and we know what happened from there (data is from the U.S. Office of Federal Housing Enterprise Oversight). To put this into perspective, total U.S. GDP is about $11 trillion annually, and U.S. government debt is around $9 trillion. If the housing market really falls apart (meaning more than conservative estimates of a 20% drop), there’s no way the government can simply cover these losses.

Why did it happen? Let’s go back to 1999, when Fannie Mae, the nation’s biggest underwriter of home mortgages, was under pressure by the Clinton administration to find a way to get more loans to “borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans.” A pilot program was launched, which soon became general policy. Money flowed to people who couldn’t afford to pay it back.

These new policies came on top of previous changes in the 90’s that let consumers get zero-down payment loans.

In a 1999 article that now looks absolutely insane, the New York Times reported on the easing of credit terms. Fannie Mae Chairman Franklin Raines, who’s quoted in the article, was all sunshine and roses as he threw away the financial future of millions of Americans. But at least one person. Peter Wallison, had a good idea of how this would all play out:

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

Too bad nobody listened to that guy.

 

wall, doesn't the mark-to-market model determine the true market price of those residential CDO's (instead of using the mark-to-model)? Anyways thanks for answering my question.

kev,

Mark to market works in a stable and liquid market. When the market is frozen and there are a zillion sellers and no buyers it actually adds to the fire, pricing instruments at the bid, adding more margin calls which freezes the market even more.

Vermeer, actually I am saying that the residential market has less to do with the situation than most think. Look at the names of the companies who went under and are in trouble..most arent lending banks, most didnt own residential mortages are assets. WM and IMB and WB are the lenders who went under, but even still the issue is MARGIN. If those mortgage companies had not margined like they did versus deposits/assets, they would have weathered the storm..instead they were full to the gills with loans and some had BAD loans..and the bad loans arent the problem if you arent margined to death. If WM had lent using reasonable levels ratios wise then they would be hurting but look at their balance sheet going back last year..it wasnt foreclosures that ate their cash it was MARGIN calls because of leverage.

Bear, Lehman, Morgan, Merrill..they werent lenders, they didnt own residential mortgages. All the big names and others like Citi are drowning because of margining on their CDO investments.

The mortgages and investments on their own arent the problem, it is the level of which these firms were levered..

Before anyone bashes the living crap out of me, I DO NOT enjoy being bearish.  However, I am a realist.  Therefore, if there is any sort of short-covering mularkey baloney "rally" aftter the "House" gets scared enough in to agreeing to pass this bull-crap bailout package (btw, "Wall Street" deserves to die a slow death....along with America), then by all means, lighten up on your 401K and IRA and stock purchase plans----PEOPLE!!!!

 

The world economy is teetering on the brink of full blown depression.

 

And people laughed at me for talking about warlords and fiefdoms a few months ago.

 

CC,

You are off the deep end from time to time and you know it.

We appreciate all the messages and nobody minds the warlord comments, but you have to admit it is a bit over the top.

Wall: I am not debating the role that leverage played in the crisis. But you are pointing out the means, not the origin of the crisis.

 As for CC's warlords, they exist presently in Somalia and many other countries as do pirates.And frankly the likelihood of collapse is greater now than say 60 years ago, as nuclear weapons proliferate, the ability to devise and deploy chemical and biological weapons of mass destruction also becomes easier and easier.

 Who here would take the bet that not a single nuclear bomb, or weapon of mass destruction of any sort will be set off in this country in the next100 years?

So when does DRYS start trading at 1x 2008 earnings

I would not be surprised to see DRYS back into the low $20's, where it was before the commodities bubble started and stay there for awhile.  The BDI will continue to fall back down to where it was pre bubble as well.

Why are you guys "trying to catch a falling knife" with this?  It's been going down a lot for awhile, why not wait until it holds at some level before buying more and more?

VH2,

I dunno..

At this point the stock is trading at less multiple than the OR assets. Including the rig deposit, that values the shipping division at ZERO.

Today I was looking at the fleet page from last earnings and George locked several Cape vessels for TEN YEARS at rates higher than current spot.

Tell me he doesnt know exactly what he is doing.

I sold some other stuff to buy more DRYS today.

jaxwhitey, you are looking at the price of the stock compared to the index and relating the stock...that is wrong for two reasons..back when DRYS was a 20 buck stock they had HALF the fleet they do now at worse TCE rates..since that time George has nearly DOUBLED the fleet at the youngest age per ship for any public bulker.

On top of that he used capital to purchase almost 2 BILLION in rig leasing assets..between the OR purchase and the deposits on the future two addition rigs, the market cap of the stock is LESS than those assets.

Book value here is 60 bucks guys. If George holds the OR assets, next year based on TCE locked rates AND the OR contribution, this stock earns 12-14 plus per share NOT including current vessels on spot or coming off charter.

This isnt a joke, I know this company and they are throwing a great name down the toilet and wrongfully so.

VH2 did you see the write up/release from Doug today? He is standing behind his 160 valuation and I think he should.

Suckers are going to regret selling this stock today...not me I buy MORE ever day it drops.

No offense but why does it not surprise me that you listen to Coast to Coast 

That is the epicenter of the loonies, nothing but truckers and meth heads calling in saying that they've seen ghosts or bigfoot.

I listen every now and then when I can't sleep, listening to crazy people makes me feel better about myself.

Lets go east of the Rockies to Barb or how about the Wild Card line with Bubba.  It is amusing if nothing else.

'Cause I like to be entertained when I can't sleep-------just like you.