Emillia II

Emillia

Credit Crisis, Tip of the Iceberg?

The current market conditions are pushing me to come back to my blog after a long absence.
Folks, make sure you're sitting down before reading this, and I might upset a lot of people with this post but this is my view of things at this point.

First off, I would like to focus your attention on the Carlyle Capital Corporation. This investing firm (mostly Fannie may and Freddy mac mortgages and US government bounds) had at the beginning of 2008 $21.1 Billions in debt principally funded by repurchase agreements ($20.976 Billions) , $129.923 Millions in Liquidity cushion, $16.4 Billions in assets. The drop in the value of the assets held, created margin calls on the Carlyle Capital loans, and the company was unable to make theses calls for lack of sufficient liquidity (cash). The bank traders decided to take advantage of the recent pledge from the Fed and JPMorgan to back up Bear Stearns (Who by the way was the first one to liquidate positions in Carlyle Capital Corporation) and provide them with liquidity. the bankers seized all assets, or whatever was remaining of the bonds and mortgages backed assets. The big wigs with which Rubenstein usually meets with to get the loans, had abandoned the company, their leaders, and the shareholders.The company had just gone public on the Amsterdam Stock Exchange leaving the proud owners of 500 Millions of B, non voting, shares with absolutely nothing or close ($0.71 per share, up 90% on vague comments from founder Rubenstein to somehow try to compensate shareholders).

The lesson to be learned here is to remember that stocks, in the end, are worth nothing. They are just pieces of papers. There will never be enough money, after the bankers get their shares, for the stock holders to get anything back.

I would like to take a moment and take a look at how a corporation run by such a brilliant man as Rubenstein with friends in very high places who were there to start him up by funding his private equity fund (Citi ex CEO Charles Prince), was to fail so miserably.
Lets look at what I think is key in this situation and really in what the credit crisis is about: How does an investment company leverages (borrows) $21 Billions with $130 millions in liquid assests????!!!!! That's an 161:1 ratio!!!! To put it in perspective if you went to the bank with $100 as collateral and ask for a loan the bank would say in return: "Yes! Here is $16,150.00!" I'm not sure what the interest terms were, but do you think this would ever happen to you or me? Why are there no limitations on the amount of money financial institutions can leverage to invest with? Try printing your own money out of your house and see how fast the secret service guys will be knocking on your door, yet this is exactly what is going on and what got Carlyle in this mess.
So when the dividend paying assets, on which the Carlyle Capital guys were trying to get fat on, starting to free fall in value the lenders wanted their money back. Why wouldn't they? It's their money, they need it to pay off their own debt, which for a while was getting called in buy the boss of the banks: The Federal Reserve.

The Federal Reserve who after a few years of record low interest charging, created a monster in the real estate bubble, and then drying out markets of liquidities buy raising interest rates and selling securities to the banks.
As Federal as Federal Express, and holds no reserves whatsoever: the U.S. government only owns 20% of the shares, and all the money they lend out is created out of nothing, but the interests they collect is real.
I will give my 10 shares in the gold ETF GLD to anyone who finds me a list of all the Federal Reserve shareholders.

But you're probably not persuaded, well here is an other prediction Bear Stearn is not going to survive, it will either be absorbed by the mother ship of banking and financial companies JPMorgan Chase, or if enough insiders and friends of privileged get out in time, it will become insolvent, the stock will be worth nothing, employees laid off, pensions and retirements wiped out, lives ruined, and the offices will close. All financial institutions in Europe, specifically in London, have be told to stop doing business with Bear Stearns, all the New York Hedge Funds have pulled out their holdings. This, my friends is a banker's worst nightmare: a run on the bank, and there is no coming back from that.
Plus liquidation continues and the domino effect will soon affect the entire financial sector and will spread to the more credit sensible industries (and already has). Stay away from any investment that demands capital to be readily available in order for the company to profit. All the cash in the market is being sucked into a hole which has no bottom, as all the debt far, far exceeds the available liquidity.

Good luck, we all need it now.

Monthly Portfolio Performance Report

Two months have gone by, and after a market peak mid July, my stocks took a big hit, lowering my year to date return to +15.20% from a high of +26.74% on 07/13, and bringing my monthly losses to -6.02%.
Even with above expectation earning announcement my biggest loser was Volcom plunging -29.21%! The last time this stock lost a third of its value it went on a bull run, rising 140% over 11 months. This may well be an excellent buying opportunity, now that their European infrastructures are up and running the next quarterly earnings should bring a big upside surprise.

GOOG: -2.43%

NUAN: -1.49%

MRK: -0.30%

EEM: +1.12%

VLCM: -29.21%

GLD: +2.29%

COP: +2.98%

Investing Strategy

After a day like today, it's always good to take a long hard look at your portfolio and point out what is not working, and at the same time look for what is working that is not in your portfolio.
Here is what you should see in there:

• Defensive stocks (food, liquor, tobacco, and high yielding stocks)
• Bonds ( I don't care if you own munis (municipal bounds), or the total bond market ETF AGG, buy more)
• Oil related equities
• Precious metal

While I personally don't recommend shorting the markets, money can still be made buying index puts, or even going long on one of the new ultra short ETFs, like SDS which will capture twice the loss of the S&P 500, up +4.62% today. Putting a small portion of your money out of say, your small cap growth funds, in there would probably be wise.

Google's Earning Miss, an Opportunity For You?

As I came home today and turned on my favorite channel (CNBC) I first beheld the DOW closing above, or more exactly at 14,000, and thought "uhm, how bullish", my next observation was not as promising, as I watched the GOOG ticker followed by a red 39.40.
My heart dropped. I immediately checked the Dow Jones News to find out why my favorite stock was taking a 7% dip after hours.
As I remember, there was a couple of things that scared investors last quarter, one being the fear of rising expenses, and the other, the fear Google could not grow it's revenues fast enough anymore to justify this kind of PE. These two worries seem to have been put to rest for the time being, as traffic acquisition costs declined to 30% from 31%, and revenue came in for the quarter at $2.72 billion when analyst were expecting $2.68 billion.
Unfortunately, earnings came in at $3.56 a share compare to the expected $3.59, but since we are used to see Google's earnings beat the street expectations like a pinata, investor disappointment is high.
Time has taught us that any dip in price for Google share is usually a buying opportunity, but if CEO Eric E. Schmidt doesn't turn his recent acquisitions into earnings this company is going to have a hard time growing at the speed they have been in the past few years.

Fortress and Blackstone, Time to buy?

I was in a classroom environment last week, briefly discussing recent IPOs, when one of my class mates noted how poorly Blackstone stock had performed since its debut on the New York Stock Exchange. At first it didn't bother me..., but I then realized he had no idea why the IPO had a bad first week, and that did annoy me. The reason behind the poor start are the fears of tax law changes which could drop hedge funds and private equity firms into the 34% tax bracket from the actual 15% I believe.
Today the stock dropped an other 2.51% to $29.18 on corporate governance issue concerns, apparently the way the IPO was structured it did not follow NYSE rules imposed on other corporations trading on the exchange (operating company vs. investing company).
But as investors will learn tomorrow the first legal hurdle seem to have been passed, as Treasury Assistant Secretary for Tax Policies Eric Salomon had nothing positive to say about the new proposed tax laws.
I remember thinking, last week, "with all the money these guys have, I'm sure they'll be able to lobby successfully(Blackstone co-founder and CEO Steve Schwarzman made $7.7 Billion on the day they went public), plus if this guy says "sell" without knowing why, the odd lot theory would indicate "buy"".
Now it seems my initial prediction is holding true, I am sure they are smart enough to navigate around anything legislators might throw their way, and with BX now down 10% from its opening day, and FIG down 22%, I bet they are due for a pop.
Keep an eye out!