The Credit Crisis Financial Stocks Short Journal

[ralph00]

Speaking of alternate realities, Annalay's blog has an excellent piece about how new accounting rules are enhancing the apparent profitability of banks. I wouldn't say there is anything nefarious about this particular rule, its more like an unintended consequence. The bottom line is that the banks remain underreserved for likely losses.

http://annaly.com/blog/2010/05/25/BankProfitMirageIIIFromFASBWithLove.aspx

 

[Daal]

Quote from Debaser82:

Why not simply short all currencies trough the gold play?

Or would you say that trade feels to crowded for you at this point in time?

Most of my funds are in USD which I hedge by shorting a number of pairs, including USD/XAU(at Oanda). About 15% of the hedges are in gold and bit of silver, thats a lot already, if I'm wrong there I stand to lose quite a bit. EUR/USD EUR/CHF should move regardless of what commodities do.

 

[m22au]

Quote from Debaser82:

Why not simply short all currencies trough the gold play?

Or would you say that trade feels to crowded for you at this point in time?

If you assume that governments (particularly the US) won't interfere with the financial system as deflation continues to eat away at the world economy, then gold/USD should fall.

This is what we saw in the second half of 2008, when gold went as low as 680 USD.

In this type of deflation scenario, buying USD against most currencies (obvious choices are EUR or GBP) would make more money than being long gold/USD.

 

[ralph00]

Mark Zandi ready for padded cell ...

“It’s the best time in our generation to buy. It may be the best time in any generation. Mortgage rates are so low and with homes prices down and lots of inventory, you couldn’t pick a better time to buy or re-finance.”

Sounds like the same rational for buying C at 40 or at 30 or at 20 or at 10.

Home prices may have fallen far enough in some horrid exub 20 miles in the middle of the Arizona desert, or at some former pig farm in Merced, CA that is now populated w/Mexican gangs, or in some former swamp 20 miles from Ft Myers, FL. Trouble is, who in their right minds would want to live in these places, or what commerce is there in these places that could pay folks enough to live there.

I'm old enough to remember when it was a good time to buy - homes in good Phila neighborhoods sold at way less than 10 times what you could get for them in annual rent in the mid-80s. And that was with interest rates pushing double digits. So, over the ensuing years, you had the kicker of lower rates enhancing the value of your home and/or offering the ability to save a boatload by refinancing. When you buy when rates are at their lowest., that's fine if you get a 30 year fixed and don't plan on ever moving. For everyone else, not so great.

 

[Daal]

From Breakfast with Dave:
"CAN WE EXPECT A 30-40% CORRECTION?
There have only been two other times when the stock market ran parabolically up from a low in barely over a year, as was the case this time around (+80% from March 2009 to April 2010): the 112% surge from June 1, 1932 to September 7, 1932; and the 116% runup from March 2, 1933 to July 18, 1933. In the first case, we had a 40% correction and in the second, the correction was 34%. So, we are talking here about the prospect of a pretty hefty reversal in the S&P 500 that could very easily take the index down"

 

[Daal]

Must read by Montier
http://www.zerohedge.com/article/james-montier-debunks-traditional-asset-allocation-theory

He does goes into the 'problem' with commodity futures that I'm yet to understand fully. If its such a slam dunk that the contracts are priced to create a negative roll return, isn't a free lunch to take the other side?

 

[Daal]

If Montier is so sure the past will represent the future why doesnt he eat the long commodities in contango/short comm in backwardation free lunch?His net directional exposure will be close to 0(or at the very least it will be random depending where correlations go and which benchmark you are looking at) and he gets to collect his 'sure' profit

 

[Daal]

Lacker is off his meds, again...
"REMARK (26/05/10 Reuters): Likely to see low inflation for next couple of months. Will trend back to 1.5-2.0% rest of year. Asset sales before raising rates legitimate option. Decreasingly comfortable with extended period language.

VIEW: Lacker marking himself out - with Hoenig - as the most hawkish FOMC members though latest minutes highlight the extent to which they are likely to remain in a minority for some time yet, esp. on the issue of asset sales before/after rate rises"

 

[Ghost of Cutten]

Quote from ralph00:

Mark Zandi ready for padded cell ...

“It’s the best time in our generation to buy. It may be the best time in any generation. Mortgage rates are so low and with homes prices down and lots of inventory, you couldn’t pick a better time to buy or re-finance.”

Sounds like the same rational for buying C at 40 or at 30 or at 20 or at 10.

Home prices may have fallen far enough in some horrid exub 20 miles in the middle of the Arizona desert, or at some former pig farm in Merced, CA that is now populated w/Mexican gangs, or in some former swamp 20 miles from Ft Myers, FL. Trouble is, who in their right minds would want to live in these places, or what commerce is there in these places that could pay folks enough to live there.

I'm old enough to remember when it was a good time to buy - homes in good Phila neighborhoods sold at way less than 10 times what you could get for them in annual rent in the mid-80s. And that was with interest rates pushing double digits. So, over the ensuing years, you had the kicker of lower rates enhancing the value of your home and/or offering the ability to save a boatload by refinancing. When you buy when rates are at their lowest., that's fine if you get a 30 year fixed and don't plan on ever moving. For everyone else, not so great.

A home is not comparable to a leveraged bank. There is an asset value floor based on comparable rents and incomes for people in the area. A bank can easily go bust, a home very rarely does (only if there's a toxic spill or something like that). Furthermore, everyone is naturally short real estate until they own a habitable place.

There are plenty of acceptable places in ok areas selling at reasonable prices in the USA now. You can pick up 2 bed townhouses in Vegas for $60k, and they aren't in ghettos. You can buy detached family homes in middle-class suburban Detroit for $60k.

Considering that mortgage rates are pretty low, and anyone with $10-15k and a $20k pa salary can easily afford these places, I'd say that is objectively cheap. Do you think these places could be built all in for less than the current price?

 

[Ghost of Cutten]

Quote from m22au:

If you assume that governments (particularly the US) won't interfere with the financial system as deflation continues to eat away at the world economy, then gold/USD should fall.

This is what we saw in the second half of 2008, when gold went as low as 680 USD.

In this type of deflation scenario, buying USD against most currencies (obvious choices are EUR or GBP) would make more money than being long gold/USD.

Gold and especially gold stocks did well in the first half of the 1930s. Gold rose 60% and gold stocks rose about 400-500%. Given that the price level fell about 25% in this time, that's equivalent to an after-inflation return of 113% and 600% respectively. Pretty good when stocks were down huge.

I agree that if there is deflation, the USD will do well. One can easily solve this problem by going long gold/gold stocks and short EUR/GBP.