Wednesday, July 25, 2007

What is Different?

When the market suffers a fit of selling, I always re-examine my outlook and ask myself, "What is Different?" This has to be done with an open mind and after looking for new facts.

Reading the news articles on CFC I see their earnings miss is blamed on unexpected losses in "prime home equity loans". Hmmm. Reading further in the WSJ: "Many of the home equity loans that are going bad are 'piggyback' loans to borrowers who took out a second mortgage because they couldn't afford a large down payment and didn't want to pay for mortgage insurance." Naturally these people bought homes at the peak and now the home prices are below the combined 1st and 2nd mortgage balances.

What is "prime" about a second lien loan to a borrower without a standard down payment? How can this ever be considered "prime"? These loans were miss-classified by CFC. CFC wanted to put paper on its sheets with disregard of reality. This says nothing about the economy or the huge standard mortgage markets.

AMZN beats earnings bigtime. It's stock ripped up afterhours. Who are Amazon's customers? The consumer.

This is the third major selling fit that the "subprime" screech has generated [late Feb, early June, and yesterday]. I think "subprime" mortgages are the housing loan analogue to "high yield" bonds [ aka "junk bonds" ] in the corporate markets. In the 1989-90 period, there was a seize up in the junk bonds market that caused lots of problems. This was legislatively created as Congress banned junk bonds from S&L balance sheets and the insurance industry created new capital requirements that greatly cut insurance company holdings. So the junk bond market had much forced selling and few buyers. Simultaneously, there was a commercial real estate debacle as that market was overbuilt and the S&L and insurance company loans had reached idiotic levels. A major investment bank went bankrupt [Drexel Burnham Lambert]. Combined with the surprise first Gulf War and its oil price shock, we had a short recession.

Some LBOs are actually having to pay spreads and terms that are reasonable - how shocking! And the bridge loans firms are re-learning the lessons of the past. High yield spreads are actually getting reasonable - they were insanely thin in the Spring. By the way, the historical cumulative default rate on Ba/BB corporate bonds is about 20%. For B/B corporates it's about 40%. Recent corporate default rates are far, far lower. So junk spreads under 250 for Ba/BB and 400 bps for B/B are stupid. Some of those spreads were at the "stupid" levels recently. Have any major LBOs defaulted? No. Have we seen any major defaults? No. This is a move back to reasonable pricing - aka a correction.

You can see how different the 1989-1990 period was: massive dislocation in multiple problem sectors and legally forced selling plus a surprise war. And now instead of predicting a housing recover soon we hear it's a "Depression" and no recovery until 2009. No one seems to want to buy the homies now or is predicting a bottom. Last summer and fall everyone was buying homies, thinking it was the bottom. Bill Gross says a big drop in equities coming. Hmmm. Wasn't he saying that last year? Isn't he a bond guy? Hmmmm.

So without a recession and since bottom fishing seems dead, is the "bad" news all in? Is it really that "bad"? Or is this just beefer panic and profit protection selling and more shorting by the bears? And even the Fed does expressly say they are watching the housing markets closely. Uh, that means that they will consider a rate cut if it gets as "bad" as the bears say it will. I think they will cut this fall, for several reasons including the downtrend in core inflation rates.

So running threw my mind as I sat watching the birds and squirrels while listening to Tommy Dorsey with Frank Sinatra singing was how "stupid" this selling in the major financials seems. And in the past at those times I've bought stocks. So yesterday in the comments I posted that I put some fins on the sheets - just to remind me to look.

I'm going to build a big position in the major financials - only the big ones like BAC, C, JPM - maybe more as I look around. Their PE multiples are really low and I think way undervalued. My Alpha Fund target return is 30% per year and I think this sector will give me that leg next year. I'll average in over six months or so - you have to use time diversification on these type of moves to avoid overtrading.

PS: No surprise, the bears are hitting the early bounce. Be patient. Buy dips of good stocks if you have cash.

PPS: Interestingly, I heard that some beefers are stopping redemptions. Hmmm. Beefer liquidations would be a plus long term, imho.

65 comments:

Bud said...

I agree Frosty. Trading curbs need to go.

Bunkerman said...

lol I think they should tighten the trading curbs and bring back the uptick rule and apply it to ETFs. Beefers are the enemy. Anything to restrict their manipulation games is good hehe.

Spin-em said...

LIVE YANKEES LIVE...Meeeeeeehahaaaa

Bunkerman said...

Cleveland looks better than the Yanks. Isn't there just one wild card spot?

Go Tribe!!!!!!!!!!!!!!!!!!

Waaaaaa Hoooooooooooo!!

Spin-em said...

Yes B..one wild card..The tribe does look good..up 4 games on the Yanks.....

Bud said...

Rofl...restrict. Wow B'man. I thought you believed in a free and fair market. Buyers and sellers should never be restricted from executing trades. I always thought the uptick rule for shorting was unfair and finally the SEC agreed. 'manipulation games'...lmaoooooooooo

Bud said...

yankees suck !!

Spin-em said...

frosty with a BOBJ winner..congrats

Bud said...

B'man you know the gold guy who posted last night? Who is he/she?

Bud said...

Ya....should have listened to frosty on BOBJ.....ugh

Bud said...

The problem I had with Frsoty's BOBJ post was.....I couldn't tell if he was sayin 'buy it' ..or 'short it' so i passed on it. Please frosty......make your posts easier to understand.

Bunkerman said...

No, Bud. Blogs sometimes get people posting who are pumping ther own sites. Perhaps one of those? I don't know the poster.

mfl59 said...

die yankees die!

Bud said...

Looks like S&P 500 is up 6% this year. What was your year end target B? Isn't 6% about the mean for s and p over last 50years?

Bunkerman said...

These guys on Bubblevision are talking "corporates" when they mean junk. Most corporate paper is investment grade. Almost all the big caps are investment grade.

Invetment grade corporate yields are following Treasuries down. There is only about a 5 bps spread increase. Sheesh. More miss-information.

The Merrill High yield 100 spread has widened about 50 bps to about +320 now. That's a fair spread.

Bunkerman said...

I said I was looking for +20%, about 1700 by year end. I haven't changed my mind.

Bud said...

darkside list

PNSN if it cracks 19
NAFC freefall
ASYS gonna fill the gap to 10?
MSTR lol

some rollover patterns developing
RVBD LOOP LNN

FTEK 50dma pierced

PS. last time i posted a list....frosty faded it and made a killing

Bud said...

Brokers on my long list....especially GS.

mfl59 said...

wow 1700 for the SPX by year's end...that is pretty aggressive...you must be a loyal viewer of Mad Money...

Bunkerman said...

Nah. I was way ahead of Cramer. He might read my blog, though ;-)))

Bunkerman said...

Looks like the bounce was mostly short covering and they're re-loading. Patience for longs. Average in. I have about 1/4 of my planned financials long postion.

Frosty said...

CEGE...looks like a fish to me....good juice the past two days with 15 days to cover...BBH has been hammered and is basing while the market contracts....bio wreck a bright spot yesterday, perhaps the bears will move on from CEGE.

mfl59 said...

beefer raids everywhere!!!

Bud said...

Frosty I thought you were out killing animals.....uh....i mean on vacation.

Bunkerman said...

without the uptick rule, bear raids are a lot easier. They can just push a stock around ... like a ping-pong ball.

Bud said...

Gimme a break B'man. That is such nonsense. Traders buy and sell stocks cuz they either want'em or hate'em. Has nuthin to do with the mechanics or rules of trading. Lmaoooooooo....ping pong ball

Bunkerman said...

gee you are naive, Bud. Beefers and the street floor guys push a stock around to run stops and shake out weak hands all the time. Hmm. I think you don't believe in window dressing, either?

Without the uptick rule, it's the 1920s manipulation all over again. Jesse Livermore would rule. And the Beefers have huge capital to play with, too.

Now they don't have to go through ETFs - they can hit the stocks directly.

Bunkerman said...

But for patient long term investors, all that virtual froth gets washed out. Hence my buying tactics of time diversification.

Anyone doubt that NAzz short interest will be a record?

Frosty said...

Bud...think I'll take friday and monday...you'll be proud of me, going to spend the time water skiing...may dip my worm a little, as trout and eggs makes one fine breakfast. But for the most part I will just burn mass ammounts of fuel, gas and oil....boat, quads, jet skis....global warning can kiss my arrrsssssss....lol

Bunkerman said...

It's a beautiful day here - sunny, dry, 80F. I might go read in the sunroom awhile. Or take the K9 squad on a long range patrol past the kill zone hehehe.

Frosty said...

kasstanza putting on some MER...Bunkerman in bed with the beefer bear poster boy for cnbc...bears luv value traps, I just don't get what the rush is....I want at BAC 45...sub 10 pe and a yeild on par with the ten year as a starting point...below that it begins to get cheap.

Bunkerman...k-9 unit...nice.

Bunkerman said...

Ooops, I meant observe the tree line from my observation post.

Frosty said...

Bud 7-8 today on the list, you must be drunk again....make sure you hit the h20 before you pass out.

Bud said...

Exactly B'man. Since you are a long term investor why do you even care about trading curbs or uptick rule. It's meaningless in a 3-6-9 month horizon.

Screw that frosty. I ain't drinkin anymore....without drugs.

Bud said...

Uh....oops.....now I get your H2O joke. Sorry frosty.

P.S. FTEK....lmaooooooooooooo

Bunkerman said...

I think people with less experience than me in long term investing can get scared & shaken out by the beefer tactics. Since I'm a libertarian populist, I care about the common man and a level playing field.

Bud said...

Roflmao...'the common man'.

Bud said...

Come on Frosty....gimme some stox. I am a poor 'common man'. I need to make money.

Frosty said...

PCAR ripped through the 50 day Bud so you should be up at least 10...wouldn't you think CMI should have 6 on the way to it's 50....maybe you'll do that one as I can see you are still stalking yimmie boyah.

Frosty said...

what we need Bud is for spinny to put down that mint julep, get out of the cement pond and post some picks. he is the guy printing bank today would be my guess.

Bud said...

PCAR i came late to the party. But they were still serving . Good one frosty.

Bud said...

Spin must be busy with Gmac's wedding arrangements.

mfl59 said...

Gmac get cut by the 76ers yet?

Frosty said...

Bud you doing the AAPL...well of course you are...just need to know if you are going to butta it up.

Spin-em said...

rofl

Hes a married man

signed with italian team for 250k

didnt look good in the 2 nba camps ..he was hurt but..they ran right by him on D..so he went for the cash.....good for him

Frosty said...

TTPY someone attempting to gun it right here.

mfl59 said...

okay bunkerman i am going to take down some of these refiners here...frosty stay short because im sure my timing is wrong...

Bud said...

No way frosty. If i do an earnings trade ...i get smoked. And the ones i do on paper...are monsters. e.g....yesterday paper trade NTRI short......oh well.......guess i'm destined to a life of poverty.

mfl59 said...

I must say Gmac's antics in the Big East tournament a couple years ago were some of the greatest things these eyes have ever seen...

Frosty said...

MLF thanks for the heads up, no need to be a pig....if we swap direct we can save the commision...just think about it.

Frosty said...

come on Bud man up....gun to head AAPL up or down...christians or lions?

Bud said...

Gun to my head.......i would rather be short than long. But....uh.....gun to my head...i prolly shit my pants first.

Bud said...

Speaking of gun to the head. Hey B'man , you sleep with a loaded gun under your pillow? What about mrs B....she go to bed strapped too?

Spin-em said...

lmao...strapped

Bunkerman said...

strapped. yeah, I was trying to remember that ghetto word of Bud's. Last weekend I was strapped to the nines ;-)

Bunkerman said...

no Bud. Dogs are first line of defense. They slow them down while I get my locked roscoe (hmm or shotgun) to smoke the bad guys ;-)

Frosty said...

should I tell Bunkerman about that little play on words or should you Bud? I wouldn't want him running me over with his tank if I were you...to imply the mr b digs the snap on tool is just sick. Vick treated man's best freind better. you disgust me.

Bud said...

Lmaooooo B'man. Your strategy pretty lame. Dogs can be easily neutralised......especially if i bring mike vick along.

Bunkerman said...

I luv that word, "roscoe" ;-)

Bud said...

Lol frosty.....i knew you'd find that funny.

Bunkerman said...

Uh, Bud, since I can get my shotgun loaded with #1 buck and slugs in a long, long magazine and my roscoe with hollow points in about 5 seconds, even a pack of 10 Vick dogs and a few homies would be history in short order. I practice a lot ;-))))

All my dogs need to do is give me 5 seconds warning. Which they do well.

Bunkerman said...

Hmm. BAC is back up to Monday prices. C and JPM lagging. Shoulda put it all in BAC. I guess the IB operations are making C and JPM lag.

Bunkerman said...

I'm learning how to use this Windows Vista computer. It's OK, so far. Better than XP and easier.

Frosty said...

Bunkerman...BAC made my earlier post look silly with that dividend bump over the ten year...smart, very sharp...good one big shooter.

Spin-em said...

ICE....quintuple bottom???