Risk still far from being priced into the market

What amazes me is that investors are still bullish at the slightest bit of good news. Yet, they ignore the growing and very serious macro risks facing the global markets. The report on new home sales released today was an absolute disaster, yet the Dow was up 1.5% on rate cut hopes. After last week’s 75bps emergency cut, investors are rallying on another expected 50bps cut? That makes no sense… 125bps in one week is the most the Fed has cut in such a short period. Rational markets would have tanked further, but as we all know there are still many bulls and lots of liquidity out there. Smart move by the Fed as no one seemed to smell the Fed’s fear. Gold and short equity positions are looking even better these days, though volatility is pretty brutal.



Mortgage bond insurers need $200bn boost

Won’t be long before the monoliners are nationalized. This is a great article from The Times (January 25, 2008). Some classic highlights:

America’s biggest mortgage bond insurers collectively need a $200 billion (£101 billion) capital injection if they are to maintain their key AAA credit ratings, a figure that dwarfs a plan by New York regulators to put together a capital infusion of up to $15 billion, a leading ratings expert said yesterday…

…One insurer, Ambac, has already lost its AAA-rating, while Mr Egan [of Egan Jones, an independent rating agency] has a B-plus rating on MBIA, the biggest bond insurer, which is 13 notches below the AAA-rating it has from S&P, Moody’s and Fitch.

Greenspan to blame

As in our previous post “Alan Greenspan should be jailed,” this is a great quote from Professor Anna Schwartz in the January 14th edition of the Telegraph:

“As rebukes go in the close-knit world of central banking, few hurt as much as the scathing indictment of US Federal Reserve policy by Professor Anna Schwartz.

“The high priestess of US monetarism – a revered figure at the Fed – says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. ‘The new group at the Fed is not equal to the problem that faces it,’ she says, daring to utter a thought that fellow critics mostly utter sotto voce.

“‘They need to speak frankly to the market and acknowledge how bad the problems are, and acknowledge their own failures in letting this happen. This is what is needed to restore confidence,’ she told The Sunday Telegraph. ‘There never would have been a subprime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for,’ she says.

“Schwartz remains defiantly lucid at 92. She still works every day at the National Bureau of Economic Research in New York, where she has toiled since 1941.”

As expected, Wamu posts big loss

As we wrote in August (Washington Mutual Cut to Sell) Washington Mutual has been headed for some serious writedowns.  Sure enough, it didn’t take long for this to happen, with the stock closing at $12.46 today.  This is from $36 in August, and $47 when we shorted the stock in February 2007.  It is time we covered our position as certainly Wamu’s management is looking for a white knight. 

Washington Mutual Swings to Loss in 4Q, Writes Down $1.6 Billion

January 17, 2008 (AP) – Washington Mutual Inc., the country’s biggest savings and loan, said Thursday it swung to a $1.87 billion loss in the fourth quarter, hurt badly by the sinking value of its mortgage portfolio.

The quarterly loss was $2.19 per share, compared with a profit of $1.06 billion, or $1.10 per share in the same period last year.

Those earnings included a write-down of $1.6 billion that WaMu had previously disclosed as the value of its home loan portfolio withered. Continue reading

2008 Market Predictions for Macro Investors

This is our “Market Predictions” post from January 17, 2007.  Other than declining interest rates (what is Bernanke thinking!), we were spot on with:

  • Gold
  • Silver
  • Falling US dollar
  • Oil
  • Natural gas
  • Agricultural commodities

The only other sectors we should have added to this list are (i) desalinated water and  (ii) clean and “cleaner” energy (such as solar, wind, geothermal, biomass).  Despite the significant run-up in prices we are still very bullish on the above investment calls.  Good luck in 2008!

Predictions for the Next 5 Years (2012)
A few weeks after the New Year, but not too late for thoughts on the macro trends for 2012. Quoted prices are for January 17, 2007 and in U.S. dollars; source is Bloomberg. Perhaps in 5 years we will not be quoting in U.S. dollars.

Gold and Silver (and falling U.S. dollar)
No doubt, gold will continue to outperform. The multi-trillion dollar credit bubble has created unprecedented inflation, which has been greatly underreported by nearly all governments. With the U.S. dollar and many other currencies rapidly declining in value, gold will be the only safe alternative. The spot price for gold is US$625.00/oz; silver is at US$12.53.

Oil and Natural Gas
Increasing demand from places such as China and India will only add to the bleak supply picture. Yes, there will be a short-term oversupply given the boom in oil prices, but increasing costs in labor and equipment, risk premium associated with instability in the Middle East, and long-term dwindling of supply will force oil and natural gas prices higher. Current prices are US$44/barrel and US$6.50/MMBtu. Cheap travel as we know it today will change dramatically.

Interest Rates (and Inflation)
The bankrupt U.S. government and consumer should be junk-bond quality. Yet, China, Japan, and other U.S. trading partners are continuing to support the currency train. At some point, this will change and the artificially low interest rates will be back to the levels seen twenty-five years ago in the U.S. The current levels are insane – why would anyone in their right mind want to hold U.S. treasuries or any bonds for that matter? Way too much liquidity sloshing around in most global economies.

Federal Reserve Target Rate: 5.25%
3-Month Libor: 5.36%
Prime Rate: 8.25%
15-Year Mortgage: 5.51%
30-Year Mortgage: 5.74%
3-Month Treasury: 5.10%
5-Year Treasury: 4.78%
10-Year Treasury: 4.74%
30-Year Treasury: 4.83%

Agricultural Commodities
Due to rapid changes and severe affects of global weather patterns, rising land costs and increased development, increased production costs, water shortages, declining number of farmers amidst an ever growing population, farmers are having a tough time. In China today, the majority of the workforce is in agriculture, but rapidly declining. No doubt, all of this will affect most soft commodity prices.

CORN FUTURE (cents/bu.) 408.250
COFFEE C FUTURE (cents/lb.) 121.650
LEAN HOGS FUTURE (cents/lb.) 64.975
SOYBEAN FUTURE (cents/bu.) 714.750
COTTON NO.2 FUTR (cents/lb.) 54.920
LIVE CATTLE FUTR (cents/lb.) 94.175
WHEAT FUTURE(CBT) (cents/bu.) 464.750
SUGAR #11 (WORLD) (cents/lb.) 10.910
FCOJ-A FUTURE (cents/lb.) 200.450
COCOA FUTURE ($/metric tonne) 1,606.000

Update on Oracle (ORCL)

Larry Ellison has now sold $1.58 billion of ORCL shares in the last 52-week period.  This compares to $165 million that he sold in the previous 52-week period.  On a daily basis, he has stepped up his insider selling to approximately $30 million a day.  While the US recessionary environment will take some time to filter through to IT budgets, it’s not too early to consider LEAP put options on ORCL.  The stock has run up recently due to solid quarterly results, but we don’t expect this to last too many more quarters.  Example:  Intel announced poor results today and the stock plummeted.  ORCL may not be that far behind. 

Disclosure, we have a short position in ORCL LEAPs.