Below The Crowd

Quote of the Day

Those are not blue chips!

- Jim Cramer
Speaking of the financials

While I'm often critical of Cramer, it's good to see somebody on TV speaking the truth about these sleazy, scammy stocks run by clueless (at best) or criminal (at worst) CEOs who still won't come clean.

The exchange was with Wall Street whore cheeleader Erin Burnett, discussing the telecoms. Jim's opinion, with which I agree, was that there's nothing wrong with any of the telecoms regardless of which way the lemming-like analysts happen to be running today, and that there's never a bad reason to buy a blue chip with a 5% yield.

Burnett pimped her beloved financials: "There are a lot of banks with that kind of yield," she yapped.

And Cramer responded simply with the quote above.

Bravo!

-btc

Stupid Quote of the Day

What bothers me is the longs who don't have the faith to buy these [financial] stocks!

- Dennis Kneale
Chief Clown and Cheerleader
The CNBC Entertainment Network

That was our buddy Dennis, talking about the new short sale rules that are designed to protect a few favored insitutions run by the government's best buddies. While conceding that short selling is probably a necessity, he admitted that the shorts aren't the problem, it's the lack of dedicated longs.

Unfortunately, he still doesn't get it, nor do his buddies Bernake, Paulson, Schumer, Frank, Cox, or any of the other berries in Washington.

While they are out there trying to shore up "confidence" so that more of us with have "faith," the markets have moved on. "Faith" isn't going to cut it anymore. As I noted in The De-Financialization of Everything, we're moving towards a future in which you'll either come clean, be transparent, or you won't have investors. Nobody's going to buy opaque monstrosities full of unexplainable Level 3 assets on "faith." We gave you faith and you raped us with it. Now you can show us the money. Or die.

I think these institutions have outlived their usefulness and should die. Their disappearance may cause some temporary dislocation and "the system" as we know it may never be the same. The wonderful thing about markets though is that they tend to evolve new systems when it makes sense. The only people who should be scared are the Wall Street and Washington big shots who feed on this corrupt and obsolete system. But we shouldn't let them scare the rest of us into rescuing them, because the destruction of this system and its replacement with something better will only be a minor blip in our lives and in the end will benefit us all. We should rejoice that this detrius may be swept away in favor of something better, newer and more equitable. We should be excited, not scared, that the future can be bright if we don't insist on preserving the vestiges of the past.

Who knows? It might even be a future without Dennis Kneale.

Real Estate Prices Still Have a Way to Go

[Note: I just posted this one on Barry's Blog, but thought it was worth putting here as well, with a bit of elaboration and nice graphics.]

Ed Leamer of the UCLA Anderson Forecast put together a pretty expansive and detailed analysis of the impact of the real estate business on the economy.

His conclusion, in a nutshell, is that housing volume delines are an almost-foolproof predictor of recessions. Every recession (even the great depression) was predicted by a downturn in housing volumes. The reasoning is simple: housing volumes drive jobs in construction, financing, sales and everything else, thus the volumes have a real multiplier effect while prices don't.

The entire paper is available at the UCLA Anderson Website
(note this is a 73 page pdf, but is well-worth skimming through)

If you read through and look at all the charts and numbers, another thing will become obvious though. Volumes lead prices significantly. Look at the chart on page 26 of his paper: In the current downturn (in Los Angeles anyway) volumes peaked in March 2004, but prices continued climbing through the end of 2006. In the last downturn, the bottom in volumes occured in March 1991, but prices didn't bottom until December 2006, more than a five year lag!

Click on the chart for a larger image
Chart from Leamer paper cited above, page 26.

Historically this is typical. Real estate bottoms are long and drawn out affairs. For those who don't have a 10 year or longer time horizon they may effectively become "L" bottoms rather than the very wide "U's" that they really are. So, while it is entirely possible that the worst of the volume declines are behind us and the NAHB will start moving inventory again soon, those who are looking for a rapid bounceback in prices are likely to be disappointed.

Unfortunately, those pesky mortgage backed securities don't get moved by real estate volumes. The prices of the underlying assets and the owners' ability to pay are what drives their value or lack thereof. A recovery in volumes that saves some of the homebuilders may not do the same for the owners of those toxic securities.

Worth noting that on page 46 of his paper, Leamer gives the Fed an "F" for performance since 2000! On page 53-54 he gives a nice bit of prescriptive advice that would have avoided this mess if it were followed.

Incidentally, Leamer presented this at the Anderson School on the same weekend that Michael "I will write some loans" Perry gave his now-infamous "people don't need to save" advice.

-btc

A Call for a New Wizard of Oz!

It seems that somebody needs to write an updated version of the Wizard of Oz. Of course there would need to be some changes. The yellow brick road (gold) would today have to be paved with plastic, representing easy credit. The wicked witches would be an investment banker and a mortgage broker. I'm not sure who we could even cast as the good witch. The monkeys would still represent politicians. And of course Bernake as the ultimately powerless man behind the curtain.

Many of the others remain the same, the farmer (scarecrow), the industrial worker (tin man) starved for oil and the cowardly lion (then William Jennings Bryan, but today he'd have to be played by Ron Paul) just looking for a chance to be brave and take on the system but ultimately failing to accomplish much.

Truth is, you'd have to rename the thing. OZ itself represented gold (oz. = ounce) and the notion that it could lead to prosperity. Not sure what we could use today. FICO comes to mind, but The Wizard of FICO is a bit unweildly as a title. The Emerald City would still be green, but it would be green for being papered over with worthless US currency. Today the silver slippers (MGM changed them to ruby to show off Technicolor) which represent silver as the solutions to Dorothy's gold problem would probably be gold. Or they could stay silver. Or virtually anything that isn't made of paper dollars or plastic.

The more things change, the more they remain the same.

-btc

Picture of a Disaster in the Making: Michael Perry 9 Months Ago

Heck no they're not saving, because their net worth is growing. If your net worth is growing, in financial assets and other assets, you can spend more than your annual income!

- Michael Perry
CEO of IndyMac Bank
October 12, 2007

Almost exactly nine months ago, I had the opportunity to hear Michael Perry, now the ex-CEO of former home lender Indymac speak at the UCLA Anderson School's Alumni Weekend. I was dealing with a slight credit crisis of my own that day, involving a possible case of identity theft (later traced to somebody who updated the wrong credit card account's address at Citibank), so I missed part of the speech and all of the Q&A. I did, however, get enough of it to feel just a bit queasy. I shorted the stock that Monday. I am still short it, though I guess my broker should be closing that one out soon. My first ever GTO (gone to zero) short!

In light of Indymac's sudden demise I decided to go back and check out the video of the whole thing. It's even more sickening today, and offers lots of lessons for investors and troothseekers in the markets.

For those of you who are interested, the entire thing is at the UCLA Anderson website. My commentary, with approximate times into the video is below.

Edit [July 16, 10:45]: now that we've hit some of the major blogs, I've moved this video to Yahoo in a slightly lower resolution version so it doesn't get pulled. The original is still linked above at the UCLAAnderson website.

Vegas Weekend: Craps tables lose fans to AAA Ball

I spent part of the weekend in Vegas, celebrating my brother's birthday.

The airplane was fairly crowded in both directions, but the airports were relatively empty, probably a function of there being fewer but fuller flights.

As Tim Melvin notes this morning on RealMoney, Casinos are in trouble everywhere (subscription required). And there was ample evidence of that in Vegas this weekend. None of the downtown hotels seemed particularly full, and while we didn't spend much time down on the strip, it seemed relatively sedate compared to what I've seen in the past on summer weekends.

What was busy?

The Friday night game between the Las Vegas 51s and the Tacoma Rainiers was not quite a sellout, but was pretty full. Normally less than half the seats are sold, but we are told by some of the season ticket holders around us that things have been busy lately. One of the interesting things I noted was that lots of the people there were tourists, not locals. Not exactly what I would have expected, as Vegas has never struck me as being a place you would go to in order see a minor league baseball game.

Still, with gas at $4.50 a gallon and even Vegas buffet prices well into the double digits, it makes some sense. For $11 each, we had three and a half hours of entertainment right behind home plate (A four-figure ticket at Dodger Stadium), enjoyed Hebrew National hot dogs for $4 each (compare those to the horrible "Dodger Dogs" at twice the cost) and good beers for $4.50 each (crappy Bud at any major league stadium costs at least double).

In short, it looks like people are cutting back, going for simpler and cheaper pleasures, and avoiding the craps tables. Not exactly encouraging news about the state of the consumer, let alone for the gambling industry going forward.

Our downtown hotel rooms notwithstanding (avoid the Four Queens, whose website is as close as you can come to an ourright lie and not end up in jail), it was one of the best Vegas weekends in a long time.

-btc

Brief Notes

Things kind of slow here. I've nibbled on a few things as markets decline, but I don't see anything all that compelling yet.

• Larry continues to advertise his show with the statement that "America's got to hold on to its goldilocks economy!" Exactly which planet does he live on? Oh yeah, Planet Washington, where reality doesn't apply. My previously-expressed opinion about this scumbag remains in force.
• I've noted a bit of desperation from retail brokers and financial services guys of all sorts.
  • Just got off the phone with my mom's broker who is trying to get us to roll over some life insurance policies we purchased within a family trust some time back. He's playing the high pressure tactics even though mom is a senior citizen and that's a very bad card to play as a fiduciary. Methinks he's having a bad year and has quotas to hit.
  • The insurance broker he's working with has been even more desperate sounding. Yesterday he told my mom "you can't afford not to do this!" Again, really bad news if you're a retail broker of any kind dealing with a senior citizen. Haven't these guys what happened to the folks who used similar tactics to sell mortgages?
  • Barry notes this about a retail guy he knows who's good at grasping for straws.
  • Cramer is actually quite subdued. Even he can't find stuff to hype.

• This is a clear description about why you have to be careful of those good ol' median prices that the NAR are always trotting out. For that matter, consider any of those statistics suspect.

The De-Financialization of Everything

For the past 25 years, the trend in the world's economy has been to financilization of everything. It doesn't matter what business you have been in, some form of securitization, new financial products, hedging, derivatives, financing, or other financial intermediation has been part of your world. Those of us who actually like to create stuff have been playing second-fiddle to those whose game has been moving the financial blocks around, slicing and dicing them beyond recognition, repackaging them into incomprehensible forms, and then trying to sell them back to us.

A Financialization Orgy

That world hit incredible heights. General Motors (NYSE:GM) and Ford (NYSE:F) have become shells of their former selves, making most of their money from financing. Automobile manufacturing has become practically a sideline, something they needed to do in order to have something to finance. Even General Electric (NYSE:GE) has become much the same kind of company, slowly shedding low-profitablilty manufacturing divisions, while securing the rights to provide financing to purchasers of the products that are manufactured by others yet still bear their name. Jack Welch's success wasn't so much in making GE's manufacturing divisions better as it was in making them less relevant to GE's financial results, depending more and more on easily game-able financial business results. (Jack Welch's greatest genius may have been realizing when it was time to get out with his money intact. His jumping off the financialization train was -- in retrospect -- an early signal that it was about to run off a cliff.)

Even small companies with little financial sophistication were caught up in this. As Kevin Depew pointed out in December, little CKE Restaurants (NYSE:CKR) got caught flat-footed in a bad interest rate swap deal. Why an interest rate swap made any sense for a company in the business of operating fast-food restaurants is not clear to this relatively sophisticated investor. Hedging food costs? Maybe. But interest rate swaps? Most likely it made no sense to anybody other than the bankers who sold the deal and the auditors who were paid to tell management that it was a valid use of shareholder money. (Hint to all managers of small companies: Remember the poker axiom that if you can't see the sucker at the table, it's probably you. If you're sitting at the table with a bunch of investment bankers whose job is to create financial products, each of whom makes more in a year than the top ten earners in your company, then odds are you are the sucker.)

Most of us have been suckers. It's just taken a couple of decades for the final cards to be dealt and the reality of things to kick in.