WC Varones

Don't lend your hand to raise no flag atop no ship of fools

Tools & Tactics for Speakers of English

Yesterday I drove down to the bookstore to learn something about technical analysis, and came home with "Tools and Tactics for the Master Day Trader," by Oliver Velez and Greg Capra (McGraw Hill, 2000). I should have had some idea what to expect from a day-trading book that was published at the height of the tech frenzy. So what do you get for the $55 cover price? Here are a few nuggets:
"Fan the flame of you [sic] passion until it ignites into a white-heat desire to attain that wonderful state we call trading mastery"...

"That is actually a reverse cop-out behind which a tremendous lack of talent has historically hid from critical eyes"...

"...trying to correct it any other way...could result in exasperating the loss."
This is leaving aside the cut & paste repetition of various sentences throughout the book, graphs that contradict the accompanying prose, and a barrage of motivational/profound quotes in sections titled, "Seeds of Wisdom."

Now I understand why women like to save receipts and return things.

Closing CFC short

There's been plenty of news about subprimes, and discussion of whether the disaster will spill over into the larger mortgage market. I'm closing my CFC short today on the theory that a lot of the negative news is priced in and we could get a snapback rally.

Inflation? What inflation?

I've been having so much fun in the subprime mortgage sector that I haven't been talking about gold much lately. Never fear: gold continues its upward march.

And this interesting news from gold miners last week:
Two of the world's largest gold miners reported robust fourth-quarter earnings Thursday due to higher selling prices but said production will slow in the year ahead because of rising operating costs.

The production forecast likely will translate into higher gold prices in the year ahead for both Newmont Mining Corp. and Barrick Gold Corp., speculated analyst Patrick Chidley, with Barnard Jacobs Mellet.

He noted that higher production costs have proved significant for the industry as a whole. "The gold price isn't really high enough and probably will move higher," he said.

Newmont said net income jumped more than threefold in the fourth quarter.

For the quarter ending Dec. 31, Newmont reported net income of $223 million, or 49 cents per share, compared with $62 million, or 14 cents per share, in the prior-year quarter. Revenue rose to $1.46 billion from $1.29 billion in the comparable period of the previous year.

While the Denver-based company's gold sales dipped to 2 million ounces in the fourth quarter from 2.4 million ounces a year ago, Newmont said its average realized selling price rose 31 percent to $619 per ounce from $472 per ounce.

However, the cost of sales rose to $322 per ounce from $232 a year ago, and likely will rise about 25 percent this year because of lower production and higher costs for labor and energy, among other factors, the company said.

Higher labor costs? How can that be? We don't have any inflation, remember? And energy costs? Well, those are so irrelevant that we exclude them from the core CPI. Inflation is supposed to only measure the prices of cheap consumer goods we buy from China. After all, who really needs things like food, energy, or housing when you've got cheap consumer electronics, clothing, and home furnishings?

It's still not too late to buy gold.

Old Zeke to WSJ: I love you, baby...come back

Dumbed-down content, pricing shenanigans, being in bed with my girlfriend when I came home: none of this was enough to make me kick the Wall Street Journal out for good.

I mean, come on, a $79 special? The last time I got one of those was in Vegas...and this time I bet I won't even end up with V.D.

Welcome back, my sweet.

IMH: bad, but I was hoping for worse

Here's the IMH press release. It was a horrible quarter, missed estimates by a mile.

Yet I was hoping for more. Originations were down big, and they badly mismanaged net interest margins, but I wanted more portfolio deterioration. And an announcement that the dividend would be cut.

Based on other mortgage REIT disasters recently, other investors may have been expecting even worse news too. So I closed my short position in the morning extended hours at $7.29. We'll see if I bailed too early.

Sweet anticipation

So it's 7PM California time, 10PM New York time, and we're still waiting for the earnings announcement that IMH promised "after the market closes on Thursday, February 22, 2007."

Should be a doozy.

Diff'rent strokes

Phil Gramm, a great Senator and a past Presidential contender himself, not only endorses McCain, but sees him as a messianic figure (which, come to think of it, is exactly how McCain sees himself).

Eh, Gramm's wife was one of the asleep-at-the-switch Directors of Enron. So bad judgment runs in the family.

Vive le France

Heh, as they say.

WSJ to longtime subscribers: F--- you!

As my subscription to the Wall Street Journal, now running on 10 years, nears expiration, the publishers are unleashing a stream of solicitations to renew at the low, low price of $249/yr. That's $82 below the newsstand price!

Never mind that the going rate for new subscriptions is $99/yr on their website. I'm subscribing to Forbes instead.

When you're down and out...

...feeling small, and cannot possibly fathom the purpose of your existence, find comfort in this: At least you're not Britney Spears.

It's lit to pop

From the esteemed Economist comes more ghoulish news on subprime mortgages. The article is a summary of the desperate and stupid loans that desperate and stupid lenders made to desperate and stupid borrowers. But what caught my eye was this graph:

The market has realized that subprime loans are so bad, they've lost 20% of their value in a few months.

What does that mean for holders of subprime loans? Big trouble. Especially for the leveraged ones.

Old Zeke was telling me about a wily old investor he met at the poker table. This guy had a hot stock tip. A mortgage lender -- not subprime -- with a huge dividend yield and trading at just 60% of book value. This old bird thought he was pretty clever to have invested in such a gem. As a favor, he told Zeke the name: Impac Mortgage Holdings (IMH). Zeke passed the name on to me.

As it turns out, IMH is really a hedge fund posing as a mortgage lender. First, our old coot was wrong about the subprime thing. Second, take a look at this balance sheet. This turkey is leveraged 20:1. $22 billion in loans, and $1 billion in equity. Leverage is great in the boom years (hence the great earnings and dividends in the boom), but deadly in a bust. What happens when the loans have to be written down to market value or written off as bad debt? Using the 15% - 20% drop from the Economist, IMH's portfolio would be worth about $18 billion... meaning a negative net worth of $3 billion, AKA bankruptcy. Even a much smaller drop in portfolio value (because IMH holds some higher-quality loans), would be plenty to completely wipe out the book value.

IMH's 12% dividend is completely unsustainable. It will be cut drastically, possibly soon. The Q4 earnings announcement is expected soon (next week if not delayed by feverish book-cooking), and I would put the chances of very bad news in the earnings announcement pretty high. We could see portfolio deterioration, origination slowing due to belatedly tighter lending standards, pricing pressure, portfolio disappearing to prepayments, or a combination of these. I am heavily short IMH ahead of the earnings announcement. You could be too.

The $10,000 lay

San Francisco taxpayers paid more than $10,000 in unexplained retroactive pay to the woman who had an affair with Gavin Newsom.

We should have hired him a high-class hooker instead. Would have been cheaper.

The Great Debate

Housing slump: already over or we've only just begun?

Fisher and Kass are both great investors. I've been wrong doubting Fisher before. But I have to side with Kass on this one.

Morning reading

OpinionJournal: John Fund honors American libertarianism.

Look out below!

For bonds, that is.

China, which has been supporting U.S. Treasury bonds by buying huge quantities with funds from its trade surplus, may be wising up and diversifying into other investments:
China's central bank sits on a hoard of $1.07 trillion in foreign currencies and securities, making it one of the biggest investors in the world. Now, officials have agreed that the traditional approach to managing this massive rainy-day fund -- keeping it safely invested in bonds issued by U.S. and European governments -- is out of date.

Following the lead of countries like Singapore, South Korea and Norway, China is starting to look at new ways of managing its investments.

Together, these moves by central banks have ramifications for financial markets world-wide. The likely result: fewer steady purchases of investments like U.S. Treasury bonds and more buying of investments that are riskier but have better long-term returns, like corporate bonds, stocks or even real estate and commodities.

Scholars suggest China could spare perhaps $200 billion or $300 billion from its reserves for more aggressive investments.

Even a slight shift of this type could have a significant impact in U.S. markets. China has long been one of the biggest buyers of Treasury notes, making it in effect a major lender to the U.S. government. China's buying has helped keep interest rates low in the U.S.: The greater the demand for a country's bonds, the lower the interest rates the country needs to offer.

This is what I expected to see a long time ago. And some of it may have been taking place quietly over the past few years. But now that it is getting underway in earnest, the ramifications are the same: bad for bonds, good for stocks and gold. Buy gold and stocks, both U.S. and foreign. All of them will benefit (in dollar terms) from a falling dollar.

Tales from the bubble

The bubble ain't just in the U.S., folks.

Intrepid foreign correspondent "M" writes:
I was talking to a French colleague who works in Madrid and bought an apartment in Madrid recently - he is moderately financially astute, but was given a loan by Bankinter in Yen rather than Euros, as a Euro interest rate of around 4.5% was considered too expensive. The currency risk is unhedged, and it bought back memories of the swiss franc loans in Australia in the 1980's.

I've heard 3rd hand that another Spanish bank (BBVA) are offering a 50 year mortgage, but I know that 40 year terms are now common for first home buyers entering a market that is so over-inflated, it makes Sydney at it's December 2003 peak look tame.
Loans in yen. That's a good one. You get a 1% or 2% interest rate. Never mind that the Economist just named the yen the single most undervalued major currency in its annual Big Mac Index ($)... 37% undervalued vs. the Euro. Imagine seeing your mortgage balance and payments rise 37% as exchange rates revert to norms.

As for 50-year loans, they are really a sign of desperation. For the extra 20 years of indebtedness, you really save very little on each monthly payment. A colleague asked me yesterday about 40-year loans. I showed him that in return for increasing his number of payments by 33%, he'd save less than 10% on each payment (from $4800 to $4400 per month for an $800,000 loan, which will buy you an average, not-so-nice house in the Bay Area. Figure in another $1000 per month in property taxes, then maintenance and utilities, and you're easily talking $6000 or $7000 per month for an average house!).

Shocker: real estate appraisers pressured to inflate valuations

Well, duh.

Real estate appraisers, whose jobs are dependent on referrals from realtors and mortgage brokers, are pressured to assess homes at inflated values.
Loan brokers are now routinely "dialing for values," [appraiser Alan] Hummel said. "They call up appraisers and say, we've got this sale at $335,000 at such and such an address. Can you get to that number?" If an appraiser answers yes, he or she gets the assignment. If not, the appraiser is bypassed.

Worse yet, Hummel said, when an appraiser comes back with a market value estimate that is lower than the sales contract price, the appraiser may not get paid for the work, and may be blackballed by the mortgage broker or real estate agent.
The winners? Realtors who take 6% on inflated deals. Sellers who cash out at inflated prices. Buyers who get undisclosed cash-back deals.

The losers? Lenders stupid enough to lend 90%, 95%, or 100% of an inflated price and end up foreclosing on a deeply underwater house.

I don't want to point fingers, but Countrywide (CFC) did this, with no questions asked, for Casey Serin, an unemployed 24-year-old who lied about his income and who took cash back from the seller based on the appraiser-inflated price.

The chickens are coming home to roost. The roosters are shorting CFC.

Scientists warn of epidemic of immaculate conceptions

"Avoidance-based sex ed gets little scientific backing."

A request I can handle

(click to enlarge)

Bill Gross on the asset bubble

A year and a half ago, I commented on the Chinese acquisition of IBM's PC division and the attempted acquisition of Unocal. I expected to see more Chinese acquisitions of U.S. companies, as they had to do something with all of the dollars we send them for Chinese goods.

We haven't seen a surge in outright acquisitions, perhaps because of the political backlash over Unocal and Dubai Ports, but it seems clear that our trade deficit is funding a more subtle foreign acquisition of U.S. assets: Treasury bonds and publicly traded equities.

Bill Gross explains it well. Our trade deficit finances an asset bubble, pushing interest rates down and causing the housing bubble:
...my critical point is that asset prices are no longer entirely a function of the real economy: it can be just the reverse. The real economy is being driven by asset prices, which in turn are influenced by financial flows of non-historic origin, composition, and uncertain longevity.

How might it all unwind? I'd guess a U.S. domestic economic slowdown from the housing bubble, combined with a weaker U.S. dollar, will eventually moderate the trade deficit, slowing the foreign flows that sustain the asset bubble. Until then, stay in stocks. Or better yet, gold, which is will benefit pretty much any way this bubble plays out.

Gold on the move

Gold has resumed its inevitable march northward, passing $660 per ounce. That's a nice reward for those who used the past several months as an opportunity to build positions in the low $600's (or even at $570!). Dollar-cost averaging has its rewards.

Old media wakes up to easy money mortgages

SF Chronic:
There could be trouble ahead in California's housing market as buyers are going deeper into debt while sellers are seeing less profit, according to a survey.

More than 21 percent of buyers last year took out mortgages with no down payment, soaring from just 4.5 percent in 2000, according to the California Association of Realtors, the industry's trade group.

No down payment? How about all those negative down payment cash-back deals? And you still think the lenders aren't in trouble?

UPDATE: Nice timing. On today's WSJ Front Page, In Home-Lending Push, Banks Misjudged Risk:


Many of those [subprime] loans have soured, sometimes quickly. The percentage of HSBC mortgages more than 60 days past due is climbing. Fraud by borrowers [see: Casey Serin; liar loans; cash-back deals undisclosed to lenders] has been higher than expected. "We made some decisions that could have been better," says Tom Detelich, the HSBC executive in the U.S. spearheading an effort to clean up the mortgage portfolio.

In a surprise announcement late yesterday, HSBC said its subprime-mortgage problem was worse than previously indicated. It said the capital it sets aside to cover all bad debts, including the soured mortgages, would be 20%, or $1.76 billion, higher than analysts' consensus estimates. "The impact of slowing house price growth is being reflected in accelerated delinquency trends across the U.S. subprime mortgage market, particularly in the more recent loans," the bank said.

HSBC's mortgage woes provide a window into the economic hangover brought on by the end of the housing boom. In recent months, mortgage bankers have taken a place beside home builders, condominium developers and real-estate agents, all of them struggling to adjust to a new housing landscape.

The beneficiaries

The big winners from today's story about the psycho astronaut chick? US Postal Service workers. "Going postal" has just been surpassed by "going NASA!"

As in, "Dude, don't go all NASA on me just because I ate the last piece of pizza!"

Brilliant breakthroughs in law enforcement

Here's a novel idea: deport illegal aliens who commit crimes in the U.S.:
SANTA ANA, Calif. -- Juan Martinez was looking forward to returning to his construction job after a one-month sentence for violating probation on drug charges.

But when he got out of the Orange County jail, he was met by immigration agents bent on deporting the 23-year-old illegal immigrant with $68 in his pocket and few prospects. "I just probably won't come back," he said about being sent to Tijuana, Mexico. "If I do, I'll keep coming back to prison, and I don't want that."

How on earth does an illegal alien get probation in the first place? He should have been deported immediately the first time he was arrested.

The truth is that there is no consistent policy of communication and cooperation between local police departments and immigration authorities. In fact, many cities, like Los Angeles, pander to their Latino voting constituencies by prohibiting the local police from cooperating with immigration enforcement:
Some of the most dangerous thugs preying on immigrant communities in Los Angeles are in this country illegally. Yet the Los Angeles Police Department cannot use the most obvious tool to apprehend them: their immigration status.

Dozens of gang members from Mara Salvatrucha, a ruthless Salvadoran prison gang, for example, have sneaked back into town after having been deported for such crimes as murder, assault with a deadly weapon and drug trafficking. Police officers know who they are and know that their mere presence in the country after deportation is a felony. Yet if an LAPD officer arrests an illegal gangbanger for felonious reentry, it is the officer who will be treated as a criminal for violating an LAPD rule.

That rule, Special Order 40, prohibits officers from questioning or apprehending someone only for an immigration violation or from notifying the immigration service (now known as Immigration and Customs Enforcement) about an illegal alien. Only if the person has been booked for a nonimmigration felony or multiple misdemeanors may officers even inquire about his immigration status.

Any "comprehensive" immigration "reform" package ought to include a requirement that local police cooperate fully and actively with immigration enforcement.

Stupid English tricks

Judge tells paedophile to buy bike for girl, 6:
Children's charities have attacked the decision of a judge who freed a paedophile and told him to buy his six-year-old victim a new bicycle to "cheer her up".

Eric Cole, who has a previous conviction for sexually assaulting a child, admitted touching the girl as she played in a garden.

Judge Julian Hall gave the 71-year-old a nine-month suspended sentence and ordered him to pay £250 compensation, telling him: "If it buys her a new bicycle, that's the sort of thing that might cheer her up."

Nice. The child molester is out on the streets, and the victim learns to think of her genitals as a source of income.

Now on DVD

I just saw This Film is Not Yet Rated on Netflix. See it as soon as you can. Independent filmmakers take on the biased and secretive MPAA Ratings Board, and it's like Toto pulling back the curtain on the Wizard of Oz. MPAA lies and hypocrisy are exposed, and secret board members are outed.

Independent. Subversive. Full of righteous vengeance. I love this stuff.

Rehab ruins lives

In the free-love spirit of San Francisco, Mayor Gavin Newsom was screwing his campaign manager's wife. All was well, until the woman went into drug rehab, and was persuaded there to confess her sins to her husband.

Now the campaign manager is out of a job, a long-time friendship is ruined, a marriage is in trouble, and a once-bright political future is now in doubt.

Come on, people. Honesty is never the solution for anything.
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