"Altruistica": Seeking a return to full financial disclosure and regulatory oversight. A financial market analysis blog for "entertainment purposes" only by an experienced CFA seeking new hedge fund engagements for investment writing and analysis. The author has experience investing internationally, running a hedge fund, making angel investments, and helping launch five startup companies. Investors should do their own due diligence.

30 November 2006

Paulson Balks on Hedge Fund Regulation

Anticipate-Hedging on Hedge Funds
Published: November 30, 2006

In October, a month after the Amaranth hedge fund lost $6.6 billion — the most ever by a hedge fund — Henry Paulson Jr., the Treasury secretary, spoke with Bloomberg News about the importance of “transparency” at hedge funds and “liquidity” in the system. His remarks were interpreted at the time as a warning, perhaps even a harbinger of more oversight.

What a difference a month makes.

In what was billed as a major economic address last week, Mr. Paulson devoted less than one-tenth of his speech to hedge funds, leaving the impression that he is basically satisfied with the regulatory status quo.

No one wants the Treasury secretary to be an alarmist. But other officials, notably at the Federal Reserve Bank of New York and the Securities and Exchange Commission, have gone further than merely acknowledging “potential risks” and pledging more “deliberations,” as Mr. Paulson did in his speech. Without pushing any panic buttons, they have broached the need for more collateral and better risk controls at banks that deal with hedge funds and greater oversight of hedge funds that solicit investments from pension plans.

Currently, some 9,000 hedge funds manage $1.3 trillion of investors’ money and control trillions of dollars more through their use of loans and derivative financial tools. They invest in all major sectors and operate through banks and securities firms, affecting the economy as a whole. And yet, they remain largely beyond the reach of federal overseers, a holdover from the days when they were much less ubiquitous. In 1990, only a handful of hedge funds existed, and altogether they managed just $39 billion.

Opponents of regulation routinely note that hedge funds are indirectly supervised because the banks they do business with are regulated. According to that logic, banks guard against excesses by their hedge fund clients to protect themselves from losses and regulatory problems. That reasoning also assumes that bankers are free of conflicts that might impair their judgment. But as hedge funds have grown, banks have earned increasingly larger commissions, fees and trading profits from them, a development that could induce some bankers to err on the side of recklessness.
There’s also an issue of practicality. As hedge funds become more numerous and complex, it is simply not feasible for banks to stay on top of their activities. And then there’s the matter of responsibility. It’s not a banker’s job to protect the public interest. It’s the job of regulators.

But, what's more ominous is this- Another GS Exec becomes the US Chief Trading Officer

The Fed’s new Chief Trading Officer, William Dudley, while addressing the NBER Conference in May, made what I think is an outstanding insight into the cause of market crashes. The trigger for collapse is typically unexpected.
Dudley said:

“Oftentimes, the trigger for the collapse of an asset bubble is some event that calls into question a widely-held market belief. For example, one trigger for the LTCM debacle was the decision of Russia to default on its ruble debt. This was unexpected because market participants thought the worse-case scenario was that Russia would just print more rubles to service its debt. Another example is the role of portfolio insurance in the 1987 stock market crash. Portfolio insurance works to limit risk if market prices adjust continuously. In 1987, prices gapped lower and portfolio insurance played an important role in making prices move discontinuously. After the fact, the flaws of portfolio insurance were self-evident. But when it occurred, it was unanticipated.”

Mr. Paulson was right when he noted in his speech that the need for regulation must be balanced against the benefits of flexibility. But the challenge of striking a balance is beginning to sound like an excuse for delay. It’s time to move the discussion beyond whether hedge funds require more regulation to how they should be regulated.

And look who got a nice boost from the Cerberus deal to buy out GMAC, former Treasury Secretary John Snow !! Funny how these great deals just work out...

Kerkorian Dumps Entire GM Stake
Move Clouds Prospects
For Auto Maker's Revamp
Of North American Unit
December 1, 2006

Billionaire investor Kirk Kerkorian Thursday afternoon unloaded his entire investment in General Motors Corp., according to a person familiar with the matter. The move clouds the outlook for a restructuring program intended to stanch red ink in GM's core North American operations and could mark the end of a 19-month-long battle over the fate of an icon of industrial America.

A person familiar with the matter said Mr. Kerkorian's Tracinda Corp. investment vehicle sold 28 million shares of the world's largest auto maker by output, at $29.25 a share. The shares were sold to Bank of America Corp., a key lender to Mr. Kerkorian, and represented Tracinda's remaining stake. Earlier Thursday, Tracinda said in a filing with the Securities and Exchange Commission that it had agreed to sell 14 million shares for $28.75 per share in a private transaction.
[Kirk Kerkorian]

The two transactions would bring Mr. Kerkorian's investment in the Detroit giant to zero. Tracinda last week sold another 14 million shares in a private deal for $33 a share. Before the sales, Mr. Kerkorian held 9.9% in GM, the world's largest auto maker by output.

At 4 p.m. in New York Stock Exchange composite trading Thursday, GM's shares were down 27 cents, or 0.9%, to $29.23. A sale of a block of 28 million shares moved Thursday afternoon, but it wasn't clear before markets closed that Mr. Kerkorian was selling his stake.

GM spokeswoman Gina Proia declined to comment. Tracinda spokeswoman Carrie Bloom also declined to comment.

Mr. Kerkorian's GM sales come at a point when the 89-year-old investor is ahead on his investment in the auto maker by less than $100 million, when dividends and gains from his recent stock sales are factored in. The gain represents a modest return on his $1.6 billion investment, falling well short of the multibillion-dollar profits he has reaped in the auto industry in the past.

The sales came as GM said it closed a deal to sell a 51% stake in its GMAC Financial Services unit, formerly known as General Motors Acceptance Corp., to a group led by Cerberus Capital Management LP. The transaction means GM will receive $14 billion over three years that it can use to help finance restructuring of its North American auto business. (Related article on page C5.)

"Successfully completing the GMAC transaction has been a key priority for the company, and an important step to further support GM's turnaround," GM Chairman and Chief Executive Officer Rick Wagoner said in a statement.

Mr. Kerkorian's decision to abandon his GM stake amounts to a no-confidence vote in Mr. Wagoner's strategy.

Doubts about the health of the U.S. economy and concerns about cash flow at GM have led other investors to pull money out of GM shares in recent weeks, depressing GM's stock price 19% from its 52-week high of $36.19 in October.

Mr. Kerkorian and adviser Jerome York have a history of activism and fought a battle with the management of the former Chrysler Corp. in the mid-1990s, when Chrysler rebuffed their demands to return more cash to shareholders. Mr. Kerkorian sold GM shares at the end of 2005, citing tax purposes, only to repurchase shares early this year.

Since making his initial investment in GM shares in June 2005, Mr. Kerkorian and Mr. York repeatedly put pressure on Mr. Wagoner to take more aggressive restructuring actions at GM. In January, prior to taking a seat on GM's board, Mr. York called on GM -- which lost $10.6 billion in 2005 as U.S. market share skidded and U.S. labor costs rose -- to take several drastic measures.
[Richard Wagoner Jr]

While the company followed Mr. York's guidance to cut executive pay and halve the dividend to shareholders, it didn't follow through on a suggestion it should abandon certain brands.

Mr. Kerkorian and Mr. York also were frustrated when Mr. Wagoner and other GM directors this year opposed their proposal that GM forge an alliance with rival auto makers Renault SA and Nissan Motor Corp., both run by Carlos Ghosn, whose turnaround of Nissan Mr. York cited as a model for GM.

Mr. York held a seat on GM's board for about eight months this year, but he quit in October after the talks with Renault and Nissan collapsed.

Wednesday, following a speech at the Los Angeles Auto Show, Mr. Wagoner indicated he wasn't overly concerned about Mr. Kerkorian's moves.

He said the company's management is focused on eventually posting positive cash flow and improving earnings.

"I think that's what shareholders, all of them, really care about," he said.

GMAC, one of the country's biggest automotive and mortgage lenders, said it expects to benefit from access to a lower cost of funds as it steps out of the shadow of its parent, which is hobbled by junk debt ratings. "The prospects for GMAC look quite promising as we now combine our existing business strengths with improved credit ratings, a more competitive cost of funds, and a strengthened capital base to support profitable growth," said GMAC CEO Eric Feldstein.

As part of the transaction, GMAC has a 10-year deal under which it will remain the exclusive provider of GM-sponsored auto loans.

Japan's Aozora Bank Ltd. is part of the Cerberus group. The New York firm resurrected Aozora, formerly Nippon Credit Bank, and still has a stake in the bank. Now it is using Aozora to help fund its investment in GMAC.

29 November 2006

Vonage (VG:NYSE) -Time to Hang Up

It doesn’t take a rocket scientist, or a financial analyst for that matter, to see that a company with decelerating sales growth, increasing customer defections, aggressive new competition, and soaring marketing costs will suffer operating problems. But what if it faces lawsuits, cash shortages, and an increasing non-competitive offering?

For anyone with access to cable television, radio or the U.S. postal system, a nearly ubiquitous and annoying “wooHoo” advertisement has saturated the “airwaves” since 2003- yes, it’s that competitive voice service provider (CVSP),Vonage (VG:NYSE). After a U.S, entry in October 2002, in Canada in November 2004 and in the United Kingdom in May 2005. By mining the bottom end of the telephony customer base, VG has spent a couple of billion dollars adding almost 2.06m subscribers as of 30 September 2006 – yet producing an accumulated deficit of $604m. And during this most recent quarter, VG claimed to add 359,000 subscribers which declined from 377K during Q206 or a deceleration to 11% sequential growth. However, VG lost a staggering 154K subscribers in Q3, yielding a net reported subscriber addition of 204.6K, down 20% sequentially from 256K during Q206. Revenue was up 12% sequentially, and 118% year-over-year; that’s good, but not as good as last quarter, when revenue grew 21% sequentially and 141% year-over-year. The Holmdel, N.J., Internet phone flogger posted an adjusted net loss of $62 million, or 40 cents a share, compared with a Q206 pro forma loss of $74 million, or $1.16 a share, as VG pumped out more shares but lost as much as last year.

But wait, VG cut its forecast for 2006 year-end subscriber count to 2.2 million, from a previous forecast of 2.3 million to 2.45 million. Now VG forecasts revenue of between $600 million and $615 million for fiscal 2006. Oops! But VG projects “positive adjusted operating income” What? By Q1 2008. When? VG’s key problem is that it will likely never make it there, barring some financing miracle from a non-discriminating private equity buyer playing financial musical chairs. Its core Voice over Internet Protocol (VoIP) offering only made sense for people with a cable modem initially but now almost all cable companies offer VoIP phones, and the real draw for customers is to purchase bundled service options including cable, high speed internet and phone service. Why add another service provider?

Customer Regret about the “Bad Vonage Decision”

Some analysts see VG as overstating subscribers numbers since, unlike cable operators which report customer statistics, Vonage reports customer lines ( nearly 1.25) due to heavy promotion of line adds to existing customers, thereby losing signup fees and other startup customer charges. Pushing customers to take new lines, without any service improvement or service enhancement, leads to customer dissatisfaction.

So customers have figured out VG has flat to falling quality, generating a quarterly 5% disconnect rate relative to the total subscriber base is a massive warning flag. Okay, everyone knows that subscriber disconnects relative to the overall subscriber base (i.e. customer churn) hurt profits sharply for cell phone firms and online Internet service providers (remember AOL?). Average monthly churn in Q306 was 2.6%, up from 2.3% in Q206 and the year-ago quarter. Worse, subscriber revenue generation is slipping with average telephony revenue per subscriber line (“ARPU”) down from Q206 to just $26.33. And gross margins have been slipping from 32% as VG is exposed to volume-related third party call termination costs – flat fee users maximizing total monthly minutes above 1,500/month. But as customer loss rises, VG DOUBLED its assumed customer retention life from 30 months in FY04 to 60 months in FY05. On what evidence??

But the real shocker is that this company has no sense of cost controls. Marketing costs were up sequentially at $91 million, yielding marketing costs per gross subscriber line of $254, up 6%. But on a net subscriber addition basis, it soared to $444.79, from $351.56, indicating a dramatic deterioration in success in adding and retaining customers. With a $29 customer equipment subsidy, the VG model yields no payback from adding customers even with a four year timeline. That’s right: VG’s incremental subscriber revenues are falling sharply away from rising incremental subscriber addition costs. In 2005, VG burned $243 million on marketing costs alone or about 94% of their revenue and it’s tracking for $350m for 2006. VG used $190 million in cash from operations in 2005, and another $150 million in investments with no incremental revenue gains. It’s akin to the domestic auto industry model: lose money on every vehicle you sell, but, ummm, make it up on volume.

Surging New Competition

Although connectivity, equipment add-ons and audio clarity has been an historic problem for VoIP service providers, according to the second Keynote VoIP Competitive Intelligence Study of Internet telephone service, improvements have been made with Time Warner Digital Phone ranked first for both reliability and audio clarity while audio delay plagues VG and other non-cable players. With hindsight, VG only made sense for people with a cable modem in 2003 and 2004, but now all of the cable companies are offering VOIP phones. Over time, both phone companies and cable companies will have high speed digital connections to homes and will offer digital TV, phone, and internet service with Time Warner (TWX:NYSE) and Comcast (CMCSA:NAZ) controlling two thirds of 8.2m domestic VoIP customers at September (up from 3.5m a year ago, according to market-research firm TeleGeography Research). And early mover Telio and newcomer SunRocket are looking to leverage new devices, such as the new Nokia N80i with Gizmo software. Yet the failure rate is huge in the VoIP business with 85 failures in 15 months. (

New offerings from Google, Yahoo, and the eBay Skype upgrade are predicated on a coming VoIP “open standard” that will allow users to access the voice network through the multi-thousand “wireless internet” or wifi networks. Instant messaging clients can also access the networks. The VG holders are getting desperate: they now claim that the company is a buyout candidate. Good luck, WebVan.

Ford is Imploding -Faster than Even GM

Ford- $11B in 2007 losses, div eliminated-SOOO MUCH GOOD NEWS

Ford-F sees deterioration in overall earnings in 2007-Bloomberg

Sees 2006 pre-tax special items cash costs of $10B-$11B.

Ford-F suspending dividend in 2007-Dow Jones
Cash Drain: Ford said last month it expects a cash drain ``for the near to medium term'' on automotive losses and job-cutting costs. The company said it's ``exploring various financing strategies, including secured financing involving a substantial portion'' of its automotive operations. Competition from Japanese carmakers including Toyota Motor Corp. is also causing Ford to lose market share in the U.S. Toyota sold more cars and light trucks in the country than Ford in July, a first for any month. Ford's U.S. sales have fallen 7.4 percent this year through October, while Toyota's have risen 12.2 percent.

Ford-F's hourly buyout acceptances reach 38,000 this year
As part of a key objective of its North American turnaround plan, Ford Motor Company confirmed that so far this year about 38,000 of its UAW-represented hourly workers have accepted package offerings for voluntary separations from the company.

F Over 35,000 workers accept Ford buyout-Detroit News
More than 35,000 of Ford's (F) blue-collar workers, about half of its U.S. factory work force, have accepted buyouts and will leave the company by next September. Ford's goal had been to cut 30,000 hourly jobs by 2008, and this news is expected to provide a major boost to the company's effort to cut costs and return to profitability in 2009.

Ford-F announces plans for debt financing
Ford Motor Company announced that it plans to obtain financing totaling approximately $18 billion in order to address near- and medium-term negative operating-related cash flow, to fund its restructuring, and to provide added liquidity to protect against a recession or other unanticipated events.The financing transactions consist of: New five-year senior secured revolving credit facility of approximately $8 billion that is intended to replace Ford's existing unsecured credit facilities of $6.3 billion; senior secured term loan of approximately $7 billion; and nsecured capital market transactions of approximately $3 billion, which may include unsecured notes convertible into Ford common stock. The size of the individual components of the financing may vary depending on market conditions.

Ford cuts jobs, output at Kentucky SUV plant-Bloomberg
Ford (F) plans to cut jobs and production capacity at a Kentucky plant that makes the Explorer SUV. The plant in Louisville employs 3,800 and is the only factory that manufactures the Explorer. Sales of mid-size Suvs have fallen 26% this year through October.


The accounting changes involve the use of derivatives by Ford Motor Credit, the finance arm of the Dearborn, Michigan- based automaker. Ford Credit didn't follow accounting standards when using derivatives to hedge the interest-rate risk from longer-term debt, Ford said last month. The company, in slides prepared for a conference call, said it has ``fully remediated'' its financial controls for derivatives.

28 November 2006

Phony NAR Data "Justifies" Stable Market Today

Absurd- the NAR data released today claimed a 0.5% sequential improvement in Existing Sales for October at a SAAR rate of 6.24M units (actually DOWN 2.1% sequentially on reported data). Prices dropped at a record 3.5% annualized pace to $221K, ignoring the contract cancellations and end-of-month option deals which save the balance sheet of these homebuilders which carry "orders" at last transaction prices. Remember, none of this data reflects other promos, games, financing incentives, toss-ins, kick backs and other gimmicks. Frankly, the reported NAR data on housing is a farce.$FILE/EHSreport.pdf

Look at this data- it smells:

* as reported, existing home sales dropped 8.3% Y-Y and 16.2% in the West but the report plugged the idea that Western sales rebounded from September by 6.9%. Yeah, sure, October really brought the buyers back in;

* Inventories have climbed steadily to 7.4 months supply or 3.854M units- an incredible understatement since the actual supply is nearly 10 months (some peg it at 13 months, counting unoccupied units);

* Pricing fell 3.5% Y-Y to $221K but reported prices in the Midwest and West were claimed at FLAT ! This is a complete joke relative to the real world experience.

And see this tidbit:
Foreclosures? Housing Bubble? In Southern California? Impossible!
Last week DataQuick released quarterly foreclosure numbers for the state of California. If anything the numbers again are pointing to a bursting housing bubble. Take a look at the chart on the left:

And Barry Ritholtz mocks NAR:
Existing Home Sales: Unspinning The NAR Numbers

Posted on Nov 28th, 2006

Barry Ritholtz submits: It's "Trash a Trade-Group's Spin" day here... After this morning's look at the National Retail Federation's nonsense, we might as well have a go at this morning's enzyme-free donkey fazoo from the National Association of Realtors.

The data: Existing Home Sales & Prices

The spin? Let's have a look at what the friendly agents at NAR had to say:

David Lereah, NAR’s chief economist, said market fundamentals are improving.

"The present level of home sales demonstrates some confidence in the market, but sales are lower than sustainable due to psychological factors"

“The annual decline in the October median home price is skewed because there was an uncharacteristic spike in October 2005, but the trend for the fourth quarter will be prices remaining slightly below a year ago.

Fundamental's are improving? Well, the freefall in unit sales stopped -- thanks to a record drop in prices:

"The median home price was $221,000 in October, compared with a revised $221,000 in September and $229,000 in October 2005. It was the largest year-to-year decline ever and a record third consecutive decrease, NAR said." (emphasis added)

Somehow, Lereah overlooked the small issue that October's 3.5% decline in the national median existing home price follows September's 1.8% year-on-year decline. (Whoops! I'm sure he'll follow up on that next month).

How common is this annual fall? CNN/Money noted:

"While month-to-month declines in home prices are not uncommon, year-to-year drops had been rare before the recent housing slump. Last August was the first month in 11 years to see such a decline."

Let's move on to Confidence -- is it really returning? Certainly not based on the increase in inventory:

"Inventories nationally increased 1.9% at the end of October to 3.85 million units. That represents a 7.4 month supply at the current pace of sales."

Hmmm, how about that unusual spike in 2005 which skewed the data? Let's have a closer look at that, and see how unusual it realy is. We go to Kevin DePew at Minyanville, who is on the case:

"Lereah claims the October decline in national median prices is "skewed" due to "an uncharacteristic spike in October of last year. Sure enough, in October 2005, the national median price jumped 16.6% year-on-year, which followed September's 13.4% year-on-year jump, which followed followed August's 15.8% jump, which followed July's 14.1% jump, which... wait a minute... followed... STOP IT! That's not an uncharacteristic spike. That's a freaking TREND!"

Finally, I am not sure just what it means to say that "sales are lower than sustainable due to psychological factors." My best guess is that's a polite way to say: "You want howe much for that house? What are you f%$#@ crazy?"

Bottom line: Investors need to look at data sources very very carefully before relying on them -- this is especially true when the source is a trade group, who tend to be non-objective, and indeed have a very specific agenda that benefits from happy talk. In the present case, a strong motivation for transactional business.

Look Out: Investors Are Turning Optimistic !

As a contrarian, when the "market" turns optimistic (after endless hype, pumping and financial cheerleading), it's a sign of caution. Professional investors expected the mid-term jam job and the Fed and Treasury have been pumping liquidity at a massive rate. One estimate I've seen shows M3 up 12% annualized YTD. USNews's Paul Lim details that ACTUAL earnings growth (which supposedly underpins this market)is a lot weaker than as stated. Corporate sock buybacks have been running at $350B this year after $300B last year, and financial sector results are buoyed by heavy fees and carry trade speculation.

Published: November 26, 2006

PESSIMISM has been propelling the stock market.
A Slowdown in Earnings?

Of course, that gloom — contrarian indicator though it may be — isn’t enough on its own. But combine it with strong economic and profit growth and you end up with a series of positive earnings surprises. And this, in turn, has fueled the 4.9 percent rally in the Standard & Poor’s 500-index so far this quarter and the 12.2 percent gain for the year to date. Yet stocks are on the verge of losing this all-important tailwind. “After 13 consecutive quarters of double-digit earnings growth, investor expectations are pretty high now,” said Jack A. Ablin, chief investment officer at Harris Private Bank in Chicago.

In fact, investors have become downright optimistic in recent weeks, thanks in part to an avalanche of solid earnings reports and economic data. For example, 59 percent of fund managers now say they believe that the economy next year will remain as strong as it is now or will improve, according to a recent survey by Merrill Lynch. That’s up from 32 percent of fund managers who thought so in October. The percentage of investors who think that the economy is likely to slip into recession, meanwhile, has shrunk to 8 percent from 20 percent last month. Sheeple??

That’s not the whole story. Investors are also growing more bullish about the outlook for corporate profits. Today, half of all domestic fund managers think that earnings will remain steady or improve in the coming 12 months. A similar survey in September showed that only 18 percent felt that way. This degree of optimism is somewhat surprising, because earnings growth usually begins to slow noticeably as an expansion matures. And by historical standards, this expansion is already long in the tooth.

So what’s with this what-me-worry attitude? Part of it has to do with recent government data showing that the economy is hanging tough. The latest Labor Department reports, for instance, showed that the economy was still creating a significant number of new payroll jobs without fanning the flames of inflation.
(and if you believe government data is accurate then read about "the birth/death" jobs creation model used at the Bureau of Labor Statistics [the B.S.-for short])

But something else is also at work. “We have come to a point in the cycle where people have begun to extrapolate trends,” said Richard Bernstein, chief investment strategist at Merrill Lynch. In other words, having grown accustomed to a resilient economy and improving profits, investors now simply assume that times will always be this good.

Mr. Bernstein says it is particularly curious that investors are becoming more bullish on earnings while hoping that the Federal Reserve will soon start to trim short-term interest rates. For corporate earnings to improve substantially, the underlying economy would have to expand faster than expected. Yet, if economic growth were accelerating, the Fed wouldn’t be easing monetary policy. Instead, it would probably still be raising rates.

Nevertheless, isn’t this growing sense of optimism a bullish indicator for equity prices? Actually, “this type of thinking can be very dangerous,” Mr. Bernstein said. That’s because the aging bull market has thrived recently as investors have set the bar low and watched as corporate profits have consistently exceeded expectations. In the third quarter, for instance, investors had been bracing for 14 percent earnings growth, compared with the year-earlier period. But they were pleasantly surprised when profits for the S.& P. 500 companies grew by 19 percent.

Now the situation is likely to reverse. It appears that investor expectations are rising just as corporate earnings are on the verge of disappointing. How do we know that earnings will begin to slow? For starters, history has shown a strong correlation between corporate earnings growth and the spread between 10-year Treasury yields and the federal funds rate, Mr. Ablin said. Whenever 10-year Treasuries are yielding less than the federal funds rate — the rate that banks charge one another on overnight loans — corporate earnings tend to slow or go negative, Mr. Ablin noted. And in case you haven’t been paying attention, 10-year Treasuries have been yielding less than the fed funds rate for much of this year.

There are other signs as well. For example, the research firm Thomson Financial routinely surveys Wall Street analysts about their earnings expectations for the individual companies they follow. Thomson then adds up these forecasts to build a so-called bottoms-up estimate of equity earnings. According to the most recent Thomson survey, S.& P. 500 earnings are expected to expand 9.6 percent in the fourth quarter. That would be a major slowdown from the third quarter, and even the second quarter, when profits rose 16.3 percent. It would also be the slowest rate of earnings growth since the second quarter of 2003.

IN reality, profits for most S.& P. 500 companies are growing much slower than 9.6 percent this quarter. If you stripped out the financial sector, where a profit surge of 32 percent is expected, corporate earnings would be likely to grow by only 3.1 percent, said John Butters, senior research analyst for Thomson Financial. And this slowdown is likely to continue through 2007. Many economists and market strategists, for example, are forecasting only modest single-digit earnings growth next year.

Jeffrey N. Kleintop, chief investment strategist at PNC Wealth Management in Philadelphia, says he thinks that S.& P. 500 earnings may grow by only 3 percent next year. And this assumes that the economy expands at an annual rate of around 2.5 to 3 percent, he said. “If we see something worse — something in the 1 to 2 percent range — there could be a lot more downside to earnings growth,” he said. In fact, he added, “it could pull the whole year into negative territory.”

Paul J. Lim is a financial writer at U.S. News & World Report. E-mail:

And, when even perma-shill Abby Jo Cohen of Goldman can't generate much enthusiasm for the S&P for next September (+4%), then it's only a matter of time before even mutual fund managers decide to "protect their year and get defensive"

27 November 2006

NAZ,Ford Heavy Borrowers for Risky Ventures

Hmmn: NAZ borrows $5B for LSE Bid, Ford needs $18B for cash flow

Disaster:Ford Plans $18 Billion in Financing to Fund Restructuring, Make Up for Automotive Losses

DETROIT (AP) -- Ford Motor Co. said Monday it plans to get about $18 billion in financing to help fund its restructuring and make up for anticipated losses in its automotive operations over the next two years. The No. 2 U.S. automaker also said the financing -- with its domestic plants and other automotive assets used as collateral -- will help protect against a recession or other unanticipated events. Analysts said it makes the possibility of Ford selling its finance arm less likely but could support bigger restructuring efforts. The announcement prompted downgrades on Ford's debt rating.

Ford said a new five-year senior secured revolving credit facility of about $8 billion is intended to replace Ford's existing unsecured credit facilities of $6.3 billion. A senior secured term loan will total about $7 billion, and unsecured capital market transactions will total about $3 billion. The revolving credit and term loan will be secured by liens on U.S. manufacturing facilities, substantially all of the company's other domestic automotive assets, certain intellectual property, stock in certain subsidiaries -- including Ford Motor Credit Co. and Volvo Cars -- and up to $4 billion in cash.

Ford spokeswoman Becky Sanch said it was the first time the company had used assets such as plants to secure financing. Earlier this month, Ford had said it was near an announcement on such a deal. Ford shares fell 22 cents, or 2.6 percent, to $8.30 in midday trading Monday on the New York Stock Exchange. Following the transactions, Ford said it will have about $38 billion at year's end to fund automotive operations. That includes cash, cash equivalents, loaned and marketable securities and available credit facilities. "The additional liquidity should be sufficient to give Ford the ability to fund itself for several years, even with considerable negative cash flow," Rod Lache, an analyst for Deutsche Bank, said in a note to investors.

Dearborn-based Ford lost $7 billion during the first nine months of the year and has said it won't return to profitability until 2009. The company has offered buyouts and early retirement packages to all 75,000 U.S. production workers and plans to shutter 16 plants to reduce manufacturing capacity to match lower demand for its products as part of its "Way Forward" restructuring plan. Some Wall Street analysts have questioned why the sale of part of Ford Motor Credit wasn't part of its restructuring update announced in September. Ford has said that it didn't plan to sell its finance arm. At least two analysts said Monday that using assets such as Ford Motor Credit to back the secured loans makes it less likely that Ford will sell the credit arm.

Following the announcement, Moody's Investors Service downgraded Ford's senior unsecured rating to "Caa1," seven notches below investment grade, from "B3." But Ford's long-term corporate rating was affirmed at "B3." "The company still faces daunting competitive and market challenges, but this plan would give it some breathing room over the next two years," Bruce Clark, a senior vice president with Moody's, said in a statement.

Also, Fitch Ratings downgraded Ford's senior unsecured debt further into junk status to "B" from "B+." "Revenues are projected to remain under severe pressure in 2007 as a result of slowing economic conditions, production cutbacks, continued share loss and competitive and economic pressures," Fitch said in a statement.Ford expects the transactions to close before Dec. 31. The senior secured credit facilities will be arranged by Citigroup Corporate and Investment Banking, Goldman Sachs Credit Partners L.P. and J.P. Morgan Securities Inc.

Ford Motor Co.:

How Housing Slump Is Risk To Big Three Rebound
November 27, 2006; Page A3, The Wall Street Journal

DETROIT -- Detroit's beleaguered Big Three auto makers face a new risk to their turnaround plans: After a string of strong years, U.S. auto sales are slowing and an increasing number of forecasts say sales could fall next year to their lowest level in nearly a decade. Slowing growth in the overall U.S. economy and the slump in the housing industry, particularly in big markets such as California, are hitting at a bad time for General Motors Corp., Ford Motor Co. and DaimlerChrysler AG's Chrysler Group. All three are losing money in North America at current sales volumes. A downturn in vehicle demand would make it even more difficult to regain profitability -- and to clear out bulging inventories of unsold vehicles without costly production cuts or discounts. "A softer market really stresses the Big Three out," said David Cole, president of the Center for Automotive Research in Ann Arbor, Mich. "For them, lower volume is not good."

But even some strong Japanese and European players face pressure. Toyota Motor Corp. and BMW AG, for example, could be hurt by any downturn in California, where they control a large chunk of the market. Toyota has spent billions of dollars building a plant in Texas to assemble a new full-size pickup truck due to hit showrooms early next year. But the housing slowdown and high gas prices have damped pickup-truck sales in the past few months. That could make it harder for Toyota to hit its sales targets with its new truck, the Tundra. IRN, a Michigan market researcher, is now forecasting U.S. 2007 sales of 16.3 million light vehicles, or cars and trucks. That would be the lowest level since 1998 and a drop of 300,000 from this year's expected sales of 16.6 million vehicles."To be honest, there is a lot more downside risk to that than there is a chance it gets better," said Erich Merkle, IRN's director of forecasting.

Merrill Lynch Calls Market Top

This Party May End Before It Starts
By CONRAD DE AENLLE, The New York Times
Published: November 19, 2006

THE stock market has had a great run over the last few months, but as the holiday season begins, some analysts are worrying that the traditional year-end rally on Wall Street may have already come and nearly gone.
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Mary Ann Bartels, technical research analyst at Merrill Lynch, wondered in a note to investors whether the tendency for stocks to climb in the last couple of months of the year had been rescheduled this year for September and October.

“We think yes,” she wrote. She then acknowleged feeling torn between what her charts have told her and what the calendar and history have led her to expect.

“It is not our favored stance to be more toward the bear camp looking for a cyclical correction of 8 to 10 percent, but all of the market indicators suggest this is the more likely scenario over the coming weeks,” Ms. Bartels said. “What is surprising is that these readings are occurring at this time of year. Most years see a bullish year-end rally.”

She highlighted several exceptions that prove the rule, including three years in the 1990s when the Standard & Poor’s 500-stock index lost at least 6 percent at some point during the last two months of the year. What signs suggest that 2006 will play out as those three years — 1991, 1994 and 1996 — did?

Trading volume has shrunk, something that often precedes a price decline, she noted, and several sentiment indicators, including opinion surveys of investment advisers and measures of market volatility, show the sort of complacency that typically occurs near market tops.

She also detected a “barbell strategy” among investors, favoring emerging markets on one end and defensive, high-quality American blue chips on the other while ignoring the moderately risky stuff in between. That is similar to the pattern last spring, just before the market took a tumble.

These warning flags lead Ms. Bartels to forecast a decline in the S.& P. 500 to as low as 1,260 from its close on Friday of 1,401.20 “All technical signs are pointing to the markets nearing a consolidation period and not a blowoff to the upside,” she said. “We cannot rule out further upside, but the risk/reward warrants a more defensive stance.”

DATA WATCH Few economic reports are on the business calendar, which is shortened this week by Thanksgiving on Thursday.

One report that may attract interest on Monday is the index of leading economic indicators for October. A Bloomberg News poll of economists forecasts an increase of 0.2 percent after a 0.1 percent climb for September.

On Wednesday, the University of Michigan will issue its revised consumer sentiment report for November. The Bloomberg poll forecasts a reading of 93.1, up from the provisional reading of 92.3.

Commercial Boom Softens Housing Bust

Commercial Boom Softens Housing Bust
Strong Non-Residential Demand Keeps Local Builders Busy

By Nell Henderson
Washington Post Staff Writer
Monday, November 27, 2006; Page D01

To understand why the housing slump hasn't dragged the economy into a recession, it helps to visit the Smoketown Plaza in Woodbridge, where the thumping of hammers signals the healthy pulse of a building boom that's still going strong.

Just two miles off Interstate 95, hard-hatted construction workers clamber up dusty ladders and scaffolding, hanging wallboard, laying bricks and drilling metal frames in a buzz of activity aimed at completing a new Arby's drive-through restaurant in time to open by mid-December.

Inspecting the progress as she crosses the bare concrete floor, stepping around the pipes and exposed wires and pointing with pleasure to the gleaming metal frame where the menu board will hang, Christy Gilligan envisions how the place will look when hungry commuters rush in after work for a quick bite, entering through a glass foyer with a two-story cathedral ceiling into a dining room seating 84. "I see opportunity," said Gilligan, vice president of development with ACW Corp., of Wilmington, Del., a family-owned Arby's franchiser building the restaurant, its fourth in Prince William County.

Many other executives are making similar calculations across the Washington area and throughout the country, boosting non-residential construction enough over the past year to more than offset the decline in home construction. That boom is helping to cushion the impact of the housing slump on the economy.

The nation's harshest housing downturn in 15 years has unquestionably inflicted pain on many homeowners, builders and their suppliers. The plunge in new home construction was severe enough alone to slice a full percentage point off the nation's economic growth in the July-through-September period, depressing the increase in total economic output to a sluggish 1.6 percent annual rate. And the housing market hasn't hit bottom, according to the figures since then.

But the rest of the economy outside of housing remains largely healthy. With unemployment low, wages and stock prices rising and fuel prices ebbing, consumers continue to boost their spending. And businesses are increasing their capital investment, spending more on buildings, equipment and providing new fuel for the economic expansion.

Builders of non-residential projects say they are simply playing catch-up. So many new neighborhoods filled up during the housing boom that they're still building the stores, offices, restaurants, bank branches, hotels and hospitals needed to serve the influx of residents.

In Prince William County, for example, the population surged by 23 percent in the past five years, during the peak of the home-building boom, to 374,678 people. Now, many residents complain they have to drive too far, often to Fairfax County, for basic business services.

The companies that provide those services "don't build until they see the rooftops" over new customers, said Bill Fairchild, president of R.W. Murray Co., a construction contractor in Manassas that's overseeing the Arby's on Minnieville Road and a dozen other non-residential projects in Northern Virginia. "People have got to get groceries. They've got to get their hair cut. They need to go to the cleaners."

Nationwide, building contractors are expanding factories to crank out more exports to meet rising demand from overseas. Others are modernizing refineries to squeeze more fuel out of oil. And the recent volatility in world oil prices has spurred a wave of investment in alternative fuel plants, said Kenneth Simonson, chief economist of the Associated General Contractors of America. Scores of ethanol plants are under construction or being planned across the country.

The money spent on private non-residential construction nationally rose a sizzling 19.2 percent over the 12 months that ended in September, according to Census data. In addition, state and local governments are building roads, schools and other public buildings. Public construction rose a robust 11.6 percent in the year ended in September. Add it all up and the increase in non-residential work more than offset the 6.7 percent decline in home building over the same period, so the value of all construction rose a net 2.9 percent.

These figures have heartened many analysts, who predict the housing slump will continue to dampen economic growth through next year but will not lead to a recession. "The expected further weakening in housing activity is likely to be largely offset by business capital spending," Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, said in a speech last month.

More pessimistic analysts say it is too soon to know how far or for how long the housing market will slide, or how much it might hurt the rest of the economy. They note that total construction spending fell 0.3 percent from August to September, a trend that would be worrisome if it continued. But so far, they agree, the economy is holding up pretty well. "The problems in housing have not bled into the rest of the job market, at least not yet," said Mark Zandi, chief economist at Moody's

On the contrary, job growth has been so strong that the national unemployment rate fell in October to 4.4 percent, the lowest in more than five years. The Washington area job market is even tighter, with a jobless rate of 3 percent in September, the latest month for which figures are available.

And "if you're any kind of construction worker in the Washington area, it's not hard to find work," said Gene Pinder, business manager for the Baltimore-Washington Laborers' District Council, which represents 7,000 laborers, the workers who pour concrete and asphalt, prepare sites and handle building materials for both residential and non-residential construction projects. "The industry is still red-hot." At general contractor R.W. Murray, for example, "we never stop hiring," Fairchild said. "There's just a shortage in our industry, nationally" of skilled workers.

Lacker, the Richmond Fed President, whose territory includes metropolitan Washington, predicted that "further increases in non-residential construction will allow many workers to simply change construction jobs rather than become unemployed." That is at least partly true, builders said. Some, but not all, residential construction workers can shift to non-residential projects, which typically pay more and require higher skill levels. Among those who can make the change are project managers, site supervisors, accountants and other office workers involved in design, engineering, legal and financial work.

For example, R.W. Murray's site supervisor on the Arby's project, Scott Merryman, previously worked for a home-building company. But much of the work in non-residential construction is more specialized and more complicated than in housing. Such tasks include electrical wiring, installing heating and air conditioning systems, operating multi-story tower cranes and erecting metal frames.

Even installing wallboard in a fast-food restaurant requires different skills than doing so in a house, Merryman said. Companies, too, are suffering different fates depending on how strongly they specialize in housing compared to commercial work.

Home builders KB Home and Ryland Group Inc. have cut hundreds of jobs. Mortgage lenders Countrywide Financial Corp., Washington Mutual Inc. and Ameriquest Mortgage Co. are laying off thousands. Masco Corp. reported a 4 percent decline in its third-quarter profits because of lower sales of its cabinets, faucets, bathtubs, windows, doors and other home fixtures. Weyerhaeuser Co. said its third-quarter earnings fell 26 percent because of lower wood product sales, lumber prices and log prices.

The companies feeling a little less pain are those that also supply or transport materials for non-residential construction. In Chicago, for example, USG Corp., the nation's largest maker of gypsum wallboard, suffered a 3 percent drop in earnings in the third quarter because of the housing slowdown. But the results would have been worse if not for the non-residential market, which accounts for about 40 percent of the company's business, said spokesman Robert Williams. The growing commercial market "certainly does cushion the impact of the softening of the residential market," Williams said.

Many people who live in the neighborhoods that arose during the boom say they're happy to see commercial construction catch up, bringing more services to their neighborhoods. "I remember when I was growing up, it was nothing but houses being built," said Melissa Rook, 20, of Manassas, a college student tapping on her laptop in a Panera restaurant at the Signal Hill Shopping Center. "Now they're always building another restaurant, another place to go." And Rook said she wants more places to go. "I would definitely be happier if there was a bigger mall in Manassas," Rook said, explaining that she often treks to the malls in neighboring Fairfax County for serious shopping.

It was consumers like Rook who prompted Arby's corporate marketing people to advise Gilligan's company to move into Northern Virginia in the late 1990s as the population was expanding. "There was definite potential here," Gilligan said, recalling what she found when she moved to Manassas in 1998.Gilligan said she chose the site at Smoketown Plaza because it is near both new homes and new workplaces, full of hungry suburbanites. She is already planning two more Arby's elsewhere in the county -- jobs that will help keep the construction industry busy. "We're doing very well," Gilligan said. "We're seeing growth."

25 November 2006

Incessant $ Printing Recalls Weimar Banana-Republic

Welcome To The New Weimar

by Mark Pierce III, The Wall Street Examiner

Looks like its official. The U.S. Bonar crumpled in a heap last night as all the 400:1 leveraged Forex Gamers hugging onto the “words” and promises of all the Fed Govenor Bullhorning about “we support the strong dollar” got shanked. Effective immediately, all asset classes of every race, stripe, color, gender, and ethnic origin could be locked in a Full Scale Meltup Mode.

Look no further than the REITs, undoubtedly treated as the safe haven asset class of choice; and the homebuilders, which have been accumulated with a vengeance by the “smart money” types lately. I wonder if we will reach the Wheelbarrow Stage where simple items such as door handles and mailboxes are stolen to be carted off to the scrap house to be exchanged for food?

Who knows?

Perhaps the currency breakdown is a bear trap, and the PigMen will reverse it next week in a Searing Rally? I wouldn’t put it past them, as it will be the fastest money made in the shortest timeframe. It could be that stocks are shanked also, only for a brief correction. No doubt, a clothesline event will crank the put/call ratio back up to 1.40 for 4 days in a row. Bears will be yelling “4-year cycle top”. Tim Wood will be rushing out to trade in his Hyundai for a Lexus. Mc”Huge” will be spamming with the usual giant plunge arrows. Prechter will be pounding out “I told you so” EWI updates.

Then the PigMen will McQueen U-Turn the tape once again for the Christmas Rally and End of Year Greenprint to assure Walled Struck of obscene bonuses and payouts.

Emergency board meetings will be held to permit instantaneous stock option grants provided at the low of the day (in ed: YEAR) for all CEO’s who are prepping their retirements by gunning the Stock Option Wealth Engine.

In the meantime, there were repeated reports of “pandemonium” and “chaos” at the various retailers today. No doubt, Joe Sixpack is expecting $1.75/gal. gasoline, forever rising 401(k) accounts, continued wage inflation, infinite mortgage refi possiblities with the launch of the “Rent to Own” interest-only 100 year mortgage in 2007. Therefore, they are buying more goods with a vengeance, pushing the trade deficit higher and higher, while foreign central bank reserves reaching such huge levels, they have no other choice but to recycle the money back into Treasuries, mortgage-backeds, U.S. Stocks, and all the other AAA-rated instruments backstopped by the full faith and credit of the Bernanke Helicopter Squadron.

Mark Pierce III is a commercial banker, and trades for his own account in stocks. The views expressed are those of the writer only, and not necessarily those of The Wall Street Examiner, its publisher, editors, or staff. The purpose of this article is for education and information only, and should under no circumstances be construed as an invitation to purchase or sell securities. Neither the writer nor The Wall Street Examiner undertake to update this article. Readers are urged to consult with a qualified financial professional before making any investment decision.

23 November 2006

Dollar Getting Hammered as M3 Soars

Discontinuing publication of M3 data by the Federal Reserve has not fooled anyone. It's rising an absurd and unsustainable 14% ANNUALIZED rate from a very high level ( So the market has been up nearly every day since late July. That's when the Goldilocks economy preachers saw the last Fed increase before the EXPECTED rate cut in May 2007.

But the hype and market pump ignore the fact that foreigners control $3T of our Treasuries with China at $1.2T alone. China has already announced it is diversifying away from the dollar, buying gold, and swapping into Euros.

Blowing up a $370TRILLION Derivatives Market


London Hedgies often lead on market turns

Why GM is Worth Less than its Stated Debt-not off-balance sheet and not equity. Why Kerkorian is dumping his position (finally)

here's what is really interesting about the Kerkorian news: Kerk has seen the inside numbers. he has been advised by Jerome York from beginning. I hate York, but he's an original Chrysler guy from when Chrysler financially reorganized and an ex-CFO and he understands auto industry accounting. this news event means that York has told Kerk to bail after examining the books for the last 6 or so months.

what reinforces this is the fact that Renault/Nissan took at pass at investing in GM - remember during the summer when it was made a big media deal that GM was seeking 3 billion each from Renault and Nissan? They too got to check under the hood and see the real numbers and they too passed.

Now, the question begs, what did they most likely see that they did not like?

1) GMAC. the widely heralded sale of GMAC was more like a partial sale/leaseback with several free options for the buyers (Cerberus and banks) to bail. GMAC is a junk-rated entity that I'm sure is loaded beyond belief with derivatives, and GM could not monetize GMAC for obvious reasons and GM is still carrying GMAC on its balance sheet, despite efforts to effect a transaction which would shed GM of the burden of GMAC. GMAC is financial nuclear waste.

2) Pension woes. That explains itself. However, I will add that GM raised $18 billion in a bond deal about 20 months ago or so. $13 billion of that was injected into the pension fund in a financial engineering move that supposedly was going to eliminate the pension funding deficit. About 6 months after the bond deal, one of the better Wall Street credit analysts announced that GM's pension was underfunded by at least $31 billion...why bond investors would bail out GM's pension fund is a complete mystery to me. but the deal added 18 billion in debt to GM's balance sheet and GM's ability to service its debt has deteriorated since the time of that bond deal.

3) failed operating model. that explains itself.

The bottom line is that GM, in total (GM + GMAC), is more than likely not worth even the face amount of the outstanding debt, let alone the debt plus the market value of the stock (enterprise value). If I had to hazard an educated guess, absent a Government bail-out "in the best interests of the public," I believe GM will be in bankruptcy within 2 years.
GM Being Looted before Bankruptcy Filing-Kirk Dumping
- a total fiasco and no one seems to care about the individual shareholder, workers, past employees and car buyers. Gee, how good a vehicle would YOU build if your pension benefits were eliminated, half your co-workers got laid off over the past two years, and your housing market is collapsing..

Kerkorian selling GM says Faber on CNBS
Faber said everyone was talking about the price declines over the last few days. Surprise. York off the board, GM parts suppliers getting stiffed, derivatives blowing out and oh, the former Treasury Secretary John Snow-job is stealing GMAC from the GM equity holders. This stock is going to be a shell with lots of pension and health care obligations and NADA else

GM Got No Bailout from USG during Nov 14 meeting- BUT $21.75B Treasury TOMO and FED repos pre Thanksgiving

TOPIX, Nikkei down as banks drop, small-caps hit

(Reuters) - Tokyo's broad TOPIX share index fell 2.52 percent on Monday, logging its lowest close in nearly four months as bank shares declined ahead of earnings and investors fretted about a possible end to tax breaks. Some market participants said rumours of trouble at U.S. hedge fund Citadel Investment Group LLC triggered selling of stocks.

Small-cap shares plunged 6 percent to a three-year low, reflecting bearish retail investor sentiment. "The big investors are all too bearish, and individual investors are getting burned," said 77-year old Yoshio Tomita outside the trading room off a small Tokyo brokerage. "I don't own a lot of stocks, but I got hit pretty bad today." Sanyo Electric Co. Ltd. plunged to a 31-year-low on reports it would likely post a net loss for the current business year, missing its forecast for an annual profit. Other technology stocks also fell in the wake of drops in their U.S. counterparts, helping the Nikkei 225 average to post its biggest one-day percentage loss since July 18.

The TOPIX was down 39.60 points at 1,533.94, the lowest close since July 26. The TOPIX's percentage fall was also the biggest one-day drop since July 18. The Nikkei shed 2.27 percent, or 365.79 points, to 15,725.94, the lowest since late September. Shares of Japan's second-largest lender Mizuho Financial Group Inc. lost 3.1 percent to 823,000 yen, and Mitsubishi UFJ Financial Group Inc., the world's largest by assets, fell 2.8 percent to 1.38 million yen.After the market closed, Mizuho reported a 15.9 percent rise in first-half profit on Monday as falling bad-loan costs outweighed a decline in its mainstay lending business, and it left its full-year forecast unchanged.

Hurting market sentiment were concerns about the expiry of temporary Japanese tax breaks on stock investments in 2008. Preferential tax rates on capital gains and dividends were introduced in 2003 for a period of five years to support the faltering stock market. (US Tax cuts OVER in 2008 also. A government panel is expected to propose ending the tax breaks as planned, and a final panel decision will likely be made by next month. "Rich retail investors are quite sensitive about taxes. This will have a significant impact," said Norihiro Fujito, general manager, investment research and information division at Mitsubishi UFJ Securities Co. Ltd. Fujito's view was echoed by Taizo Nishimuro, president of the Tokyo Stock Exchange (TSE), who blamed concern about securities taxes for the recent sluggishness in the market.

Small caps led the fall. The Mothers index plunged 6.2 percent to 1,022.54, a three-year low. "Share prices are low enough and there are attractive issues, but they all fall once the market heads south," said Shuichi Hida, portfolio manager at Plaza Asset Management.

In addition, currency traders in New York on Friday cited rumours that a large U.S. hedge fund had suffered losses this month, prompting some closing out of dollar long positions. (Dollar is TOAST) A spokeswoman at Citadel's Tokyo office declined to comment, but the Wall Street Journal reported on Friday that a U.S. spokesman for the company had denied the rumours.
"The hedge fund in question did deny (the rumours), but hedge funds will be reporting their earnings this month, and it does seem that speculation is spreading," said Hiroaki Kuramochi, managing director at Bear Stearns (Japan) Ltd. Chicago-based Citadel manages some $12 billion in assets, according to the company's homepage.

Advantest, a manufacturer of chip-testing gear, fell 4.1 percent to 5,870 yen. Fellow chip-gear manufacturer Tokyo Electron Ltd. lost 4 percent to 8,570 yen after the tech-heavy Nasdaq Composite Index slipped 0.13 percent.

Oil and gas developer INPEX Holdings dropped 3.4 percent to 902,000 yen, adding to a 3.5 percent fall in the previous session. Crude oil futures were at $58.36 a barrel in early Asian trade on Monday after falling to a 17-month low of $54.86 last week.

Trade volume rose to 1.94 billion shares, the highest daily volume since Sept. 8. Decliners swept past advancers by a ratio of 24 to one.
(Additional reporting by David Dolan)

The broad TOPIX was down 2 ½ percent overnight. While the Nikkei 225 fared better, it was only because of the "flight to safety" (to big name stocks) that accompanies panic in herds of investors. A little more reasonable explanation is the extremely troubling report from the Bank for International Settlements that derivatives trading globally is up 25% Year on Year (YoY) and the shocker is that the notional value of the derivatives turnover this year will be (hold on to you coffee) 11½ times all of the money made on earth this year. In other words, Global GDP will be between $60.6-trillion and $61-trillion [plus or minus a small country or two] this year while the derivatives turnover will top $750. ($800T annualized)

The biggest bubble of all - derivatives Trading Soars to $370 Trillion – it will be the root cause for global depression
Alan Hershey
Nov. 17, 2006 -

An interesting data came out from the Bank for International Settlements. The global market for derivatives soared to a record $370 trillion in the first half of 2006. It is the highest ever and the bubble is bigger than any one can imagine.
The kind of euphoria in derivative trading has never been seen before. The amount of outstanding credit-default swaps contracts jumped by 60% at the end of last year. This year the rise is even faster. It is a typical pyramiding technique. Money is creating false concept of money and that in turn is creating ever lager conceptual money. When the tide blow off and balloon bursts, the catastrophe will be unimaginable. The 1929 debacle and resulting depression will be miniscule to what is coming.

The derivatives were initially designed for hedging. It has now become the instruments of trade. An example of what can happen is as follows. Recently when Amaranth, the hedge fund, did bet on the wrong side of the natural gas market, it lost billions in days and went out of business drowning the capital of many investors. But something more sinister happened in London credit swap market. On the news of Amaranth's problem, the credit swaps based on Amaranth funds collapsed creating massive problem for the London credit instruments markets. Even the little hedge fund was able to bring the market to its knees. Thinks what can happen when many hedge funds collapse at the same time.

Remember 1987. Before the October crash public were arguing about the fact that the market will not give an inch on the down side. Every individual investor was in the elevator at the Penhouse level. Finally when the crash came, the brokers did not pick up their phones and Dow lost more than 20% in one day. Something much more serious is getting cooked here. The complacency level, the sentiment indicators and above all the fundamentals are all ready to make the market collapse big time.

The biggest bubble of all - derivatives Trading Soars to $370 Trillion – it will be the root cause for global depression
Alan Hershey
Remember 1987. Before the October crash public were arguing about the fact that the market can give an inch away. Finally when the crash came, the brokers did not pick up their phones and Dow plunged for that 20% in one day.

Oil price and housing collapse continue as stocks look down to see the fundamentals to weak to support the recent hefty gains – a 40% correction
Sam Adelton
The real estate housing collapse continues. Housing starts fell in October by 14.6% to the lowest level in six years. Building permits, an indicator of future building activity, fell for a ninth straight time.
Since you mentioned derivatives..
NEW 11/21/2006 10:59:10 AM

...please allow me to take this opportunity to rant a little more on interest rate derivatives.

We are told that interest rate derivatives are innocuous and only help offload risk.

Well, let me give you a scenario where they screw shareholders and bondholders:

To take a simple example, let's say Company A has $100 million in floating-rate debt.

And Company B, with a better credit rating, has $100 million in FIXED-Rate debt.

So far, so good, right?

Now, the two companies do a swap. Company A agrees to pay Company B a "premium" to swap cash flows on the debt. Company gets to now enjoy a fixed rate on $100 million in debt.

Company B gets a premium payment from Company A

Finally, of course, Company B now has to pay the "floating-side" of the bet, er, swap, leaving them vulnerable to interest rate swings.

But of course, the argument goes, Company B has been compensated for this risk by whatever premium Company A paid them.

However, here is the reality:

Company a had to pay FLOATING rates in the first place because they are a POORER credit risk than Company B.

So, when Company A gets to switch out their floating rate debt for fixed, they are essentially "leaning on" the good credit rating of Company B.

Now, think about it. Did Company B's investors (shareholders AND bondholders)REALLY want to have Company A's floating rate debt on their backs?

Answer: NO, or they would have bought Company A stock or bonds in the first place!!!

Finally, since the entire swap transaction can be held "off balance sheet", Company B's investors probably don't even KNOW they are exposed to this risk.

Now, take that small example and times it by, literally, TWO-HUNDRED SEVENTY MILLION times (to get to the $270 TRILLION in interest rate derivatives alone!) and you can see why Bulldog is so, so right.

Monday, October 23, 2006
That Word Again, Derivatives
In what I believe will be a broken record, some firms are digging through their derivatives minefields and coming clean on "accounting issues.. As long as the cognoscenti can play Alice in Wonderland make believe, it apparently doesn't really matter. Ford is already a weakened, bleeding company, with massive credit swaps written against it, so Riskloves are once again treading in croc infested waters on this story. Ford said it discovered that since 2001, certain interest-rate swaps Ford Motor Credit had entered to hedge the interest-rate risk inherent in certain long-term fixed rate debt were accounted for incorrectly.

Elsewhere in toxic waste land, we see marked deterioration in various tranches of mortgage backed securities. The default rate for subprime loans rose to 7.35 percent in July (three more months of weak prices, and rate resets ago) from 5.51 percent a year earlier, according to investment bank Friedman Billings Ramsey Group Inc. in Arlington Virginia. Accordingly credit swaps backing this cesspool, have quickly spiked as well. The true test will come when these claims are actually presented for "collection" and we learn who the counterparties are.

The ABX index, which measures the risk of owning bonds backed by home-loans to people with poor credit, rose 30 percent since Aug. 9 to the highest since January. There are more than $500 billion of such notes outstanding.
The US Treasury will be putting the markets to the test this week, having announced that $10 billion in new money will be raised for the four week Bill, on top of the $21.5 billion for bills and notes. The five year TIPs Old Maid Card was once again nicely supported by FCBs who took half of it. Yields on three month and six month bills were pushed up however, going off at 5.124%, and 5.174% respectively.

On Sunday I conducted a radio interview with Lee Adler of Wall Street Examiner. I was on a cell phone so sound a little muffled, but think we covered Riskloves, Ponzi finance, credit spreads, moral hazard, and global carry trades pretty well. Hopefully this will help readers with those terms. Interesting, follow on from about the Las Vegas Ponzi unit example I cited in the interview:
David M. Crosby, a Las Vegas bankruptcy attorney, says he has seen a ’surge’ in borrowers with mortgage problems. ‘Most of it is [tied to] the end of the housing boom, but I do see a good percentage of clients who got caught by a change in their mortgage rates.’ In addition, some clients ‘bought a number of speculative homes,’ he says. ‘The market turned on them, and now they are in a real financial mess.’”“Some homeowners are calling it quits. ‘A surprising number of people are walking away from their homes rather than trying to save them,’ says Mr. Crosby, either because the rate on their loan has jumped or because they owe more than the home is worth.”
Business Week accurately portrays private equity firms in Gluttons at the Gates.

10:15 AM - 6 eprops - 3 comments - email it

Sunday, October 22, 2006
Weekend Reading
Recommended interview with David Levy nails the points, but I'm not so sure he's right about speculators refusing to budge on price. Flippers in trouble.

9:14 AM - add eprops - add comments - email it

Barbarian takes down the gate - BOJ can no longer manipulate currency to gain American jobs. The strong banks of Japan which buy US bonds to keep their currency low can not with stand the financial markets that are taking on the US dollar. Japan, also, is unable to keep wheat prices artificially low. A practice that they have used for years to deprive farmers in foreign countries the true market price of their grain.

The US dollar found itself defenseless against the world traders selling dollars ahead of the long holiday weekend, as traders pounced on the opportunity to send it significantly lower against its foreign counterparts. Experts cited a cascade of stop loss orders as the primary driver for the surprising move, with unchanged fundamentals providing little underlying cause for such a breathtaking dollar drop. Leading the barrage, the Swiss Franc was the top gainer with a 1.1 percent appreciation against the Greenback. Yen traders were not far behind unable to manipulate the currency by bond buying of US bonds, pushing the USDJPY 0.9 percent lower through the psychologically significant 117.00 mark. Japan also is unable to keep wheat prices locked in price. Japan has had a fixed price for 24 years for the sale of wheat by foreign countries. The market-up in the price of 70% on wheat sold by the government to gain millers is used as a subsidy for wheat farmers in Japan.

US traders hoping for a quiet market ahead of the extended holiday weekend were sorely disappointed to see the Dollar Index post its largest drop in over a month. What likely surprised the majority of traders was that such a decline occurred on no new US news, with relentless stop-hunting providing a jump in volatility. Market makers seemingly took advantage of low liquidity on the holiday-shortened week to drive dollar-long position off of their books. This notably sent currency pairs such as the EURUSD and GBPUSD beyond key resistance levels and the Dollar Index to two-month lows.

Pronounced dollar declines left many traders questioning whether this was the start of a larger-scale shift against previous Greenback resilience. Looking to other markets for clues, we see that specific US securities did not follow in the currency’s footsteps?leaving vague implications for the future of dollar movements. On the one hand, muted bond and interest rate futures action suggests that traders see little reason to change outlook on the US economy. On the other hand, the dollar's pronounced weakness on purely technical trades suggests that bears may dominate rolling forward. Proprietary volume data suggests that the former is the common perception, with speculators taking very one-sided US dollar long positions in expectation of a retrace. Regardless, traders will likely need to wait until Monday for an answer to this question, as trade is likely to prove uneventful through extended holiday weekends in the US and Japan.

And this perspective smells it too

22 November 2006

Absurd Dell "Results" Boost Futures

Dell's reported results of $577m profit and $0.30 in EPS versus a "$0.24" consensus suggests the absurdity of this market. Obligatory "upgrade" by some shill firm and futes goosed. Just a few details -there are actually only a few since the Q3 SEC filing (10Q is delayed....)

Stock Futures Up After Dell Earnings; Light Trading Expected Ahead of Thanksgiving Holiday

LONDON (AP) -- U.S. stock futures notched higher Wednesday on the back of Dell Inc.'s upbeat earnings figures, though trading is likely to be muted as some traders leave early for Thanksgiving...Of companies in focus, Dell Inc. shares jumped 8.5 percent in early Frankfurt trading after it said its quarterly profit rose nearly 12 percent. Though revenue didn't rise as quickly as analysts had forecast, its rise in earnings suggest the company is making progress in growing margins. The news earned Dell an upgrade to outperform by Bear Stearns.

But here's the whammy:
Prudential thinks the story has just begun and believe that Dell only partially benefited from its key margin drivers in the OctQ - 1) stable PC pricing and a richer product mix, 2) server/storage product cycles, 3) reduced component costs, and 4) services expansion. Firm expects to see more margin leverage in coming quarters as these initiatives to improve profitability gain traction. What's new here? Nothing but wishful thinking- stable prices? an AMD -driven server cycle? Lower component costs? (not for quad processors)

They are modeling Dell to increase operating margin by another 100 bps over the next 2-3 quarters, and then turn further cost reductions into more aggressive pricing to win share.
Another hail Mary pass on this one- aggressive pricing is the Walmart/Dell way

Firm continues to believe Dell has the best chance in their universe to post upside to consensus estimates over the next several quarters. They are increasing their street high FY08 EPS estimate by $0.11 to $1.61, and are raising price target to $31 fr0m $28. How is a 20x multiple justified for a company growing revenues 3% for a cyclical business in a global economy about to enter a recession?

In a break from its normal practice, Dell did not provide year ago results in its report. It also didn't offer the usual post-earnings conference calls, where reporters and analysts could directly question founder Michael Dell and Chief Executive Officer Kevin Rollins. Dell stressed the preliminary nature of the earnings, saying the results could change due to a Securities and Exchange Commission probe that has grown since it was first announced in August. Dell also included warnings about the uncertain outcome of the investigations that could show "a material weakness in the company's internal controls over financial reporting." Oh, and the numbers are meaningless in any event.

Heavy Put Bets on Market by Professionals

Commercials net short DJIA and 10Yr Bond (+Gold & Silver) for Dec 15th Expiration

Funny how options have a way of advertising what is about to happen. Kinda like the 227,000 QQQ calls that traded at 40 in September when the q's were over a dollar lower. They made it. What's more important today is the put volume on the SPX. Volume was 24,820 at 1350, 55,166 at 1315 and a whopping 110,656 at 1300. I say watch for 1300 SPX by December 15th

Commitments of Traders with Delta-adjusted Options and Futures Combined, November 14, 2006
: Total : Reportable Positions : Nonreportable
:---------------------------------------------------------------------------------------- Positions
: Open : Non-Commercial : Commercial : Total :
: Interest : Long : Short : Spreading: Long : Short : Long : Short : Long : Short
: : ($10 X DJIA INDEX) :
: : :
All : 64,507: 18,071 13,405 867 19,487 41,448 38,425 55,721: 26,083 8,786
Old : 64,507: 18,071 13,405 867 19,487 41,448 38,425 55,721: 26,083 8,786
Other: 0: 0 0 0 0 0 0 0: 0 0
: : :
: : Changes in Commitments from: November 7, 2006 :
: -826: 55 1,117 76 9 -810 140 383: -966 -1,209
: : :
: : Percent of Open Interest Represented by Each Category of Trader :
All : 100.0: 28.0 20.8 1.3 30.2 64.3 59.6 86.4: 40.4 13.6
Old : 100.0: 28.0 20.8 1.3 30.2 64.3 59.6 86.4: 40.4 13.6
Other: 100.0: 0.0 0.0 0.0 0.0 0.0 0.0 0.0: 0.0 0.0
: : :
:# Traders : Number of Traders in Each Category :
All : 75: 24 20 8 20 15 46 41:
Old : 75: 24 20 8 20 15 46 41:
Other: 0: 0 0 0 0 0 0 0:
: Percent of Open Interest Held by the Indicated Number of the Largest Traders
: By Gross Position By Net Position
: 4 or Less Traders 8 or Less Traders 4 or Less Traders 8 or Less Traders
: Long: Short Long Short: Long Short Long Short
All : 17.0 45.0 28.8 64.9 17.0 45.0 28.8 64.9
Old : 17.0 45.0 28.8 64.9 17.0 45.0 28.8 64.9
Other: 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Commitments of Traders with Delta-adjusted Options and Futures Combined, November 14, 2006
: Total : Reportable Positions : Nonreportable
:---------------------------------------------------------------------------------------- Positions
: Open : Non-Commercial : Commercial : Total :
: Interest : Long : Short : Spreading: Long : Short : Long : Short : Long : Short
: : (CONTRACTS OF $100,000 FACE VALUE) :
: : :
All : 3,075,711: 682,120 289,773 446,628 1,575,451 1,908,698 2,704,200 2,645,099: 371,511 430,612
Old : 3,075,711: 682,120 289,773 446,628 1,575,451 1,908,698 2,704,200 2,645,099: 371,511 430,612
Other: 0: 0 0 0 0 0 0 0: 0 0
: : :
: : Changes in Commitments from: November 7, 2006 :
: 42,715: -8,009 -14,628 21,847 4,954 16,894 18,792 24,113: 23,923 18,601
: : :
: : Percent of Open Interest Represented by Each Category of Trader :
All : 100.0: 22.2 9.4 14.5 51.2 62.1 87.9 86.0: 12.1 14.0
Old : 100.0: 22.2 9.4 14.5 51.2 62.1 87.9 86.0: 12.1 14.0
Other: 100.0: 0.0 0.0 0.0 0.0 0.0 0.0 0.0: 0.0 0.0
: : :
:# Traders : Number of Traders in Each Category :
All : 328: 77 77 85 142 149 256 274:
Old : 328: 77 77 85 142 149 256 274:
Other: 0: 0 0 0 0 0 0 0:
: Percent of Open Interest Held by the Indicated Number of the Largest Traders
: By Gross Position By Net Position
: 4 or Less Traders 8 or Less Traders 4 or Less Traders 8 or Less Traders
: Long: Short Long Short: Long Short Long Short
All : 18.1 23.1 26.7 33.8 11.9 21.0 18.6 27.5
Old : 18.1 23.1 26.7 33.8 11.9 21.0 18.6 27.5
Other: 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

21 November 2006

KB Homes in Chaos- But $47 a share? November 2006

When the CEO and some of the management team of the nation’s fifth largest homebuilder, KB Homes (KBH-NYSE), resigned this week, and admitted to misappropriating shareholder assets through options fraud, one might expect the shares to suffer. CEO Bruce Karatz admitted to manipulating the options award and pricing since 1998 by having "selected grant dates under the company's stock option plans", at a time when he has been paid more than a quarter a billion dollars in salary and …um..options. So the board is recovering $13m in excess option awards but now Karatz can dump his remaining $150m in stock (2.5% of outstanding shares). The KBH Board fired Gary Ray, head of human resources, and accepted the resignation of Richard Hirst, executive vice-president and chief legal officer.. Wow, that’s not good news.

Karatz was one of the highest-paid executives in 2005, making $155.9 million, mostly from exercising options, according to the Wall Street Journal. The board’s press release claimed that, “the company's review didn't reach any conclusion about whether there was intentional wrongdoing on Karatz's part.” Now the board is looking for an independent non-executive chairman. In the meantime, Kenneth M. Jastrow II, a director of KB Home since 2001 and Chairman and CEO of Temple-Inland, will serve as the board's lead director. And KB Home is searching for people to fill the”newly created positions of chief compliance officer and risk assessment officer.” No, certainly not intentional and nice to close that barn door…

Yet, in this otherworldly market where all news is bullish, regardless how much shareholders are being ..umm..disadvantaged. More than 188 companies U.S.-wide have disclosed their stock option practices are under internal review or being investigated by the government, according to Glass Lewis & Company, a research firm that advises investors on shareholder issues. KBH shares initially rose and even the 5.1% decline in third quarter same store sales at Home Depot (HD-NYSE) might be just shrugged off, but the average check-out invoice dropped for the first time in four years. Atlanta-based Home Depot and Lowe's have both cut their outlook this year as higher borrowing costs and weaker U.S. home sales cooled big-ticket purchases. Home Depot said per-share profit could fall as much as 16 percent in the fourth quarter.

Secondly, a recent UBS housing study forecast that homebuilder industry EPS will decline 22% in 2006, UBS is now forecasting a further decline of 46% in 2007, and a 28% decline in top line revenue. According to Yahoo Finance, KBH is expected to see a 40% fall in EPS from $8.12 to $5.09 in 2007, putting KBH at a not-so-compelling 9.2x forward price/earnings multiple. KBH has already warned that orders fell 40% during its non-reported third quarter, which it expects to report NEXT FEBRUARY (see later).

Thirdly, even the historical housing stock price support, the book value, is sliding at KB Homes from $37.66 per share in Q2 to a target closer to $30 from contract writedowns, land purchase option dispositions, and other write-offs. With $2.46B in long term debt and a $1.5B surge in inventory in the last reported quarter (Q206), there look to be further book value writedowns. More good news.

Fouthly, investors who think they are being contrarian by buying homebuilders shares may have a rude awakening- the recession of 2007 will bring losses for these firms. KBH is a LA-headquartered homebuilder and housing finance firm focusing primarily on the low end, first home buyer segment, but the bulk of its operations are in the riskiest, most over-extended housing markets: California, Nevada and Florida. In September, existing home sales slowed for the sixth straight month, and new home sales were off 14 percent from year-earlier levels, according to government and housing industry reports. And even the National Association of Realtors (NAR) has been steadily cutting its estimates for key metrics.

  • Existing Home Sales: 2006 sales slipping from a 6.5% decline in the summer to now down 8.6%, 2007 forecast is a very conservative decline of 0.6%;
  • New Home Sales: 2006 sales falling fast from a 12.8% drop forecast August to a 16.8% drop, 2007 sales are already expected to drop 8.7% but will be worse; and
  • Housing Starts: 2006 starts will slow from a 9.1% decline to a 10.6% decline.

Moreover, the NAR’s basic affordability index is approaching parity (100) even with its absurdly low assumptions of average housing prices ($232K). In short, that means home prices are becoming even less affordable as the recession approaches. And UBS is forecasting a further 10% decline in home prices over the next year, as a staggering 870,000 homes are unoccupied in the U.S.

Recently, KBH received consents to amend the indenture governing all five series of its $1.65 billion of outstanding senior notes, which it was technically in default due to the failure to file a SEC form 10-Q (quarterly report) with the SEC. So now KB has until late February 2007 to file its August 30, 2006 Q3 results, soon after it pledged to file by December 22, 2006 ? Robert Curran, a senior home-building analyst at Fitch Ratings, said offering a cash payment to bondholders ($7.50 per $1000 in debt?) in exchange for additional time to file financial reports “wasn't unexpected”. Standard & Poor's Ratings Services placed KB's corporate credit, senior unsecured, and senior subordinated debt ratings on CreditWatch with negative implications. S&P said the move affected the $1.65 billion of senior notes and $750 million of senior subordinated notes. Is the SEC serving investor interests here?

The quintuple whammy for this firm is the loss of transaction-related revenue. KBH wants clients to use their financing arm. Its Financial Services segment, which provides mortgage banking, title, insurance, and escrow coordination services to the company’s U.S. homebuyers, has been rolling over. Cash-out refinancing by U.S. homeowners in 2005 took a net $345 billion in equity out of their homes, and another estimated $400 billion this year. Accordingly, the fastest-growing component of the earning assets of U.S. banks was home-equity loans, in which houses are put up as collateral. These totaled $399 billion in 2005, up $118 billion from a year earlier. In 2005 and 2004, 46% and 42% of mortgage assignations, respectively, had piggyback loans to cover down payments and transaction costs, twice the proportion of 2003. What happens to KB Homes’s stock if it faces massive financing writedowns which no shareholder will discover until next spring?

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