Sunday, July 27, 2008

George Bush and the 'Dark Knight'

So, I just finished reading an op-ed piece by an Andrew Klavan that was published in the Wall Street Journal. The piece is titled “What Bush and Batman Have in Common”.(http://online.wsj.com/article_email/SB121694247343482821-lMyQjAxMDI4MTI2NzkyNDcyWj.html)
It’s actually pretty entertaining stuff when you consider what great lengths neo- conservatives will go to when they want to make their argument for global domination sound like altruism or some sort of deep rooted desire to defend the greater good. At one point Andrew writes “ the Dark Knight..is at some level a paean of praise to the fortitude and moral courage that has been shown by George W. Bush in this time of terror and war”


Wow, where to begin. I could make a collateral attack and point out that Andrew spends a lot of time writing about his favorite bad guys … Hamas, Hezbollah, and Ahmadnijad and that his pieces titled “Why god chose the Jews” or his countless attempts to defend Israeli actions or rhetoric at all costs as evidence that he might just be a little bit biased when he tries to tie the Dark Knight, Bush, and Islamic Fascism together, but I won’t. That would be too EASY.
First, I would like to point out that Batman has a code. He could easily kill the Joker and anyone of these criminals who are ultimately going to do nothing but harm innocent people. However, he never does, despite being provided countless opportunities to kill them. Why? Well because even the dark knight has rules that separate him from the madmen like the Joker. The Bush Administration has consistently demonstrated that they have no rules. They will preemptively attack you, lie about your capabilities, torture you, lock you up and make you disappear, and just about anything else they can think of that they believe they can get away with. They don’t do it out of necessity. They do it because they want to maintain control. In the ‘Dark Knight’ ,Batman chooses to use the sonar tool to eavesdrop and ascertain the Joker’s whereabouts, but he also wires it to self destruct. The Bush administration would have fired Morgan freeman and put a whole team of people down there to spy on everyone in Gotham until some squealer wrote a book about what they were doing. At which point, they would focus all their energy on completely destroying the credibility of this person.


The Middle East is about influence. America and Israel have it and they are very reluctant to let that balance of power change. As an American, I can totally understand that…and I am willing to concede that a military super power is going to have a hard time learning to be charitable. But the Iraq war was a clear mistake on Bush’s part, and that’s what Andrew doesn’t get. A modern day Batman would have gone in and abducted Saddam and his local cohorts and dropped him off on the doorstep of The Hague. He would have broken international laws to facilitate something for what he believes is the greater good. I do not understand how you can compare Batman to a man who simply gave the order to bomb the smithereens out of a civilized country. Or consistently defend Israel when they have pretty much helped create the desperate situation that the Palestinians are living in.


At the end of the day I have seen guys like Andrew before, and like the Joker or Bush…there is no point reasoning with them. They are resolute or crazy…which one depends on your perspective…but either way they are no Batman…because at the end of the day they clearly have an agenda and simultaneously posses no code. The dark night on the other hand is tortured by what crime has done to him and Gotham, but yet principled enough not to be completely consumed by it.


Andrew needs to wake up and drop his obsession with Islam and terrorism because he just doesn’t understand the world he is living in. Movies like Syriana which are very COMPLEX actually perfectly capture the situation that exists in the Middle East today…and the global complexities that occur when guns, oil, religion, and politics all cross paths. Jewish terrorism if you can call it that (I think tying religion to the word terror is nonsense) was a very effective tool that was used in the 1940’s to pressure the Brits and just about everybody else in what was then known as the British Mandate of Palestine to get the hell out so they could run their own religious state. Whether that is what Hezbollah is trying to do in Lebanon or whether that is ultimately what Iran wants in Iraq doesn’t really matter to me as long as I can identify the fact that if we were not meddling in these countries by virtue of being a super power that armed Iraq when it was gassing Iranians (yes, that’s not a hard selling point if you are the Iranian govt) or gave Israel its cluster bombs that are now blowing the limbs off Lebanese children; we would have less enemies in the region. When you do these things people don’t have a hard time making you look like the bad guy. And when you fight a proxy war in Afghanistan in which you arm tons of very uneducated people and just teach them to kill every day and also give them the means to fight a dirty war against your enemy…you should not be surprised that things ended up getting much worse after you left that Country because you didn’t have the time to take an interest in how it would politically develop.

If Andrew had the chance, he would probably counter my argument by saying that I am biased and that my Lebanese heritage plays a part in shaping my opinions. I will save him the time by openly admitting he is right. We do not live in a vacuum, and my upbringing and background is bound to play a role. However, I will counter that as far as religion goes I am very open minded. I think religions are fine when they are kept at the personal/ family level. I have respect for all faiths, and frankly do not believe there is one right religion out there or such a thing as the “Chosen People”. The concept of a creator choosing one clan or tribe over all others completely turns me off. I will never believe that such a being would ever play favorites. I think the Arab world has a long way to go and that it can learn a lot from the west, but I would also counter that the west could learn a thing or two from the people out here. In the end, there is no right or wrong in global politics. Parties acting out of self-interest are always going to distort reality, and the bush administration is no different than any other self-interested government. It’s just that they have much more advanced and often confusing means of distortion at their disposal that they probably often don’t even understand. The Batman’s of the world are few and far between…the George Bush’s and Karl Rove are a dime a dozen.


Hence, I conclude that Andrew’s comparison of Batman to Bush is based on his misconception of reality or is politically motivated. In either case, given Bush’s global popularity as the most destructive President in the history of the United States, even a blind person will have a good laugh at this na├»ve and silly article!

Sunday, July 20, 2008

Dubai Real Estate- On The Ground Floor

There is only one industry in the world in which everyone is an investment expert; It’s called Real Estate!!

As the loser that I am, I decided to spend two hours last night going to every single real estate stand in the Mall of the Emirates. Why? Well, frankly I was curious to hear what these “sellers” where all about, and exactly what pitch they were all using to move their properties. Boy did I have some fun. The first stand I visited featured an attractive English lady selling a project tin Dubai waterfront. Her schpeel went a little something like this…”Dubai is the new Hong Kong, there is limited waterfront property, everybody wants this property, only a fool would not buy this project, the price can only go up.” Whoa…the price can only go up?

“Why” I asked.

Well, according to this investment expert,” Property prices always rise and they never fall because land only appreciates in value”.

Hmm, “Are you sure about that statement?” “Yes, of course I am!” she replied.

Honestly, where do they find these people? When I cited the falling property prices in the rest of the world as examples of instances in which property prices fall, she responded with “Dubai is different”. Ahh…these guys will never learn will they. Anyway, I could go on for hours about conversations with real estate agents who want to argue that land only goes up in value, but I am sure nobody cares. There is really nothing surprising about this.

What I do want to talk about is how aggressive these developers are getting, and how deceptive they can be with their practices. One developer told me yesterday that if I gave him 20 million dirhams he could guarantee me 30% return. In fact, he would hand over a post dated check for 26 million which I would be able to cash in 6 months. According to him, “It’s risk free”. It’s amazing how most of these guys behave more like con artists than anything else. How can you literally market yourself as someone who can guarantee 60% annualized return, and not expect some questions? Anyway, by the time I was done I realized that if I handed over 20 million to these people all I would have in return would be a collateral agreement between me and the developer that would give me title to the land if the defaulted on the check. How many other collateral agreements are out there? I don’t know. Was this guy pushing a ponzi scheme? Possibly. Anyway, let’s move on.

The Dubai real estate game is getting pretty crazy. All the off plan projects are 5% down and marketed as flippable. The agents spend all their time talking to you about the price appreciation and not about the actual building. For example, I looked at one project which had been launched in April. The building was sold out at launch. However, 95% of the units have been relisted by the buyers and are available for sale.(I did the math as I glanced over the listings) The markup: anywhere from 3%-15%. The stock market equivalent of this is day trading a momentum stocks. When it is working it seems like very easy money, as you gear up to maximize intraday returns on small moves. When it’s not, you get taken to the cleaners. But this is to be expected in a super hot market like Dubai. The stuff that really caught my attention yesterday was the developer financed luxury condo projects. In these deals, you pay 50% of the purchase price between now and completion, and the other 50% over a 7 year period commencing after delivery. They guarantee you 11% annual rental income on the property. When I asked how they can guarantee this, the Aussie agent responded because we will rent it out for you. I then asked, “what if you can’t rent it out?” His response: Why wouldn’t we be able to rent it out?

My response: Well, what if there are more apartments than people?

He quickly fired back, “Sir, 200 new families move to Dubai every week, there is no way there will ever be more units than people.” At this point I decided to not even bother, ignorance is bliss.

Anyway, back to the developer financing: 2 agents marketed it to me like this
“No salary certificate, no documents, no banks, no headaches.” Sound familiar? Looks like the elusive ninja marketers are alive and well….they just moved to Dubai. So, where am I heading with all this…To be frank…nowhere in particular. I am not calling a top, and not predicting a crash. All I am saying is the stuff that causes real estate disasters is alive and well in Dubai and gaining momentum. Right now there is a giant faucet of liquidity pouring money over this region and it makes everybody look likes geniuses. But liquidity can be tricky…just when you think you can count on it …it up and moves on to someplace else.

Oh…one more thing…there were a few projects that were in the pre launch phase yesterday. What is pre launch? Well, pre launch is when the developer sets aside a certain percentage of the building to sell before the official launch. They then bank on marking up the price at the launch 4-5 weeks later. When I asked who gets such a deal the agent responded “VIP’s”. I then asked how you become a VIP, she replied “well sir if you are interested in buying pre launch we can make an exception”. According to her, I would be able to sell the building at launch without restriction for at least a 10% profit.

Clearly, I am in the wrong business.

Saturday, July 19, 2008

"FREE" Markets- Only On the Way UP

From the SECURITIES EXCHANGE ACT OF 1934 RELEASE NO. 58166 / July 15, 2008

“False rumors can lead to a loss of confidence in our markets. Such loss of confidence can lead to panic selling, which may be further exacerbated by “naked” short selling. As a result, the prices of securities may artificially and unnecessarily decline well below the price level that would have resulted from the normal price discovery process. If significant financial institutions are involved, this chain of events can threaten disruption of our markets.”

Wow, now I am really starting to get concerned. The SEC has decided to educate financial markets about the normal price discovery process. I wonder if the person who wrote this paragraph has ever traded stocks let alone engaged in a short sale. I am asking this question because anyone who has a clue about financial markets would never write such garbage.


Rumor-“an unverified account or explanation of events circulating from person to person and pertaining to an object, event, or issue in public concern"




Chairman Cox and the rest of the gang at the SEC need to understand that there is a very good reason for all these “false rumors”. What is this reason? Well, to put it simply, investors have no way of verifying what exactly is the value of the assets sitting on the balance sheets of financial institutions. To make matters worse these opaque balance sheets carry assets that are 30-100x shareholder equity. As an equity holder, you are facing in many situations a potential 100% loss if your bank can’t adequately recapitalize. On the flip side, as a counterparty or debt holder you face default risk if the bank’s assets are not worth what they say they are worth. Solution: sell first ask questions later. For the SEC to actually call these rumors false they need to be able to confirm that every financial institution has adequate capital to weather a prolonged housing downturn. To be able to do this….they need to be able to verify that housing prices will not fall precipitously from present levels. Since no one is capable of doing this, the rumors are by definition not false. Every bank is carrying a certain level of housing related toxic waste on their balance sheets. Human nature tells us that the ones with the most toxic waste have a huge incentive to hide it as best as they can while they try to figure out ways to ride out the housing storm.(i.e raising more capital through dilutive offerings, selling assets, borrowing from the fed, or just praying that the bottom is around the corner) As the crisis has developed the only thing we have learned is that every bank is exposed.




It’s pretty sad to see the SEC focusing on shorts who are doing their jobs by exposing the weak links and bringing them to their knees before they sucker people into giving them capital that they clearly don’t deserve. If the regulators had done their jobs, the shorts would be failing and investors would be buying. My view is simple, stay out of the shorts way and let the market sort things out. If the system is healthy, buyers will emerge and bank stocks will stop falling. If it isn’t, the bad ones will fail quicker and we can get this whole mess behind us and start fresh.




We are now approaching the 1yr anniversary of the credit crunch, and it appears that we have made little to no progress with respect to shoring up our banking system. Why? Well, it’s because there is still too much dead weight out there dragging things down. Cut these banks loose, and let’s move on. Any institution that is over leveraged and incapable of surviving should be allowed to fail. If that means we are dealing with 90% of the system…than so be it…we can start over. Though my guess is it isn’t that bad.




…and the good news from wells fargo and jpm should be taken with a grain of salt. Wfc extended charge-off acknowledgement from 120 to 160 days. What does this mean? Well, for a bank this means you get to postpone taking loan loss reserves for another 40 days and actually hold onto precious capital. As for JPM, their loan loss reserves somehow actually came down from q1. At least the accountants are earning their salaries.

Oh, and one more thing…if there are no shorts in the market who is going to be left to buy these stocks? Maybe you should think about that. Shorts can at least make money by covering on the way down. If they didn’t exist, the market would only have sellers….and then Chairman Cox would get to see what real panic selling looks like.

Saturday, July 12, 2008

'Chuck, GSE's, Gold, and the Poor old shrinking dollar'

Does anyone like Sen. Schumer? Let’s set aside my personal distaste for the man as I have over the years become convinced that he just hates Arabs, and just focus on his utter incompetence as a public figure. This Harvard man(college and law school), Aipac member, DP World blocker, and all round publicity junky can now add bank destroyer to his long list of credentials. Last time we talked about Chuck he was trying to blackmail the Saudis into raising their oil production. His strategy worked and oil prices have done nothing but steam roll higher. If exacerbating an already tenuous oil situation wasn’t enough, he has decided to throw himself into the banking game. His much publicized letter to the FDIC Chairwomen in which he suggested they keep an eye on Indymac Banc probably caused the run that finally crippled mortgage lender and will leave some 19000 unlucky depositors wondering whether or not they will ever see their non-fdic insured funds. Honestly, I just don’t understand this guy. If he wrote this letter two years ago, I’d have some respect for the man. But writing it in the middle of a financial contagion? What is he thinking? Every regulator and his uncle is working overtime right now to make sure this crisis doesn’t get any worse…and along comes chuck shouting fire in a crowded theater. If this guy likes stampedes so much, maybe they should send him to the running of the bulls. Anyway, to pin the Indy failure entirely on chuck isn’t fair.(though I can’t see how his letter did anything other than publicly suggest the fdic do exactly what it was already quietly doing) When you build an entire lending business around no document loans your demise is your own doing, and the regulators are morons for not doing anything about this a long time ago. Honestly, what do we pay these guys for? Having formerly been an employee of Treasury I am starting to wonder whether or not the regulatory system will ever effectively regulate anything. Anyway, enough of chuck bashing for now…let’s move on to the Fannie/Freddie crisis.


Anyone watching these stocks on Friday must have been wondering what the hell is happening. Both where down over 40% at one point. Things have really gotten out of hand. Though I find some personally irony in this situation as I lost a good deal of money shorting these stocks a few years ago when Jim grant and company first started talking about their eventual demise… The thesis was so compelling, and yet nobody ever wanted to listen. Now, they are on the brink of disaster, and I find myself hoping that the powers at be find a solution to this mess. Why? Well, Fannie and Freddie are just too damn important. As the largest buyers of US mortgages, these firms are largely responsible for how the current US housing market functions. Any major disruption in their operations could be disastrous.


So what’s the problem? For those who have not being following this closely or for that matter don’t understand how these guys work ;I will provide a brief summary as I have spent a great deal of time studying these two companies over the years. Fannie and Freddie are Government Sponsored Entities(GSE’S). They were created with the express purpose of making housing more affordable. Fannie was one of FDR’s new deal initiatives to provide liquidity in the mortgage market, and for the past 70 years it has done precisely that. The company was turned into a private entity in the 1960’s, and it was joined by Freddie in the early 70’s. Their business model is simple. Fannie and Freddie buy or guarantee mortgages. They then sell bonds(agency debt) against securitized pools of these mortgages. They make money by charging a small premium for their agency guarantee. Which basically means that if the mortgagee behind a pool of mortgages defaults on principal or interest Fannie will guarantee that you are paid. These bonds are NOT backed by the US Government, despite the fact that most investors seem to treat them that way. The idea is that these guys buy high quality mortgages and as GSE’s can issue debt at a very low cost(a slight premium to treasuries). The business model worked for a very long time. But sometime in the late 90’s the mgmt of these firms got more aggressive as they sought to drive ROE. Whether they got too big or too careless(or both) depends on who you talk to… either way they started to come under fire. Both were hit with major accounting scandals, and both came under significant regulatory scrutiny. The temporary beating in their shares didn’t last very long though as the US housing boom provided enough of a tailwind to get them through the mess. Today, things are different. Both GSE’s are clearly going through some hard times as short term liquidity dries up while their giant pool of mortgages/and guaranteed mortgage obligations deteriorates. Many would argue that the companies are fundamentally insolvent. I tend to agree with this argument. When you consider the sheer size of their mortgage market exposure and the rising rates of delinquencies along with their equity capital, I find it hard to fathom that either of them can cover their near term obligations if they are adhering to US GAAP. So what should the US Government do?


1) Stay out of the way and see what happens. I.e. let them them fail. This option is off the table. The GSE’s cannot declare bankruptcy. It would be a financial fiasco. The agency debt market is huge and includes a long list of creditors that range from foreign governments to major pension funds and state and local governments. With all the different parties involved I doubt the creditors could ever agree on anything. Furthermore, the temporary disruption to the mortgage market would be disastrous. The GSE's account for nearly 40-60% of the market. Taking them offline even for a short while could send the US economy into a black hole. Mortgage rates would soar and housing prices would take another massive hit.

2) Put them in a conservatorship. This is an interesting option, and was discussed by the op-ed piece in the NYT on friday. The laws were amended in the early 1990’s to allow regulators to place either entity in a conservatorship if they were found to be ‘significantly undercapitalized.’ Since that appears to be the case, this seems like a very possible outcome. Under this scenario, the equity holders probably get wiped out while a team of regulators steps in to nurse them back to health. However, I don’t really understand how the funding issues would be solved. The dividend goes away and that saves some cash, but the rest will need to come from the FED. How much? I have no idea.

3) Nationalize them. Since Fannie and Freddie basically are sitting on close to $6 trillion in debt, this option is a tough sell. The Govt would have to issue treasuries to basically replace the agency debt. This would increase the public debt by over 60%. Not a very appealing thought for the already battered US dollar. They could of course just choose to expressly guarantee their debt instead and thus keep them as they are…but that would also basically have the same outcome for the dollar.

4) The government could take a controlling stake in both companies. This would provide much needed new capital and allow the Government to replace the board, change the mgmt, cut the dividend, and all the while maintain the private status of the entities. Kind of a Dubai move as you get an implicit Government backing to with a direct Government equity stake, and still maintain the image of a functioning capitalist system by maintaining the publicly held joint stock entity. Again not a very appealing move for the dollar or US treasuries, but a move that saves some face.

If Fridays market activity is a leading indicator, it would appear that agency debt holders are convinced that the Government will backstop any GSE’s debt, thus turning a deemed implicit backing into an explicit one. At the same time, it appears that equity holders, no matter what decision is finally made, will be left holding very little(if anything at all).


I would like to point out that when I did my piece on the fed’s balance sheet a few months ago, and all the garbage they are supporting; I said that the only thing I was sure of was that treasuries were a sell and gold was a buy. At the time the market was going in the other direction on both of those trades(not tooting my horn but I’ve been a gld holder for a very long time). I am now fully convinced that there is no stopping the gold bull run. It is the easiest trade around, and anyone ignoring it is making a big mistake. The US system has taken a credibility hit that it may never ever recover from or in the best case scenario will take several years to repair. I have concluded that the financial system is full of liars. Whether we are referring to rating agencies, commercial banks, mortgage finance companies, regulators, or investment bank; I no longer believe a word any of them have to say. Foreign holders of our debt will be spending the better part of the next few years diversifying away from the dollar. I expect gold will play a major role in this diversification as central banks and even sovereign funds start to turn from being net sellers to net buyers in the next few years. I know it makes no sense to the rational thinker, but until someone figures out how to print gold it will always appeal to individuals seeking safety and certainty.(and my bet is that group is growing awful fast)

Tuesday, July 1, 2008

"Green Cheese????"

“Someone started the rumor that Barclay’s Bank was going to underbid for Lehman and buy the company for $15 a share. This rumor ranks up there with the moon is made out of green cheese in terms of its validity.”
-Richard Bove, Ladenburg Thalmann Bank analyst

Some advice to Richard-

While I agree this rumor sounds ridiculous and at this stage in the game probably is ridiculous, I have to warn that over the past 12 months the rumors have been consistently right.

Let’s recap a few of my favorite rumors from the past 12months...To be honest i could list 200...but you have to draw the line somewhere

-E*TRADE had a huge drop on rumors that it was in serious subprime trouble…this was on august 16th…stock fell from $16 to $9.92. It then recovered as analysts came out with notes that put out the fire. Stock is 3$ today. Why? Because Etrade did have serious subprime trouble!!

-Mbia was constantly getting heat from shorts claiming the monocline insurer was in trouble. And with every analyst defense and rally came a new wave of lows. Then finally in jan the stock looked like it was going to die as it plunged 50% from $13 to $6. Again, some analyst came out and said the bankruptcy rumors were unfounded. Where is the stock today ..$4.39. Not bankrupt yet..but exiting one business entirely and defintently nowhere near being out treacherous water.

-There were rumors that the buyout of Harmon Kardon led by gs private equity fund was going to fall apart….again arguments where made this was rumor mongering and that the deal was fine…or that arguing for a MAC would be too hard. Well, the buyout was pulled and the stock dropped about 60%.

-Then there was the citi free fall and rumors that the dividend would be cut….a whole team of analysts came out saying that those rumors were unfounded. But a few months later citi cut its dividend.

-Oh, and Bear Stearns…rumors were circulating in august that the losses by two bear hedge funds could eventually force a run on the bank and that bear or a broker like bear could go under. Again, a whole team of analysts and pundits ridiculed that one. 5 months later….Bear Stearns doesn’t exist

-Oh and what about the Lehman rumors the day after Bear that were put out by Erin Callan. They were totally false right? Except 3 months later she has lost her job and lehman shares are lower than where they were when everybody thought a bankruptcy was around the corner.

So, when it comes to Lehman, I’d make sure I know the hand I am playing. The rumors may seem crazy…but if that’s the case I might just go to the Smithsonian and check the moon rock samples. Because as far as I am concerned I don’t believe these banks are coming clean. Look at the game being played with Merrill right now. Up until 3.5 weeks ago every sell sider had Merrill making money this quarter. Then…almost miraculously…they all started reversing course. One quiet downgrade 2 weeks ago, and then more and more downgrades over the past 10 days. Do you think these analysts went from predicting a profit to predicting a massive loss without any rumors…hints…direction…etc…in a matter of two weeks? Last I checked Merrill had not disclosed anything to the public. Either way these stocks keep falling…and while people bicker over why…I am content knowing that for now the words “investing” and “investment banks” should not go together. Nobody knows what’s going on, and very few people have been truthful.

I usually like bold notes out of analysts, but most of these notes have been pretty sad. Look at some of the price targets these guys have on brokerage names. They are like 50-100% above current levels. Anyone think this has something to do with all the underwriting that has been done with respect to raising equity for fellow brokers?