Markets
"I have been at this for 22 years, and this is about as bad as I have seen it in the fixed-income market."
SAMUEL L. MOLINARO Jr., Bear Stearns’s chief financial officer.
What does that take it back to 85?
You have to think things were worse earlier in the 80s when treasuries blew out to double digits. I was pretty young. But I do remember unemployment lines (maybe not my family but with friends of my family but I honestly do remember). I am not sure that there is an economics text that says what happens next. Probably Manics, Panics, and Crashes.
Do you lower rates, and blow out the dollar which is getting killed? Lower rates are already priced in so does it even hurt the dollar? Do you institute a plan to help people pay their mortgage on a national scale, and start a huge welfare program to protect the American Dream and train people that it is expected that the government pays their mortgage.
Do you do what I personally think is needed to be done which is hold firm, say FU to the market and clean up credit, let equity holders in Bear and Lehman etc work it out?
If the investment grade bond market is any indication on Friday, things are pretty bad. I was on the phone with people in investment grade financials, and it was an ugly day. Seriously what do you do if you were long A Countrywide paper for 40-50 off and it is now 300 off. I guess if you liked it at the low spread you love it at 300. I cannot answer that question. And the agencies just came out with ratings earlier in the week. How messed up is that. Since when does A paper have to say that they have liquidity? The question to answer as part of this job is: when is it time to go long something that you have been short? It is not like I have a damn crystal ball. But having a crystal ball is exactly what this job entails I guess. This job is really putting a probability of future outcomes and handicapping it better than the market. Crazy.
I love how I had to qualify everything I always said about Countrywide so people did not think that I was insane on my job with this statement: "I know it is investment grade, and it is low probability, and we will probably just pay our 50 BPS and not make money, and houses will probably not go down in value, and the government will probably save everyone, and the plunge protection team will never let it fail, and the hedge funds will probably just save it if anything bad ever happens"
In the end, being a contrarian or trying to "hit it where they aint" is worthless, because people do not care if you were right, even if you made money in the portfolio or you did not. There is no position that can make up for the fact that people think you are insane. And then the douche bags that argue with you, and you say "so you are long the Countrywide at 30 BPS" and obviously they are. Which is so mind boggeling in and of itself. People question the high yield market being tight, but 30 BPS on a portfolio of illiquid assets, levered in the teens on an asset to equity ratio basis. Are you seriously long this? Are you now long it at 300? I bet you are blowing it out your ass.
I do not know the solutions to the current problems, but I suspect that Wallstreet Bonuses (me included) will be fractions of what they were. And do the banks become government entities when the government saves them? Paul, Ben, anyone? Can the government even save this market. Are we just fucked? Am I too bearish? What happens when things just opt to shut down?
Toppe - This is not LTCM blowing up anymore. This is Lehman, Bear, CFC. What the F?
SAMUEL L. MOLINARO Jr., Bear Stearns’s chief financial officer.
What does that take it back to 85?
You have to think things were worse earlier in the 80s when treasuries blew out to double digits. I was pretty young. But I do remember unemployment lines (maybe not my family but with friends of my family but I honestly do remember). I am not sure that there is an economics text that says what happens next. Probably Manics, Panics, and Crashes.
Do you lower rates, and blow out the dollar which is getting killed? Lower rates are already priced in so does it even hurt the dollar? Do you institute a plan to help people pay their mortgage on a national scale, and start a huge welfare program to protect the American Dream and train people that it is expected that the government pays their mortgage.
Do you do what I personally think is needed to be done which is hold firm, say FU to the market and clean up credit, let equity holders in Bear and Lehman etc work it out?
If the investment grade bond market is any indication on Friday, things are pretty bad. I was on the phone with people in investment grade financials, and it was an ugly day. Seriously what do you do if you were long A Countrywide paper for 40-50 off and it is now 300 off. I guess if you liked it at the low spread you love it at 300. I cannot answer that question. And the agencies just came out with ratings earlier in the week. How messed up is that. Since when does A paper have to say that they have liquidity? The question to answer as part of this job is: when is it time to go long something that you have been short? It is not like I have a damn crystal ball. But having a crystal ball is exactly what this job entails I guess. This job is really putting a probability of future outcomes and handicapping it better than the market. Crazy.
I love how I had to qualify everything I always said about Countrywide so people did not think that I was insane on my job with this statement: "I know it is investment grade, and it is low probability, and we will probably just pay our 50 BPS and not make money, and houses will probably not go down in value, and the government will probably save everyone, and the plunge protection team will never let it fail, and the hedge funds will probably just save it if anything bad ever happens"
In the end, being a contrarian or trying to "hit it where they aint" is worthless, because people do not care if you were right, even if you made money in the portfolio or you did not. There is no position that can make up for the fact that people think you are insane. And then the douche bags that argue with you, and you say "so you are long the Countrywide at 30 BPS" and obviously they are. Which is so mind boggeling in and of itself. People question the high yield market being tight, but 30 BPS on a portfolio of illiquid assets, levered in the teens on an asset to equity ratio basis. Are you seriously long this? Are you now long it at 300? I bet you are blowing it out your ass.
I do not know the solutions to the current problems, but I suspect that Wallstreet Bonuses (me included) will be fractions of what they were. And do the banks become government entities when the government saves them? Paul, Ben, anyone? Can the government even save this market. Are we just fucked? Am I too bearish? What happens when things just opt to shut down?
Toppe - This is not LTCM blowing up anymore. This is Lehman, Bear, CFC. What the F?
posted by MattKelly54 at
1:18 AM
11 Comments:
If you look at the volume CFC has probably been out at 300 since the 27th, it just didn't trade until Friday when the street finally covered their shorts. CFC has a floor on at as a more diversified player with tons of deposits has to be looking at instantly being the number one servicer and originator, even it housing won't stop going down until 2010.
Good color Jas. Thanks for the input. We should talk.
But. You figure out the servicing portfolio and tell me that someone wants it on their books and I'll go long.
They have tons of subprime in the MSR portfolio and more than 20% is delinquent and going into default. I need to see some data on what that does to cost until I go long. Why not just go long Chrysler Finco at L+400 at 95. This is what is wrong with the market. No one really understands what is going on. Things are too complicated for at least this analyst to wrap the brain around.
And what happens to MSR as rates are lowered and credit is still bad. Just my thoughts, but I do not understand it.
Just as an input I read somewhere that defaulted mortgages cost 5 times more to service than money good.
That means in my mind adding infrastructure, programs, and people at a time where you need to cut costs. Plus the news that banks are raising the costs of financing on jumbos is seemingly bad.
apparently the floor is now in the 400s.
This is hysterical. Right or wrong it is absolutely hysterical.
http://www.youtube.com/watch?v=rOVXh4xM-Ww
I held a meeting with the president of a research firm that Paul recommended me to called Inferential Focus that I am now going to use 5 votes a quarter to receive...the guy, Charlie Hess, has been around for a long time and he walked me through this thorough examination of the CDO market that his firm put together.
CRAMER MIGHT BE THE MOST HONEST MAN ON NATIONAL NEWS!
After really examining this market and the recent events I firmly agree with Matt and believe that the market, most of society, most of wall st, and even the FED have NO FUCKING IDEA how bad this situation truly is out there.
The CDO market is unbelievable!
Let me see, here is a new market, with unknown players, in an OTC format that decentralizes all transactions, and that has NO PRICING!!!!
How the fuck can anyone really no how bad things are if there is no pricing? In germany last weekend the 6 largest banks stepped in and rescued (LTCM style) a couple billion hedge fund called IKB that had a margin call on it CDO portfolio on a very small move - i.e. there was a little leverage in that portfolio. Why save the fund you ask? Because the banks knew in private that they couldn't afford to liquidate & force a repricing of the securities that would ripple through the entire system & cause systemic repricing that would likely result in a domino effect of margin calls & asset impairments.
MY FRIENDS, I FEEL LIKE I HAVE HAD AN EPIPHINY (sp?)! The enormous credit creation that I bitch about & feel that eventually will result in systemic inflation is hiding in the $400 trillion (YES trillion with a T) credit & mortgage derivatives markets that are composed of securities so complex no knows how to accurately price the securities!!!
I mean you have to be fucking kidding me if you are complacent right now...today's rebound in the market means nothing. The only thing that will save the financial system is lowering rates. However, lowering rates will CRUSH the dollar that has already been getting crushed. I really feel that lowering rates will drive gold well above $1000, the euro to $3, & the pound to $4. I think right now is a good time to go long the YEN...I will explain in my next note as I don't have time right now. In addition, I think we can expect the markets to get crushed even if rates go lower as many foreigners will definitely be selling dollar denominated assets at a fast pace as it will likely be a race through a mouse hole.
However, I AM OFFICIALLY CHANGING MY FORECAST...WHILE I THINK RATES SHOULD GO UP, I THINK THAT THE DEFLATIONARY EFFECTS WOULD LITERALLY CRUSH THE WORLD & POSSIBLY RESULT IN A SYSTEMIC SHUTDOWN OF THE ASSET MARKETS...A SCENARIO THAT I JUST DONT SEE PLAYING OUT WHICH IS WHY I AM NOW IN THE LONG EDZ08 96 CALL CAMP LITERALLLY.
I admit that I am a stubborn person, but ultimately I am practicing member of the House of Wisdom & Logic (obviously something most of wall st. & PE firms pass by in their fucking Bentley's and throw their empty bottles of Dom Perignon at & laugh.
Logically there is only one way that rates can go if we don't want the Great Depression x 10, which is what would manifest if we decide to turn America into a true socialist country that relies on the government for everything b/c higher rates would literally bankrupt a large chunk of society & numerous corporations with floating rate credit facilities.
My friends, my portfolio now includes no equities. I long the EDz08 96 calls, the Z08 185 OJ calls, CTZ07 futures, i own gold futures / gld shares / & physical gold & silver, I own JPY Z08 100 Calls, which are deep out of the money, & finally I am holding my long volatility straddle on the R2K index.
THINGS ARE BAD & THE MARKET IS COMPLACENT = THE EQUIVALENT OF A BLIND MAN RUNNING TOWARDS THE EDGE OF A SECTION OF THE GRAND CANYON THAT HAS NO SAFETY BARS.
BTW, el cid thx for posting that cramer vid as it was truly hilarious.
In the late 80's Drexel Burnham Lambert was the junk bond market. Milken created it and they ran it. Also in the 80's bank deregulation allowed S&L's to open their portfolios to higher yielding investments, which they started investing in junk bonds. Small town bankers buying high yield credits from Wall Street. You can imagine how that worked. Over 1000 S&L's eventually went bust and the government spent $150b bailing them out. About the same time Drexel went under causing the junk market to crater. Literally the junk bond market was shut down. Someone tell me why this will be worse. Better yet, ask your bosses/mentors - those who were around then and then tell me what they think. Note at the same time Citbank almost went under for bad loans to Latin America, there was a war in Iraq, and a housing crash in California, Boston and several other cities. Markets werent great but they werent horrible either. There might be no comparison but it seems reasonable.
At the beginning of the year, for shits and giggles, we took an internal poll/forecast for the year. I had 1630ish on the S&P, 4% on fed funds and 5% on the 10 year, $500 gold, $30 oil (oops) on the 2007 is 1997/1998 thesis (I forget my dollar call but I think I had it strengthening). I am sticking to it, directionally at least. Everytime the Fed has an extended period of rate hikes there is a financial accident and this is it. If I am wrong, it is a mild recession and stocks are down 20% from here - small caps down 30% or so. Maybe my psyche is still in shock from the 2000-2002 cuz this just doesnt worry me a whole lot.
FYI, I came up with the ultimate disaster hedge. Sheep farm in New Zealand. When WWIII comes, I will be there. Get your food and clothing from the sheep and vegetables on the land. Not many targets for crazy dictators or extremists down there and no radiation fallout. In the meantime, collect the income from leasing the land to local farmers. Now I just gotta come up with the initial cash for the purchase.
Cid-
Did you hear that West Virginia came up with a new use for sheep?
Wool
I still think we are F'd. Ben is right the massive inflation by Greenspan just made asset prices rise but income barely rose. Add to this that everyone is levered to the gills, and you have a deflationary credit event.
The only think supporting the U.S. currently is the inflationary pressures of the massive war spend. Which is much greater than even Vietnam when adjusted for inflation. Just imagine lowering taxes, and at the same time starting up a company (the war) that has injected 1 trillion dollars of funds into the economy.
Yet labor costs have not increased that agressively. But asset prices have. Deflation here we come. If you think the fed has a backbone, do not buy gold, silver and short the shit out of equities. If you think they do not have a back bone you buy gold and silver and go long equities.
I agree with Ben, they are going to lower rates. They do not have a backbone.
Is liquidity still around when AA banks cant get overnight funds and libor resets 50 BPS higher on credit concerns?
Liquidity is there until it isn't. And it isn't.
One difference between now and the late 80's. Oil is $80 per gallon. Gold is at $650. Silver is at $12. Thanks to ethanol (the dumbest idea ever) corn is at $340.
Hey Cid, I'll talk to my mentors when they come out from underneath the desk.
That's good. LOL.
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