Sunday, January 31, 2010

Check Out the SIGTARP report

The SIGTARP published its latest quarterly report to Congress yesterday. I've read through it since I have nothing better to do on a weekend. There's both good news and bad news in there.

The good news is that the taxpayer won't lose both an arm and a leg on TARP since some of the investments have been repaid. It looks like we'll just lose a leg and most of our fingers but keep much of the arm. Yay!

The bad news is that TARP's goal of increasing lending to small businesses still hasn't been met. Only a small fraction of home mortgages have been modified. Executive compensation at bailed-out banks is out of control. The economy is still in danger because too-big-to-fail banks are not disincentivized from taking huge financial risks. In other words, TARP has been largely a very expensive transfer of wealth from the American taxpayer to rich people on Wall Street with very little public benefit in return.

Items of note . . .

Page 11: The Treasury Department refuses to erect information walls within PPIP (further discussed in the report's Section 5), leaving open the unmitigated potential for fraud and insider self-dealing.

Page 16: FRBNY officials didn't review AIG's compensation plans as thoroughly as they should have, and didn't share what they learned with Treasury. IMHO, Timothy Geithner apparently doesn't drive his staff hard enough to find out what's going on.

Page 21: Government officials continue to resist transparency even though the report shows that transparency would not hamper TARP's execution.

Page 61: Treasury finally agreed, over a year after the initiation of TARP, to publish reports from TARP recipients on the use of public funds. Better late than never. Couldn't they have called the SEC to get some insights on how EDGAR works?

Page 89: Support for small business lending is moribund with no get-well date on the calendar.

Page 100: Table 2.28 shows the incredibly small number of permanent mortgage modifications accomplished by the top 5 servicers. Change you can believe in!

Overall, this is a competently written report. It shows that TARP is a costly mess that has largely not solved the problems it was designed to address. That's why the U.S. economy is still on thin ice, awaiting the next break. What still surprises me is that investors are willing to buy stocks in the face of such high-risk headwinds. I'm going to sit on my cash pile and hoard my gold for a while.

Wednesday, January 27, 2010

Missing the Moon

America's technological edge through much of the 20th century owed a lot to its manned space program. The future of America's presence in space is now in doubt:

When the White House releases his budget proposal Monday, there will be no money for the Constellation program that was supposed to return humans to the moon by 2020. The troubled and expensive Ares I rocket that was to replace the space shuttle to ferry humans to space will be gone, along with money for its bigger brother, the Ares V cargo rocket that was to launch the fuel and supplies needed to take humans back to the moon.

There will be no lunar landers, no moon bases, no Constellation program at all.

The torch will soon pass to rising powers in the BRIC bloc:

India will launch its first manned space mission in 2016 in a bid to match space pioneers such as Russia and the United States, a top official said Wednesday.

The government had already approved plans for a human space flight project by the Indian Space Research Organisation (ISRO), and last year gave the go-ahead for funding of around 2.8 billion dollars.

Spacefaring nations demonstrate confidence in their own futures. The end of the American empire is lost among daily news items like this. Such is the sweep of history. I keep tabs on the defense industry for just this reason. Many defense contractors - Lockheed Martin, General Dynamics, L3, and others - derive a healthy chunk of their revenues from NASA and DOD space spending. Constellation in particular is supposed to be a big winner for LMT. Perhaps I should say it "was" supposed to be a winner, until Uncle Sam spent himself into a corner.

See what happens when you blow a stimulus package on union shop overtime and fences to nowhere? Now I'll have to look for some good Indian aerospace companies to review.

Nota bene: Anthony J. Alfidi is long one put against LMT as a hedge against a decline in defense and space spending by the U.S. government.

Tuesday, January 26, 2010

Container Rates Picking Up

I've been noticing quite a few headlines in the Journal of Commerce's daily e-bulletin that describe how shipping rates have been climbing:

Ocean container spot freight rates on the key export trades out of China to Europe and the U.S. east and west coasts soared by an average of 24 percent in the past three months.

The rate of recovery is much faster than expected, buoyed by a surge in demand this month, according to Alphaliner, the Paris-based container shipping consultant.

Shippers and their brokers are bidding up the price of ocean-going space. This makes me take a second look at shipping stocks, particularly Ship Finance International. It's the only shipper that looks remotely attractive from my deep-value standpoint. The single-digit P/E ratio makes it attractive but I still worry about its debt load. I'm going to be patient with SFL and wait until the next leg down in the market before I buy.

Monday, January 25, 2010

CRE Bomb Flattens Stuyvesant Investors

The CRE default train is picking up speed. A huge and storied residential development in the Big Apple just got handed to its creditors (i.e., the Greater Fools) via jingle mail:

Tishman Speyer Properties LP and BlackRock Inc. will cede control of Stuyvesant Town-Peter Cooper Village to lenders after the value of Manhattan’s largest housing complex fell and they were prevented from raising rents.
Oh, BTW, CalPERS was one of the biggest investors in this property's mortgages. Remember their plan to double-down on illiquid assets? Great idea. :-( BOHICA, California taxpayers, because you'll get the bill to fill CalPERS' smoking holes.

Stuff like this is making me happy that I bought puts against IYR, a real estate ETF.

Thursday, January 21, 2010

Market Drop Admits to Phony Returns From OPM Gambling

Today's market action should have shocked even the most complacent bull into reconsidering the strength of the so-called recovery. The market responded negatively to the chance that the plug may soon be pulled on the casino:

Obama said Thursday he would ask Congress for limits on how big banks can become and to end some of the risky trades financial companies use to supercharge their earnings. Investors sent stocks tumbling as they worried the plan would destabilize Wall Street's 10-month rally.

IMHO such a move is welcome. Hedge funds disguised as commercial banks (hello, Goldman Sachs) should not get FDIC insurance to gamble with OPM. Glass-Steagall 2.0 will rightly return banks to their retail lending cage and send the stock market to a more realistic level . . . farther down.

Updates to the Alpha-D for Jan. 2010

A few of my option positions expired unexercised. I always like it when that happens because I keep the cash I received when I opened the positions.

Here are the new positions I've opened:

Sold covered calls on FXI and GDX, expiring Feb 10.

Sold cash-covered puts on FXI and GDX, expiring Feb 10.

Sold cash-covered puts on TDW at 45, expiring Feb .10. I wouldn't mind being forced to go long Tidewater as I suspect its fair value is much higher than $45.

I haven't sold any FXI this month even though I'm becoming increasingly concerned about both the sustainability of China's growth and the veracity of their published statistics. I'm willing to let FXI keep riding for a month, but I'm going to take a serious look again in February about taking some money off the table.

I am hanging a big chunk of money on GDX (and some on ANV) on the likelihood that financial instability will return.

Monday, January 18, 2010

The Blog Is Back In Action

Hey folks. Sorry I've been dormant for a while but I was traveling recently. My computer's hard drive was finally fried beyond repair so I bought a new one. This blog is active once again.

U.S. markets are closed today so I won't be able to refresh my portfolio until tomorrow.

Saturday, January 02, 2010

The Limerick of Finance for 01/02/10

Stock returns in the 'Aughts were a poor show
Coming years will probably keep them low
With much debt to service
The markets will stay nervous
To BRIC stocks, the new gains will go

Friday, January 01, 2010

Okay, It's Now Obvious That China's Overheating

Happy new year! Let's kick off 2010 by re-examining my enthusiasm for China. Growth certainly looks healthy at first glance:

The Purchasing Managers’ Index climbed to a seasonally adjusted 56.6, the Federation of Logistics and Purchasing said today in an e-mailed statement in Beijing. That compares with 55.2 in November and the median 55.4 estimate in a Bloomberg News survey of seven economists.

Let's bear in mind that China massages its production numbers. The real numbers - in real estate - show China clearly getting into bubble territory:

And jump they have. In Shanghai, prices for high-end real estate were up 54 percent through September, to $500 per square foot. In November alone, housing prices in 70 major cities rose 5.7 percent, while housing starts nationwide rose a staggering 194 percent. The real estate rush is fueling fears of a bubble that could burst later in 2010, devastating homeowners, banks, developers, stock markets, and local governments.

How do you say "Flip That House" in Mandarin? Sometime before the end of Q1 I'm going to sell a bit more of my FXI and take some profits. It had a nice run in 2009 and China still has potential in the long run. The problem is that bubble-up economic madness drives equity valuations up a wall. Americans learned this lesson all too well over the last few years. Chinese investors will learn it soon enough.