Category: Articles

Threats, “Cram Down”, Funny?!?, Yankee Stadium

– I am stunned more people are not talking about this

– “News” vs “Opinion”

– Question: I thought this was hysterical, am I twisted?

– Why did they ever move???

Disclosure (“none” means no position):

These result are fantastic in the current environment.

Keys:
Fox News subscriber growth and ad rate growth nearly doubled operating income
Entertainment large releases coming this summer
$2.5 billion in cash
300 million shares repurchased raise EPS in quarter from $.94 last year to $1.02 this year

News Corp. Q3

Disclosure (“none” means no position):

If housing is to recover, we need buyers, and lots of them to soak up the existing inventory. Or I guess we could just keep bulldozing them into the ground.

Anyway, this from Zillow.com:

U.S. home values continued to slide for the ninth consecutive quarter, declining 14.2 percent from a year ago, and falling 21.8 percent since the market peak in 2006. Additionally, one-fifth (21.9%) of all homeowners in the United States is in negative equity, and one in five homes sold in the past 12 months was a foreclosure.

So, homes are more affrodable, good news right? Dig deeper folks.

From the Big Picture:

About a third of homes have no mortgages whatsoever. The unencumbered properties improve the homeowners equity data from the Fed’s Flow of Funds report. Add in 33% of homes with 100% equity and it skews the data. The total looks better.

before you say “So What?” co the following: We know that those homeowners that do not have mortgages — i.e., 100% equity — cannot default. So if we want to understand the potential further mischief real estate land can cause, it is the mortgaged properties we should be watching. Back out the third of home owners that have no mortgage — the 33% of homes with 100% equity — and the Fed’s measure of 43% net equity drops precipitously.

What is the number then? 67% of homes with mortgages have an equity of 15%. The worse number? 37% of the homes with mortgages are underwater.

Has anyone been able to secure a mortgage today on a new purchase for under 20% downpayment? Simply put, when you subtract broker commissions 2%-5%, it is safe to say selling home “a” and buying home “b” with the proceeds are over unless the buyer is doing a significant trade down or putting up near 10% of the new purchase price themselves.

This rolling of equity into a new purchase was a huge part of the bubble in housing as prices appreciated. It is gone for the most part now.

Here is the dilemma. Falling home prices are making homes more affordable, of that there is no argument. The problem is that falling home prices also sap equity from those sellers looking to use it to afford the next purchase. When you add tighter lending and higher down payment requirements you further restrict demand as you eliminate more marginal buyers from the pool.

Now, lets add the 2 million additional homes estimated to be foreclosed on this year, and another near 3 million people to become unemployed as the unemployment rate creeps to to the 10.5% level  now estimated. The pool of potential homes buyers? It is becoming a puddle…

“BUT”, you say. “what about the mortgage free homes, they may sell and the proceeds used to buy new ones”. What about that?

From Realtor.com

According to an analysis of census information by USA Today, there are 123 areas of the country where 40 percent or more of home owners don’t have a mortgage.

Many of those areas also never had any sort of boom in prices, either because they are in declining areas that have suffered job losses and dwindling population or because they are thriving retirement communities.

Cities with the highest percentage of owner-occupied properties that are mortgage free:

• Bluefield, W. Va.: 57 percent
• Sebring, Fla.: 56 percent
• Odessa, Texas: 54 percent
• McAllen-Edinburg-Mission, Texas: 54 percent
• Weirton, W.Va.-Steubenville, Ohio: 53 percent

Unless anyone thinks they convince me why/how economically depressed residents of Odessa, TX or retirees in Sebring, Fla. are going to pack up and move to Southern California and buy enough homes to soak up huge inventories, lets just put that argument to bed now.

Housing busts take years to work through, not months or a couple quarters. Please keep that in mind when using housing in projections….we are nowhere near done with this yet.

Disclosure (“none” means no position):

Earth, Kindle, Standing for the President, Road to Serfdom

– Population changes

– Why it can’t save newspapers (hat tip reader Chris)

– This is soooo weak…

– Crib notes illustrated

Disclosure (“none” means no position):

I’ll let this speak for itself as I agree with it 100%. Folks, we have contract law for a reason, it gives the markets a guide and allows for orderly transactions. First Congress attempted nullify it in the AIG (AIG) bonus issue and now the White House is trying with Chrysler bondholders. When both failed, they have resorted to stirring public outrage against those with whom they disagree. In both cases that public outrage has resulted in death threats against the vilified parties.

This is a dangerous game…

Unafraid In Greenwich Connecticut
Clifford S. Asness
Managing and Founding Principal
AQR Capital Management, LLC

The President has just harshly castigated hedge fund managers for being unwilling to take his administration’s bid for their Chrysler bonds. He called them “speculators” who were “refusing to sacrifice like everyone else” and who wanted “to hold out for the prospect of an unjustified taxpayer-funded bailout.”

The responses of hedge fund managers have been, appropriately, outrage, but generally have been anonymous for fear of going on the record against a powerful President (an exception, though still in the form of a “group letter,” was the superb note from “The Committee of Chrysler Non-TARP Lenders,” some of the points of which I echo here, and a relatively few firms, like Oppenheimer, that have publicly defended themselves). Furthermore, one by one the managers and banks are said to be caving to the President’s wishes out of justifiable fear.

I run an approximately twenty billion dollar money management firm that offers hedge funds as well as public mutual funds and unhedged traditional investments. My company is not involved in the Chrysler situation, but I am still aghast at the President’s comments (of course, these are my own views, not those of my company). Furthermore, for some reason I was not born with the common sense to keep it to myself, though my title should more accurately be called “Not Afraid Enough” as I am indeed fearful writing this… It’s really a bad idea to speak out.

Angering the President is a mistake, and my views will annoy half my clients. I hope my clients will understand that I’m entitled to my voice and to speak it loudly, just as they are in this great country. I hope they will also like that I do not think I have the right to intentionally “sacrifice” their money without their permission.

Here’s a shock. When hedge funds, pension funds, mutual funds, and individuals, including very sweet grandmothers, lend their money they expect to get it back. However, they know, or should know, they take the risk of not being paid back. But if such a bad event happens, it usually does not result in a complete loss. A firm in bankruptcy still has assets. It’s not always a pretty process. Bankruptcy court is about figuring out how to most fairly divvy up the remaining assets based on who is owed what and whose contracts come first.

The process already has built-in partial protections for employees and pensions, and can set lenders’ contracts aside in order to help the company survive, all of which are the rules of the game lenders know before they lend. But, without this recovery process nobody would lend to risky borrowers. Essentially, lenders accept less than shareholders (means bonds return less than stocks) in good times only because they get more than shareholders in bad times.

The above is how it works in America, or how it’s supposed to work. The President and his team sought to avoid having Chrysler go through this process, proposing their own plan for re-organizing the company and partially paying off Chrysler’s creditors. Some bond holders thought this plan unfair. Specifically, they thought it unfairly favored the United Auto Workers, and unfairly paid bondholders less than they would get in bankruptcy court. So, they said no to the plan and decided, as is their right, to take their chances in the bankruptcy process. But, as his quotes above show, the President thought they were being unpatriotic or worse.

Let’s be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients’ money to share in the “sacrifice”, they are stealing. Clients of hedge funds include, among others, pension funds of all kinds of workers, unionized and not.

The managers have a fiduciary obligation to look after their clients’ money as best they can, not to support the President, nor to oppose him, nor otherwise advance their personal political views. That’s how the system works. If you hired an investment professional and he could preserve more of your money in a financial disaster, but instead he decided to spend it on the UAW so you could “share in the sacrifice”, you would not be happy.

Let’s quickly review a few side issues.

The President’s attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him. Why is he not calling on his party to “sacrifice” some campaign contributions, and votes, for the greater good? Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power.

Let’s also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities. That he expects them to do so when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous. That hedge funds might not participate in these programs because of fear of getting sucked into some toxic demagoguery that ends in arbitrary punishment for trying to work with the Treasury is distressing. Some useful programs, like those designed to help finance consumer loans, won’t work because of this irresponsible hectoring.

Last but not least, the President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying.

The TARP recipients had no choice but to go along. The hedge funds were singled out only because they are unpopular, not because they behaved any differently from any other ethical manager of other people’s money. The President’s comments here are backwards and libelous. Yet, somehow I don’t think the hedge funds will be following ACORN’s lead and trucking in a bunch of paid professional protesters soon. Hedge funds really need a community organizer.

This is America. We have a free enterprise system that has worked spectacularly for us for two hundred plus years. When it fails it fixes itself. Most importantly, it is not an owned lackey of the oval office to be scolded for disobedience by the President.

I am ready for my “personalized” tax rate now.

Disclosure (“none” means no position):

This is awful. I get the whole “paint a rosy picture to restore confidence” thing and to avoid panic, but this is just wrong. Every potential “hope” for a recovery is conditioned with a factual reason that may not come to pass. If the good signs are based on hope the the downside risk fact, why are we supposed to be so optimistic? I get optimism, I am an eternal optimist but when it comes to this stuff you cannot ignore reality…

Here is the section to play close attention to:

We continue to expect economic activity to bottom out, then to turn up later this year. Key elements of this forecast are our assessments that the housing market is beginning to stabilize and that the sharp inventory liquidation that has been in progress will slow over the next few quarters. Final demand should also be supported by fiscal and monetary stimulus. An important caveat is that our forecast assumes continuing gradual repair of the financial system; a relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall. I will provide a brief update on financial markets in a moment.

Now, if we know 10 of 19 banks failed the stress test, CRE loans are about to cause another desecration of earnings and huge losses and all banks have admitted that consumers loans are expected to “significantly worsen” over the coming months, then, how do we NOT think the financial system is anything but far from repair?

Full text of remarks:
Ben Bernanke 4/5/2009

Disclosure (“none” means no position):

The market, after the gut wrenching sell-off earlier is now officially positive for the year. Things are rosy and we can embrace the new bull market, right? Not so fast.

Let’s not forget we are still over 40% off from the market highs of 2008, the national deficit and debt has officially exploded past even the worst assumptions of a year ago, unemployment is racing to 10%, housing has been decimated, 2 million more homes are estimated to be foreclosed on this year, the government is the largest investor in US financial institutions & has decided to arbitrarily re-write bankruptcy law and despite all this, we cannot get oil (USO) to go below $50 a barrel which means any growth or geo-political event causes a massive surge in prices (exhale).

But, you say, we are positive for the year. Problem, see, we have done this before. Look at the following data from the 1929-1934 market (hat tip reader Mike for emailing it).

There were plenty of times during that market it rallied for prolonged periods but one thing remained the same, the underlying fundamentals of the economy were lousy, just like they are today. The FDR government underwent a massive spending plan designed to “boost growth”, just like today (it did not work, just like today). Market will rise on the hope “things will be better soon” as folks want to be in on the bottom. As it rises others come rushing not wanting to be late for the party and the market bursts higher.

Then, things do not get better and a market that looked cheap just a few months ago based on the hope people had now looks grossly overvalued based on today’s reality. Then comes the slow selloff as reality sinks in. If you look at the time frames in the above chart you see the trend. Violent rallies up followed by slow painful selloffs.

Remember, this market decline started in October 2007 after it peaked. It gained speed in September 2008 and then again in February 2009. The recent near 30% rally has taken less than a month.

We cannot sustain the rally and turn the corner until the economy does, period. “Green shoots” are meaningless….meaningless. All government officials, despite trying to talk up the economy as best they can, admit we are not even at the worst of this yet. All agree unemployment will significantly worsen and the commercial real estate issue are only now beginning to make themselves obvious. Rumors are 10 out 19 banks failed the ill-devised “stress tests” and when results are actually released (any day?) it will only serve to diminish confidence further. The banks, who by these tests seem to be on already shaky ground are all saying they expect consumer credit to “significantly worsen”.

At the end of the day we need the economy to stabilize before we grow. We have not even begun to do that yet. If that is true, how can we take the 30% rally serious? Ought we not take it with a grain of salt?

I am…

Disclosure (“none” means no position):

Barney Frank, Poverty, Housing, Rally

– “No housing bubble”

– This is what “poor” is. It isn’t not being able to afford a 3000 sq. ft. house

– Can’t sell ’em? Wreck ’em.

– More doubts

Disclosure (“none” means no position):

This filing is a must read…it is only 11 pages, please read it.

All politics aside, this is serious stuff and the case has a huge effect going forward. IF, the government is allowed to redistribute the capital structure in a Chapter 11 proceeding as it sees fit, then the “contract” debtholders hold in purchasing seniority is no longer valid. If that is true, then the lending costs and availability of credit for all but the strongest institutions are both in for stunning negative changes. If “senior” debt instruments can now be treated equally with equity and subordinate debt, then why hold senior at an lower interest rate?

To now make up for this lowered safety, either the interest rate must now go up dramatically OR the debt will simply not be purchased. Both are very adverse for those issuing debt.

Do I care about Chrysler? NO. What I do care about is laws we have in place being respected and enforced. Would you buy senior debt in a troubled company knowing there is a case in which it’s place in the equity structure could be erased? There currently is debt in troubled companies I am looking at BUT now am not sure of the rules. If I do not know what the rules are, why would I even look at it?

This case has ramifications far beyond this group of lenders. For this reason, it bear very close watching.

From Page 8

The sale of assets by the Debtors to New Chrysler is not a sale that was
negotiated by independent parties at arm’s length. Rather, it is a sale that was orchestrated entirely by the Treasury and foisted upon the Debtors without regard to corporate formalities, the fiduciary duties of the Debtors’ officers and directors or the other important checks and balances typically found in good faith sales. Indeed, well before the filing, the Debtors had ceased to function as an independent company and had become an instrumentality of the government.

President Obama, in his public statements, made it clear that the Debtors would be required to pursue the sale transaction with Fiat and ordered the Debtors to cease all efforts to pursue any other transaction. Both actions are clearly inconsistent with the requirements of a good faith sale. And, the government exerted extreme pressure to coerce all of the Debtors’ constituencies into accepting a deal which is being done largely for the benefit of unsecured creditors at the expense of senior creditors. Under the circumstances, the sale transaction does not pass muster under section 363(n), let alone section 363(m), and New Chrysler simply cannot establish that it is a good faith purchaser in connection with the proposed sale.

FULL FILING:
Chrysler Non-TARP Lender File Objection

Disclosure (“none” means no position):