Wednesday, May 07, 2008

Clumsy and Random Thoughts

I wish I had time to write extended and thoughtful pieces on each of these thoughts. And hey, if my ad revenue increases by a mere factor of 50 I can probably quit my job and just write all the time!

  • It seems increasingly obvious that Bank of America is buying Countrywide for reasons beyond normal economics (which is what I had thought when it was announced). I suspect that CFC has significant liabilities to BAC which makes the de facto price BAC is paying less than the $7/share. Of course, that doesn't explain why they don't try to negotiate something lower now. Anyway, I'm really pissed off about Bank of America's claim of "no assurance" about Countrywide's debt. I'm not a holder of anything related to either company, so its really nothing to me. But its total bullshit that Bank of America could gain the economic benefit of owning Countrywide without the economic risk. This is exactly like the SIV mentality. Just keep Countrywide as a off-balance sheet, highly leveraged mortgage play! When has a plan like that gone wrong?
  • I think the markets are too optimistic right now. We've seen very few economic reports which indicate actual strength. Most have indicated things are better than expected. And look, that's fine. We've gone from deep recession with a banking crisis to a mild recession with banks successfully raising capital. Great. But I don't buy why the S&P will keep moving higher without economic reports which are actually good. Same goes for Treasuries, especially 5 years and in. I think they are oversold. For what its worth, I personally bought some S&P puts near the close yesterday.
  • Credit is tougher because its coming off such a huge trough. So I don't feel like getting short credit even though I acknowledge that should the S&P pull back 5% or so that spreads will almost have to widen. I just think the fundamentals behind credit are too good to fool around with short-term technicals. I feel like you run a serious risk of getting your fingers blown off.
  • On Treasuries: one problem is that technicals are pretty bad. There might be psychological support around 4% on 10's, but its broken decisively through the 120 MA after bouncing a couple times off the 3.87 level. I saw 3.90% as significant resistance, but its trying to break that today as well. Then I don't see anything between here and 4.07%. Plus you have plain old supply coming, with a 10-year auction today. So I think the play in the short-term is a bear steepener, but that's purely on technicals.
  • No one really knows why Fannie Mae rallied on ugly earnings. The most logical answer is OFHEO's annoucement that they'd be lifting some capital restrictions, which should make FNM more profitable in the future. It fits with the fact that Fannie Mae debt spreads widened modestly from about +55 on 10-year senior bonds to about +60. I think you can't discount short covering as part of the problem. We might be in a place where shorting mortgage-exposed companies just ain't going to work.
  • UBS is exiting the muni business, and are looking to sell the unit. They were the #3 underwriter, so it would have to be someone quite large to buy the business. Let's see, who among the large dealers doesn't have much in munis? I know! Bear Stear--... Er... Actually I don't know who the hell will buy UBS' muni unit. If they do want to make a move they need to do it fast. Otherwise rivals will start picking off the best muni bankers one by one until finally there is nothing left of the unit worth buying. One reader and I had a off-line chat about this and he suggested that there could be a re-regionalization movement in municipals. In other words, a movement away from consolidation in New York and toward mid-sized dealers gaining more power in that market. Lately spreads (meaning commission spreads) have been wider, especially in secondary trading. If that keeps up, look for regional brokerages to benefit.
  • I'm watching the MCDX closely. I think if the 5-year hits 50 or so, its a screaming sell.


Anonymous said...

"Great. But I don't buy why the S&P will keep moving higher without economic reports which are actually good."
When I was your age, we bought a stock cuz the company was hiring, meant they were growing so hard they had to increase employees. Since 1982, seems like they buy stocks cuz they're laying off, preserving earnings.

"Same goes for Treasuries, especially 5 years and in. I think they are oversold. For what its worth, I personally bought some S&P puts near the close yesterday."
So did I, but on Friday, 18 April. Only recently did I realize my mistake. "You can't fight the Fed" means that, sterilized or not, the new PDCF puts a lotta cash into the hands of Investment Banks. Its not like these institutions have ever performed an economically beneficial service. What they do well is run up prices on otherwise undesirable assets (mortgage securities, commodities, overpriced stocks & inferior bonds). Fundamentals tell me to stay in my short ETF but I'm not buying any more of it until the Fed hikes rates. Until a rate hike its a melt-up in the stock market "without economic reports which are actually good."

Anonymous said...

On the Fannie bit, I think their talk about future results probably had a fair amount to do with it. I was on the call yesterday (my Interesting Things from Fannie Mae post talks about their housing price forecasts). They were definitely downers on housing and the mortgage market. They are expecting lots more pain still to come. At the same time, though, their portfolio is seeing improvements in average FICO scores and LTV ratios, and they're raising their guarantee fees on top of it all. Management was VERY positive on the call.

Anonymous said...

Uh, you do realize the market starts rallying ~ 6 months before the economic data traditionally does? Normally your posts are very insightful, but we all know if you wait for GDP/employment to be gangbusters, you missed a lot of the rally.

At 15.5x trailing earnings, the mkt is not expensive.

Accrued Interest said...

John: Thanks for the link.

Anon: I don't totally disagree with your point. I mean, if my grandmother asked if she should put $$ into stocks I'd tell her it was a fine time to do so. I'm just saying that it feels like a pullback is in order, purely in the short term. I'll be very surprised if stocks aren't higher by year end.

bobo7874 said...

"At 15.5x trailing earnings, the mkt is not expensive."

It's more expensive than you suggest, if one believes that profit margins are at a cylical high.

Accrued Interest said...

For those who care, I sold my put last night.

Anonymous said...

When OFHEO announced FNMA/FHLMC could cook their books some more-- sorry lever up more even though most of the risk management issues from yester-year are still issues -- FNMA rallied because the stock market wants to be lied to

When the SEC announced they were going to require Wall Street to report liquidity and solvency ratios -- the whole increase transparency thing-- the markets tanked. We have a really good idea already that these things are insolvent, but we don't want indisputable proof.

Nobody wants to see the truth. We can't handle the truth. When you are bankrupt and levered to the kilt -- the last thing you want to hear is the truth.

PNL4LYFE said...

Being allowed to do more new, high margin business is a positive for FNM and FRE equity. Assuming their new business is competently underwritten (a big IF, I admit), it will generate income to help offset some of the losses in their portfolio. It's also possible that allowing them to write more business will decrease the depth of the eventual housing bottom in which case their existing portfolio will suffer smaller losses. If the bears are correct, the extra capital requirement wouldn't have been enough to save them from the eventual losses anyway.

Regarding their debt, I think the government action removes any remaining doubt; how can the government order them to lever up and then stand aside if they're about to default?

Anonymous said...

´which makes the de facto price BAC is paying less than the $7/share´ is not entirely (actually entirely not ;) correct.
ON TOP of paying the $7 a share BAC has to make an entry in their accounts to ´pay themselves´ the money CFC is owing BAC.