It’s only a matter of time before we get some ridiculous predictions about the region from certain geographically located pundits. So, I thought id beat them to the punch with my own absolutely ludicrous predictions. You can’t poke fun at us if we beat you to the punch.
Jan 4th- Burj Dubai, the world's tallest building, opens its doors.
Jan 6th- Having completed a successful on time official opening, Burj dubai closes so that minor renovations can be completed over the next few months.
Jan 9th- Dubai World reaches standstill agreement.
Jan 10th- Dubai Planetary Investments is created by decree. Initial paid up capital of $5billion.
Jan 12th- Dubai Planetary investments acquires controlling stake in Iceland. Icbc and BOC provide financing of 20x on transaction.
Feb 1st- In an attempt to meet immediate cash needs, Dubai World announces a special valentines week cruise on board the QE2.
Feb 14th- Somali pirates hijack QE2.
Feb 15th- Somali Pirates not realizing how precarious the finances of the QE2 were, crumble under the leverage.
Feb 16th- Somali Pirates seek a standstill with QE2 creditors.
Mar 1st- Saudi Arabia announces Kingdom’s long-term strategic vision. Plans $30 trillion in infrastructure spending by year 2412.
April 1st- Kuwait Parliament approves legislation bailing out all consumer debt of Kuwaiti nationals.
April 2nd- Louis Vuitton International daily sales increase 5000%.
April 3rd- Kuwaitis request another bailout.
April 15th- Damas Jewelry closes doors.
April 16th- Damas Financial Advisors, the middle east’s largest financial planning firm opens its doors.
May 1st- To ensure the long-term viability of all Abu Dhabi projects, ADIA announces $200 billion investment in sand replication technology. Construction
on the world’s first sand synthesis plant begins immediately.
June 1st- AD Sand Synthesis One opens its doors.(goes down in Guinness book as fastest plant construction in history)
June 15th- Dp world is taken private by an Abraj led consortium.
June 16th- Chinese acquire 40% stake in Jebal Ali Free Zone.
September 1st- Abu Dhabi starts to experience water shortages.
September 3rd- Abu Dhabi discloses that it is in the midst of a water crisis. The cause of crisis is the extremely intensive water needs of its sand replication plant.
Sep18th- After letting them sweat it out for a few weeks, Dubai bails out Abu Dhabi with fresh water from its Icelandic stake. Appreciating the gesture Abu Dhabi pays off all of Dubai’s debts. Dubai Planetary Investments exits Iceland stake with 10000000000000000% return. The buyers are the Government of Qatar.
Dec 21st- A giant sand storm hits the gulf. Within 24 hours the region is swallowed whole by the earth.
Dec 22nd- Western journalists say I told you so.
Dec 23rd 2010- The World Ends. (The Mayans were off by exactly two years)
Happy Holidays!!!
Sunday, December 27, 2009
Thursday, December 17, 2009
Dubaican on Debt, Diversification, Denninger, and Transparency"
"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so"
-Mark Twain
Attended the Bloomberg Conference on Debt, Danger, and Diversification in the GCC.
I feel like the recent news and crisis as well as some of the topics discussed yesterday warranted a post….
Debt is good? Speaking from personal experience I think I can safely say I would never say debt is good.
Debt to the extent that it is serviceable across a wide range of possible economic outcomes is good.(actually I don’t even like the choice of the word good, I’d go with a ‘has a place’) Of course determining what level of debt falls into this broad definition is no easy task. What one model shows as serviceable another may find unfeasible depending on your assumptions, hence, the desire for a definition that allows for a broad range of economic outcomes. While it is difficult to determine what level of debt is good/manageable/marginally boosting return on equity without in anyway jeopordizing the existence of that equity stake, it is not difficult to identify a level of debt that is malicious, predatory, paralyzing, or potentially cripiling. For the individual too much debt leads to losing control of your own life. The corporations problem is less severe as all that happens is it gets transferred to creditors or liquidated. Debt is good or even great until it is not, and then it can be disastrous. So, while some level of debt may be good or even great, no debt is always good provided that you know what to do with your savings.
Dubai fails to grasp the concept of transparency? Will they Change? This came up a times and the panel pretty much was of the view that they are progressing down a road towards more transparency. I don’t disagree, but I think labeling transparency a Dubai problem is either a narrow minded way of looking at transparency or just plain wrong.
In my opinion, the Dubai dilemma is at the end of the day a simple story. It is a reflection of the flaws of the financial system which I think were evident to many observers. From the moment I got here, I took the view that Dubai was the world’s first sovereign hedge fund. Dubai, or as Moody’s dubbed it, Dubai Inc., was set up as a complex limited liability company. Anyone with a legal background or any experience looking at convoluted structures understands that there are only two reasons to adopt such a model. The first being to limit liability in case anything goes wrong. The second reason, which is not as obvious, but clearly was the main driver of such structures over the past decade, is to maximize leverage. By creating layered holding company, you can embed leverage at many different levels. To succeed at such a model you need to limit transparency, in fact, you actually need to get pretty good at being opaque. Those questioning Dubai’s transparency should understand that it was most likely by design, and not the result of some fatal regional flaw. Now that transparency will serve them well, they will provide a high level of it.
To put Dubai on the map outlandish feats needed to be accomplished. In many instances, what many thought was only imaginable was turned into reality in a span of a few years. Such a model once it gets going isn’t designed to naturally cool off. Someone or something has to intervene to slow it down or grind it to a halt. Dubai’s only problem is that some people just don’t want to let them invoke their limited liability shield.
Diversification- There was a lot of talk about the failures of diversification. I blogged about this at the peak of Middle East Mania in June of 2008(LandMark Properties, Rich Foreigners, and American Know How). My views on the topic have not changed. The region needs to employ better financial planners.
The average Arab in the gulf doesn’t wake up in the morning wanting to buy a gulf course in Scotland or a ski resort in Colorado. Typically, what happens is an ex-banker(consultant or lawyer works too) who is now in the employ of a government related investment entity in the Gulf generates such an idea. It most likely comes from his ex- colleagues at certain investment banks or consulting firms that are advising the western owner of such an asset. Furthermore, these ex bankers have usually gone skiing at said resort or played a few rounds on the famous course that is up for sale. Thus, they have no problem selling themselves and subsequently their bosses on the deal. Furthermore, the ex-banker has been hired to do deals, so it should be no surprise that he gravitates to what he knows and also what his former colleagues in NYC and London are recommending. So, when you criticize the gulf for diversification, you are in effect criticzing the hiring decisions they have made. Now, this doesn’t mean all bankers who worked in the west are likely to always lose you money, but it does mean that if someone is just showing you a non-stop pipeline of deals in the same sector that do nothing but lose you money, you should probably consider finding someone a little more discerning.
Debt markets and Politics-
The fact that it costs more for GCC nations to borrow than most developed nations is in my opinion quite ironic. Their balance sheets are better, they posses relatively miniscule populations, and they are resource rich. The only reason to pay a spread is that you believe the political situation will turn on you or that the governments and people in the region will be fleeced consistently across multiple economic cycles by buying high and selling low and thus ultimately transferring away accumulated oil wealth. If Naomi Klein or John Perkins was commenting on this I am sure they would take favor the latter. Banks lending money at completely ludicrous terms to people or governments in the region, they are either incompetent or following an agenda. As far as incompetence, I think that has more to do with the compensation structure at banks being flawed and thus incentivizing excessive risk taking. As for the agenda view, it’s not very complicated. Take someone that is resource rich and get them to borrow against their resources to buy overpriced and unproductive assets from you. Then pressure them to borrow even more money to repay the bad loans you might still be carrying on your books or to refinance at higher rates under the guise of systemic risk, thus effectively gaining more control over the resources in the ground. Use a massaged/engineered crisis to further your own regional political agenda by providing debt relief in exchange for strategic concessions.(think iran)
Denninger’s Ridiculous Rant-
Karl Denninger of the market ticker is someone I have read for quite a while. He can at times come off as a crazy conspiracy nut, but he usually does offer some very insightful commentary. When Dubai World announced that they were seeking at a stand- still he was quite complementary of the fact that there was no bail out. However, when the nakheel debt was paid he reversed course. I have no problem with that. What does bother me though is that he turned it into an opportunity to launch a political and cultural attack on the UAE and the region. Zero hedge has not been much better, but at least i understand where they are coming from.
“Let's face the facts about Dubai - you've run an effective slave labor camp over there for the last decade - a practice that supposedly disappeared worldwide in the 1800s.
But in point of fact, effective human trafficking and slavery have not ended. It was, however, the necessary condition for "Dubai World" and its similar adjuncts to be a viable economic entity, given that Dubai has zippo for natural resources (unless you count the raw material for high-quality glass to be a natural resource, although it is not exactly in short supply - or expensive) and was entirely reliant on conspicuous consumption of oil revenue - which incidentally also seems to all belong to what amounts to absolute monarchies and those who they have enabled - for its continued "prosperity."
We are here today to reassure investors, financial and trade creditors, employees, and our citizens that our government will act at all times in accordance with market principles and internationally accepted business practices. Dubai is, and will continue to be, a strong and vibrant global financial center. Our best days are yet to come.
Do those "best days" continue to include dumping raw sewage - complete with the condoms used by your Islamic friends who use Dubai as a place where they can ignore Islamic Law (provided you're one of the privileged rich) a few hundred yards from your "pristine" beaches?
Go have another hit off your hookah Sheikh. Your vision of a "global financial center" for those with too much money and too few brain cells will eventually be reclaimed by the desert, as it should be.
I continue to believe that the "infidels" will get hosed, and as noted above, there are plenty of weasel-words in your "statement" to keep anyone from claiming you lied through you teeth when the unilateral imposition of haircuts - against all but UAE-aligned interests, of course - begin.”-Market Ticker, Karl Denninger
To be fair. This is not new for Karl. When it comes to politics and foreign policy he often appears to be as ignorant as the people he so astutely criticizes on economic and financial market issues. I challenge Karl to compare the living conditions and treatment of construction workers in Dubai to those of Mexicans working in slaughterhouses or food processing plants in the US. I also challenge him to defend the treatment these people get from immigration while the massive corporations that knowingly employ, and in fact depend on cheap and unlikely to be able to defend themselves labor force, get away without even a slap on the wrist. As for his concerns that the UAE will seek to make local creditors whole before foreign ones; is he being serious? Check the language of most of the stimulus legislation that was passed this year? If you don’t see favoritism in there you are blind. Ask the single mother’s in the US that are working at a fast food chain what the eligibility requirements are for the earned income tax credit or a whole host of other tax credits. I once had a Mexican-American client in a tax clinic who was stripped of her tax credit because her husband was not a citizen and did not have a valid social security card, despite the fact that she was legal. And isn’t that how it should be? If you are a true believer in government economic support, shouldn’t the subsidies or assistance go to those firms employing people on the ground whose entire business is domiciled in the state first, or should they go to MNC’s that have contracts everywhere on planet earth?
Anyway, bottom line is Karl is criticizing the Gulf and UAE for stuff that exists in his own backyard. He just seems blinded by the fact that it is concealed in thousands of pages of legislation or buried by giant conglomerates.
-Mark Twain
Attended the Bloomberg Conference on Debt, Danger, and Diversification in the GCC.
I feel like the recent news and crisis as well as some of the topics discussed yesterday warranted a post….
Debt is good? Speaking from personal experience I think I can safely say I would never say debt is good.
Debt to the extent that it is serviceable across a wide range of possible economic outcomes is good.(actually I don’t even like the choice of the word good, I’d go with a ‘has a place’) Of course determining what level of debt falls into this broad definition is no easy task. What one model shows as serviceable another may find unfeasible depending on your assumptions, hence, the desire for a definition that allows for a broad range of economic outcomes. While it is difficult to determine what level of debt is good/manageable/marginally boosting return on equity without in anyway jeopordizing the existence of that equity stake, it is not difficult to identify a level of debt that is malicious, predatory, paralyzing, or potentially cripiling. For the individual too much debt leads to losing control of your own life. The corporations problem is less severe as all that happens is it gets transferred to creditors or liquidated. Debt is good or even great until it is not, and then it can be disastrous. So, while some level of debt may be good or even great, no debt is always good provided that you know what to do with your savings.
Dubai fails to grasp the concept of transparency? Will they Change? This came up a times and the panel pretty much was of the view that they are progressing down a road towards more transparency. I don’t disagree, but I think labeling transparency a Dubai problem is either a narrow minded way of looking at transparency or just plain wrong.
In my opinion, the Dubai dilemma is at the end of the day a simple story. It is a reflection of the flaws of the financial system which I think were evident to many observers. From the moment I got here, I took the view that Dubai was the world’s first sovereign hedge fund. Dubai, or as Moody’s dubbed it, Dubai Inc., was set up as a complex limited liability company. Anyone with a legal background or any experience looking at convoluted structures understands that there are only two reasons to adopt such a model. The first being to limit liability in case anything goes wrong. The second reason, which is not as obvious, but clearly was the main driver of such structures over the past decade, is to maximize leverage. By creating layered holding company, you can embed leverage at many different levels. To succeed at such a model you need to limit transparency, in fact, you actually need to get pretty good at being opaque. Those questioning Dubai’s transparency should understand that it was most likely by design, and not the result of some fatal regional flaw. Now that transparency will serve them well, they will provide a high level of it.
To put Dubai on the map outlandish feats needed to be accomplished. In many instances, what many thought was only imaginable was turned into reality in a span of a few years. Such a model once it gets going isn’t designed to naturally cool off. Someone or something has to intervene to slow it down or grind it to a halt. Dubai’s only problem is that some people just don’t want to let them invoke their limited liability shield.
Diversification- There was a lot of talk about the failures of diversification. I blogged about this at the peak of Middle East Mania in June of 2008(LandMark Properties, Rich Foreigners, and American Know How). My views on the topic have not changed. The region needs to employ better financial planners.
The average Arab in the gulf doesn’t wake up in the morning wanting to buy a gulf course in Scotland or a ski resort in Colorado. Typically, what happens is an ex-banker(consultant or lawyer works too) who is now in the employ of a government related investment entity in the Gulf generates such an idea. It most likely comes from his ex- colleagues at certain investment banks or consulting firms that are advising the western owner of such an asset. Furthermore, these ex bankers have usually gone skiing at said resort or played a few rounds on the famous course that is up for sale. Thus, they have no problem selling themselves and subsequently their bosses on the deal. Furthermore, the ex-banker has been hired to do deals, so it should be no surprise that he gravitates to what he knows and also what his former colleagues in NYC and London are recommending. So, when you criticize the gulf for diversification, you are in effect criticzing the hiring decisions they have made. Now, this doesn’t mean all bankers who worked in the west are likely to always lose you money, but it does mean that if someone is just showing you a non-stop pipeline of deals in the same sector that do nothing but lose you money, you should probably consider finding someone a little more discerning.
Debt markets and Politics-
The fact that it costs more for GCC nations to borrow than most developed nations is in my opinion quite ironic. Their balance sheets are better, they posses relatively miniscule populations, and they are resource rich. The only reason to pay a spread is that you believe the political situation will turn on you or that the governments and people in the region will be fleeced consistently across multiple economic cycles by buying high and selling low and thus ultimately transferring away accumulated oil wealth. If Naomi Klein or John Perkins was commenting on this I am sure they would take favor the latter. Banks lending money at completely ludicrous terms to people or governments in the region, they are either incompetent or following an agenda. As far as incompetence, I think that has more to do with the compensation structure at banks being flawed and thus incentivizing excessive risk taking. As for the agenda view, it’s not very complicated. Take someone that is resource rich and get them to borrow against their resources to buy overpriced and unproductive assets from you. Then pressure them to borrow even more money to repay the bad loans you might still be carrying on your books or to refinance at higher rates under the guise of systemic risk, thus effectively gaining more control over the resources in the ground. Use a massaged/engineered crisis to further your own regional political agenda by providing debt relief in exchange for strategic concessions.(think iran)
Denninger’s Ridiculous Rant-
Karl Denninger of the market ticker is someone I have read for quite a while. He can at times come off as a crazy conspiracy nut, but he usually does offer some very insightful commentary. When Dubai World announced that they were seeking at a stand- still he was quite complementary of the fact that there was no bail out. However, when the nakheel debt was paid he reversed course. I have no problem with that. What does bother me though is that he turned it into an opportunity to launch a political and cultural attack on the UAE and the region. Zero hedge has not been much better, but at least i understand where they are coming from.
“Let's face the facts about Dubai - you've run an effective slave labor camp over there for the last decade - a practice that supposedly disappeared worldwide in the 1800s.
But in point of fact, effective human trafficking and slavery have not ended. It was, however, the necessary condition for "Dubai World" and its similar adjuncts to be a viable economic entity, given that Dubai has zippo for natural resources (unless you count the raw material for high-quality glass to be a natural resource, although it is not exactly in short supply - or expensive) and was entirely reliant on conspicuous consumption of oil revenue - which incidentally also seems to all belong to what amounts to absolute monarchies and those who they have enabled - for its continued "prosperity."
We are here today to reassure investors, financial and trade creditors, employees, and our citizens that our government will act at all times in accordance with market principles and internationally accepted business practices. Dubai is, and will continue to be, a strong and vibrant global financial center. Our best days are yet to come.
Do those "best days" continue to include dumping raw sewage - complete with the condoms used by your Islamic friends who use Dubai as a place where they can ignore Islamic Law (provided you're one of the privileged rich) a few hundred yards from your "pristine" beaches?
Go have another hit off your hookah Sheikh. Your vision of a "global financial center" for those with too much money and too few brain cells will eventually be reclaimed by the desert, as it should be.
I continue to believe that the "infidels" will get hosed, and as noted above, there are plenty of weasel-words in your "statement" to keep anyone from claiming you lied through you teeth when the unilateral imposition of haircuts - against all but UAE-aligned interests, of course - begin.”-Market Ticker, Karl Denninger
To be fair. This is not new for Karl. When it comes to politics and foreign policy he often appears to be as ignorant as the people he so astutely criticizes on economic and financial market issues. I challenge Karl to compare the living conditions and treatment of construction workers in Dubai to those of Mexicans working in slaughterhouses or food processing plants in the US. I also challenge him to defend the treatment these people get from immigration while the massive corporations that knowingly employ, and in fact depend on cheap and unlikely to be able to defend themselves labor force, get away without even a slap on the wrist. As for his concerns that the UAE will seek to make local creditors whole before foreign ones; is he being serious? Check the language of most of the stimulus legislation that was passed this year? If you don’t see favoritism in there you are blind. Ask the single mother’s in the US that are working at a fast food chain what the eligibility requirements are for the earned income tax credit or a whole host of other tax credits. I once had a Mexican-American client in a tax clinic who was stripped of her tax credit because her husband was not a citizen and did not have a valid social security card, despite the fact that she was legal. And isn’t that how it should be? If you are a true believer in government economic support, shouldn’t the subsidies or assistance go to those firms employing people on the ground whose entire business is domiciled in the state first, or should they go to MNC’s that have contracts everywhere on planet earth?
Anyway, bottom line is Karl is criticizing the Gulf and UAE for stuff that exists in his own backyard. He just seems blinded by the fact that it is concealed in thousands of pages of legislation or buried by giant conglomerates.
Sunday, April 26, 2009
Real Estate 2023: Galactic Bailout
The Final Chapter of my markets are just “too awful series”…
CNBC Interview Dec 14, 2023:
M. Honey and Anonymous A.
M. Honey:
We are here today with Akram. A who until recently was believed dead. Mr. A has not spoken publicly about his whereabouts over the last year. So, to say the least, this should be a very interesting interview.
Mr. A, thanks for giving us this exclusive interview. Getting right to the point where have you been for the last 12 months?
Mr. A:
Well, Mrs. Honey, as you know about a year ago I went to the Moon for a routine site visit. We were having some problems with our Moon development that I had to tend to in person. While I was on the Moon I was approached by a member of the Inter Galactic Financial Union (IGFU). At first, I thought it was a hoax, but after they showed me their ship I knew these people were legit.
M. Honey:
Inter Galactic Financial Union, people?? A ship? Are you saying what I think you are saying?
Mr. A:
Yes, Aliens. But we are not talking about little green men. These are people just like you and me. They look like humans. They just live on planets in different galaxies. It turns out that the IGFU is very much like our United Nations, except that all the respective members are planets. They have been monitoring the Earth's development for quite some time and actually reviewing a pending planetary application for IGFU membership for the last 200 years.
M. Honey:
Monitoring? 200 years? Wow, are you being serious?
Mr. A:
Completely serious Mrs. Honey. See, the IGFU has specific criteria for member planets. The Union is monetary, economic, and political. If you do not meet the criteria you cannot be admitted. Much to the dismay of the IGFU, Earth has struggled to progress. As I understand it, our biggest flaw is our propensity to create asset bubbles which destabilize our planetary economy. This is not unusual as every planet goes through this phase of bubble cycles(IGFU economists call it the “infancy stage”), but to enter the union a planet must finally realize that bubbles are inherently destructive. The Earth's failure to progress past the bubble stage in a reasonable time frame has perplexed most IGFU economists. In fact, they even have broken from protocol over the past fifty years by placing economists on Earth to warn about the risk of bubbles.
M. Honey:
Really? Anyone we know?
Mr. A:
My understanding is that men like M Faber and N Roubini have been greatly influenced by IGFU economists. I can't really get into the details, but there has clearly been some level of subconscious interaction between IGFU economists and economists on our planet who were deemed capable of delivering the appropriate message.
M. Honey
Fascinating. What about investors like W Buffet?
Mr. A:
Ahh, funny you should ask. I asked them the same question. It turns out Mr. Buffet is as legit as they come. He is actually quite a celebrity in the Galactic Financial Markets. So much so, that at least 7 planets have approached him over the past 50 years with offers of citizenship. They tried to lure him to planets where value investing and sound buy and hold strategies are employed on a consistent basis, but he turned them all down. It seems Mr. Buffet just couldn't abandon his loyal shareholders even if it meant going to a world without bubbles and dangerous derivatives.
M. Honey:
Sorry to interrupt Mr. A, but what do they want from us and why did they approach you?
Mr. A:
Well, after Obama was elected President of the U.S. the IGFU political committee cleared Earth's application. And then when we went back to the gold standard in 2010 the IGFU Monetary Committee also signed off on our application. So, we are 2/3 of the way there. All we need is the approval of the Economic/Financial Markets Committee. However, they are pretty strict, and thus won't let us into the union until they are sure that we won't pose a bubble threat to the Galactic economy.
M. Honey:
So gold really is a global store of value?
Mr. A:
Actually, a galactic store of value would be more appropriate.
M. Honey:
Right. Interesting stuff.
Mr. A:
Yes, very. And that is why they approached me. The path the Earth has taken over the last 3 years has troubled several member planets. They feel we are regressing. So, they have decided to take extreme action and alter the application process. Earth will be granted temporary IGFU member status. In return, we will allow the Central Bubble Watchdog Agency (cbwa) to take over all of Earth's financial market regulatory oversight for a period to not exceed 500 years. The IGFU has also agreed to recapitalize Earth's financial system by injecting significant gold reserves into the planet.
M. Honey:
500 years? Seems a bit strict.
Mr. A:
Well, if you read their auditor's report on Earth's Central Banks and Regulatory Agencies you'd understand.
M. Honey:
So, they are really willing to recapitalize our financial system?
Mr. A:
Yes. And it gets better. The Intergalactic Food Bank is immediately going to remit 500 billion tons of food to earth as payment for past services received.
M. Honey:
Past services received?
Mr. A:
It turns out that Reality TV and Earth Football are very popular in the rest of the Galaxy, and since IGFU members take intellectual property rights very seriously; they have been maintaining an account that tracks all Galactic usage of Earth IP. With accrued interest the account is now worth over 29 trillion ounces of gold.
M. Honey:
Are you serious?
Mr. A:
Amazing isn't it. We are actually one of the wealthiest planets in the Galaxy and we never even knew it.
(NOTE: The characters and content of this postl are purely fictional, although in some instances they may refer or represent people or places that have influenced the author in some way. Any resemblance to actual person or places, living or otherwise is purely coincidental.)
CNBC Interview Dec 14, 2023:
M. Honey and Anonymous A.
M. Honey:
We are here today with Akram. A who until recently was believed dead. Mr. A has not spoken publicly about his whereabouts over the last year. So, to say the least, this should be a very interesting interview.
Mr. A, thanks for giving us this exclusive interview. Getting right to the point where have you been for the last 12 months?
Mr. A:
Well, Mrs. Honey, as you know about a year ago I went to the Moon for a routine site visit. We were having some problems with our Moon development that I had to tend to in person. While I was on the Moon I was approached by a member of the Inter Galactic Financial Union (IGFU). At first, I thought it was a hoax, but after they showed me their ship I knew these people were legit.
M. Honey:
Inter Galactic Financial Union, people?? A ship? Are you saying what I think you are saying?
Mr. A:
Yes, Aliens. But we are not talking about little green men. These are people just like you and me. They look like humans. They just live on planets in different galaxies. It turns out that the IGFU is very much like our United Nations, except that all the respective members are planets. They have been monitoring the Earth's development for quite some time and actually reviewing a pending planetary application for IGFU membership for the last 200 years.
M. Honey:
Monitoring? 200 years? Wow, are you being serious?
Mr. A:
Completely serious Mrs. Honey. See, the IGFU has specific criteria for member planets. The Union is monetary, economic, and political. If you do not meet the criteria you cannot be admitted. Much to the dismay of the IGFU, Earth has struggled to progress. As I understand it, our biggest flaw is our propensity to create asset bubbles which destabilize our planetary economy. This is not unusual as every planet goes through this phase of bubble cycles(IGFU economists call it the “infancy stage”), but to enter the union a planet must finally realize that bubbles are inherently destructive. The Earth's failure to progress past the bubble stage in a reasonable time frame has perplexed most IGFU economists. In fact, they even have broken from protocol over the past fifty years by placing economists on Earth to warn about the risk of bubbles.
M. Honey:
Really? Anyone we know?
Mr. A:
My understanding is that men like M Faber and N Roubini have been greatly influenced by IGFU economists. I can't really get into the details, but there has clearly been some level of subconscious interaction between IGFU economists and economists on our planet who were deemed capable of delivering the appropriate message.
M. Honey
Fascinating. What about investors like W Buffet?
Mr. A:
Ahh, funny you should ask. I asked them the same question. It turns out Mr. Buffet is as legit as they come. He is actually quite a celebrity in the Galactic Financial Markets. So much so, that at least 7 planets have approached him over the past 50 years with offers of citizenship. They tried to lure him to planets where value investing and sound buy and hold strategies are employed on a consistent basis, but he turned them all down. It seems Mr. Buffet just couldn't abandon his loyal shareholders even if it meant going to a world without bubbles and dangerous derivatives.
M. Honey:
Sorry to interrupt Mr. A, but what do they want from us and why did they approach you?
Mr. A:
Well, after Obama was elected President of the U.S. the IGFU political committee cleared Earth's application. And then when we went back to the gold standard in 2010 the IGFU Monetary Committee also signed off on our application. So, we are 2/3 of the way there. All we need is the approval of the Economic/Financial Markets Committee. However, they are pretty strict, and thus won't let us into the union until they are sure that we won't pose a bubble threat to the Galactic economy.
M. Honey:
So gold really is a global store of value?
Mr. A:
Actually, a galactic store of value would be more appropriate.
M. Honey:
Right. Interesting stuff.
Mr. A:
Yes, very. And that is why they approached me. The path the Earth has taken over the last 3 years has troubled several member planets. They feel we are regressing. So, they have decided to take extreme action and alter the application process. Earth will be granted temporary IGFU member status. In return, we will allow the Central Bubble Watchdog Agency (cbwa) to take over all of Earth's financial market regulatory oversight for a period to not exceed 500 years. The IGFU has also agreed to recapitalize Earth's financial system by injecting significant gold reserves into the planet.
M. Honey:
500 years? Seems a bit strict.
Mr. A:
Well, if you read their auditor's report on Earth's Central Banks and Regulatory Agencies you'd understand.
M. Honey:
So, they are really willing to recapitalize our financial system?
Mr. A:
Yes. And it gets better. The Intergalactic Food Bank is immediately going to remit 500 billion tons of food to earth as payment for past services received.
M. Honey:
Past services received?
Mr. A:
It turns out that Reality TV and Earth Football are very popular in the rest of the Galaxy, and since IGFU members take intellectual property rights very seriously; they have been maintaining an account that tracks all Galactic usage of Earth IP. With accrued interest the account is now worth over 29 trillion ounces of gold.
M. Honey:
Are you serious?
Mr. A:
Amazing isn't it. We are actually one of the wealthiest planets in the Galaxy and we never even knew it.
(NOTE: The characters and content of this postl are purely fictional, although in some instances they may refer or represent people or places that have influenced the author in some way. Any resemblance to actual person or places, living or otherwise is purely coincidental.)
"Real Estate 2023: A Mogul Teeters"
Another down day…another piece of entertainment……
Interviewer:
We appreciate you coming back on the show to discuss the current global crisis and all the rumors circulating around Himadeh holdings. Many pundits are now calling this the worst financial crisis since the great “credit crunch” of 2008, and many comparisons are now being drawn between your company and some of the failed institutions of the great financial collapse of 2008.
Mr. H:
Yes, these are clearly difficult times for the global economy and Himadeh holdings. Having lived through the great crisis of 2008, I am confident that we will be able to come out of this.
Interviewer:
Well, your stock price is down 90% over the last three months, and cds spreads on Himadeh holdings debt have widened to 2900bps. Some analysts are saying that if you don’t raise money in the next few weeks your company will be in breach of several covenants and that your creditors could force an acceleration of a significant portion of your outstanding debt. One analyst was even quoted as saying that, “there are significant concerns about the ability of Himadeh holdings to continue operating as a going concern.” What do you have to say about all this?
Mr. H:
As of right now our cash situation is fine. We have plenty of liquidity. Furthermore, we have an amazing portfolio of assets that we could sell if we needed to raise some cash. But I don’t think it will come to that. The market is just a little bit jittery right now. We expect this period of volatility to eventually subside.
Interviewer:
Fair enough. Would you care to comment on rumors regarding your government equities portfolio? Some people are saying that you have been forced to sell your stake in the Ukraine and that you have significantly reduced your Canada position. If that is true, this will severely impact your voting power in the UNLE and could jeopardize your ability to move forward with many projects.
Mr. H:
No comment
Interviewer:
Ok. Moving on to another topic. There are now serious allegations being made regarding Himadeh GeoThermal Explorations and the role that your company may have played in destabilizing the Earth’s core. According to one geologist, your top secret deep earth geothermal drilling rigs in Canada, Iceland, and Antarctica may have led to the “destabilization” of the Earth’s core.
Mr. H:
Nonsense. Geothermal Drilling is 100% safe. It is also a proven method of capturing the Earth’s natural heat which has allowed us to warm the homes of billions of people. There is no way our drilling rigs had anything to do with the recent wave of earthquakes.
Interviewer:
Are you sure? In 2018 Anonymous A. referred to Geothermal Drilling as a potential “Pandora’s Box”. He was a very outspoken critic of this technology and the potential dangers it posed to the environment.
Mr. H:
I thought we agreed we would not talk about my former partner. If anything I think it’s a bit odd that almost all of his real estate assets are located in areas that were untouched by the recent global wave of earthquakes. Maybe his hands are not as clean as you think seeing as his company stands to financially benefit from this crisis.
Interviewer:
Well, I am no geologists, but as I understand it he was buying properties that he felt would survive a core de-stabilization. Moving on, is it true that your friend, world renowned writer/director/producer, KMAN is about to release a documentary, that to put this mildly….doesn’t paint a very favorable picture of Himadeh Holdings.
Mr. H:
Well, I don’t really keep in touch with KMAN anymore. We sort of parted ways after CUT VII flopped. Himadeh Productions took a pretty big hit on that film. So, let’s just say that the relationship is a bit strained these days. As for the documentary, I have not seen it. So, I can’t comment on it.
Interviewer:
Ahh, I see. So, you don’t think that your insistence on casting your wife in the leading role had any impact on the film. Particularly, since she was completely untested as a leading lady.
Mr. H:
My wife is an excellent actress. It’s just a shame we couldn’t find a talented enough director to bring it all out. Anyway, what are we on the E channel; I thought I was here to talk about the financial crisis.
Interviewer:
Oh, I’m sorry. Well, then what do you think…
Mr. H:
Sorry, this interview is over!
(NOTE: The characters and content of this post are purely fictional, although in some instances they may refer or represent people or places that have influenced the author in some way. Any resemblance to actual person or places, living or otherwise is purely coincidental.)
Interviewer:
We appreciate you coming back on the show to discuss the current global crisis and all the rumors circulating around Himadeh holdings. Many pundits are now calling this the worst financial crisis since the great “credit crunch” of 2008, and many comparisons are now being drawn between your company and some of the failed institutions of the great financial collapse of 2008.
Mr. H:
Yes, these are clearly difficult times for the global economy and Himadeh holdings. Having lived through the great crisis of 2008, I am confident that we will be able to come out of this.
Interviewer:
Well, your stock price is down 90% over the last three months, and cds spreads on Himadeh holdings debt have widened to 2900bps. Some analysts are saying that if you don’t raise money in the next few weeks your company will be in breach of several covenants and that your creditors could force an acceleration of a significant portion of your outstanding debt. One analyst was even quoted as saying that, “there are significant concerns about the ability of Himadeh holdings to continue operating as a going concern.” What do you have to say about all this?
Mr. H:
As of right now our cash situation is fine. We have plenty of liquidity. Furthermore, we have an amazing portfolio of assets that we could sell if we needed to raise some cash. But I don’t think it will come to that. The market is just a little bit jittery right now. We expect this period of volatility to eventually subside.
Interviewer:
Fair enough. Would you care to comment on rumors regarding your government equities portfolio? Some people are saying that you have been forced to sell your stake in the Ukraine and that you have significantly reduced your Canada position. If that is true, this will severely impact your voting power in the UNLE and could jeopardize your ability to move forward with many projects.
Mr. H:
No comment
Interviewer:
Ok. Moving on to another topic. There are now serious allegations being made regarding Himadeh GeoThermal Explorations and the role that your company may have played in destabilizing the Earth’s core. According to one geologist, your top secret deep earth geothermal drilling rigs in Canada, Iceland, and Antarctica may have led to the “destabilization” of the Earth’s core.
Mr. H:
Nonsense. Geothermal Drilling is 100% safe. It is also a proven method of capturing the Earth’s natural heat which has allowed us to warm the homes of billions of people. There is no way our drilling rigs had anything to do with the recent wave of earthquakes.
Interviewer:
Are you sure? In 2018 Anonymous A. referred to Geothermal Drilling as a potential “Pandora’s Box”. He was a very outspoken critic of this technology and the potential dangers it posed to the environment.
Mr. H:
I thought we agreed we would not talk about my former partner. If anything I think it’s a bit odd that almost all of his real estate assets are located in areas that were untouched by the recent global wave of earthquakes. Maybe his hands are not as clean as you think seeing as his company stands to financially benefit from this crisis.
Interviewer:
Well, I am no geologists, but as I understand it he was buying properties that he felt would survive a core de-stabilization. Moving on, is it true that your friend, world renowned writer/director/producer, KMAN is about to release a documentary, that to put this mildly….doesn’t paint a very favorable picture of Himadeh Holdings.
Mr. H:
Well, I don’t really keep in touch with KMAN anymore. We sort of parted ways after CUT VII flopped. Himadeh Productions took a pretty big hit on that film. So, let’s just say that the relationship is a bit strained these days. As for the documentary, I have not seen it. So, I can’t comment on it.
Interviewer:
Ahh, I see. So, you don’t think that your insistence on casting your wife in the leading role had any impact on the film. Particularly, since she was completely untested as a leading lady.
Mr. H:
My wife is an excellent actress. It’s just a shame we couldn’t find a talented enough director to bring it all out. Anyway, what are we on the E channel; I thought I was here to talk about the financial crisis.
Interviewer:
Oh, I’m sorry. Well, then what do you think…
Mr. H:
Sorry, this interview is over!
(NOTE: The characters and content of this post are purely fictional, although in some instances they may refer or represent people or places that have influenced the author in some way. Any resemblance to actual person or places, living or otherwise is purely coincidental.)
Dubai Real Estate 2022: A Mogul Speaks(repost)
As requested i have posted my real estate spoof/story from last november...enjoy...
Dec 14, 2022-
Transcript from CNBC Interview with Real Estate Mogul Mr. Himadeh.
Interviewer:
We are here today with Mr. Himadeh of Himadeh Holdings who has been kind enough to join us in discussing the current property boom in Dubai. For those of you who are not familiar with Mr. Himadeh, he controls a global conglomerate with holdings in real estate, public equities, government equities, and a wide assortment of other assets.
Interviewer:
Mr. Himadeh you are famous for having called the top in the Dubai Property Bubble of 2003-2008 at a very young age. How did you do it?
Mr. H:
Real estate is really about the cost of capital. I try to buy when it’s high and sell when it’s low. Really it is not that complicated. I just try to anticipate what the cost of money will be. In 2008, I got the sense that eibor, which had been as low as about 1.9% if my memory serves me right, was going to be going much higher over the next 18-24 months.
Interviewer:
Sorry to interrupt you Mr. Himadeh…but in EIBOR…you are referring to the now defunct emirates interbank offer rate which was replaced with GIBOR in early 2010. Some of our listeners may not remember those days.
Mr. H:
Yes, exactly. Wow…am I feeling old. Anyway, since I thought Eibor was going much higher I started to synthetically short the real estate market. It wasn’t easy, but I found ways to do it.
And the rest as they say is history.
Interviewer:
How did you feel about getting knick-named the Dubai Demon or Destroyer?
Mr. H:
Look, it wasn’t pleasant, but it never is pleasant going against the crowd. The reward was worth it.
Interviewer:
Most people don’t realize it but the vast majority of your fortune was made going long real estate in the GCC. Particularly in Dubai.
Mr. H:
Yes, that is true. We were very opportunistic in 2009-2012 building a top notch portfolio of distressed assets. And it has paid off.
Interviewer:
What about your foray into government equities? Is it true you own 35% of the Ukraine? And 15% of Canada?
Mr. H:
Well, for disclosure reasons I can’t specifically comment on the size my government stakes. But yes we did participate once the governments of the world decided to incorporate and list themselves on exchanges to raise cash, and we have done very well getting into Canada as we did feel that potential alternative energy solutions and oil supply globally were over stated.
Interviewer:
Well, enough about the past. Care to comment on your new big venture the “Dubai FLOATS” the World’s first floating resort. Many people are saying this is a sign of a bubble and that it can’t be built.
Mr. H:
They said that about the Burj, they mocked the Palm, and then when we backed the govt in building an underwater luxury hotel; everybody said we’d lose our shirts. Then three years ago we finished the world’s only freestanding revolving residential tower. Every one of these projects has made me money, so I tell the naysayers…bring it on.
Interviewer:
On a more controversial note would you care to comment on your former friend, Anonymous A’s, “Moon Magic” development? There are rumors circulating that you have used your votes in the U.N.L.E (United Nations Legal Exchange) to block his group’s moon building permit, as you were jealous that he would beat you to the moon.
Mr. H:
That’s ludicrous. We were originally funding part of his project, but because Mr. A is stubborn; we decided to part ways. The moon is a waste of time. There is plenty of land on earth that still needs to be developed. For example, our Antarctica Polar Park project is selling very well right now.
Interviewer:
That’s not what we have heard. According to certain sources, you pulled the plug on his financing after he declined to name the iconic Dubai Moon Tower Rockopalooza 7 as he felt that the Rockopalooza chain had become oversaturated and too commercial.
Mr. H:
I am sick of this topic. If you want answers why don’t you ask him? I came here to talk about Himadeh holdings and all the exciting real projects we are working on and not about some crazy man who has sunk everything he owns and leveraged himself to the hilt buying small natural islands and moon property.
Interviewer:
Well, we would but after you pulled the financing on the moon project Mr. A, who was already very levered, started getting massive margin calls. And then on a routine site visit to the moon last week he mysteriously disappeared.
Mr. H:
Really? Kind of sad. He used to know what he was talking about, but he lost his edge a few years ago and became obsessed with this whole earth’s core is unstable and about to implode theory. (Sounds of explosion in the background)Hey, what’s going on?
We interrupt this broadcast for an emergency message. Apparently the world has been hit by a wave of unprecedented seismic activity. Millions of people have died, and large portions of the planet have become uninhabitable. Certain well situated property developments remained strangely unharmed and moon real estate prices have supposedly climbed through the roof as world governments have begun bidding for assets. Interestingly, almost all of these holdings are now controlled by the now missing investing guru/recluse Anonymous A. who increasingly was being mocked by the main stream media for his odd real estate purchases on earth and obsession with moon property.
(NOTE:The characters and content of this post are purely fictional, although in some instances they may refer or represent people or places that have influenced the author in some way. Any resemblance to actual person or places, living or otherwise is purely coincidental.)
Dec 14, 2022-
Transcript from CNBC Interview with Real Estate Mogul Mr. Himadeh.
Interviewer:
We are here today with Mr. Himadeh of Himadeh Holdings who has been kind enough to join us in discussing the current property boom in Dubai. For those of you who are not familiar with Mr. Himadeh, he controls a global conglomerate with holdings in real estate, public equities, government equities, and a wide assortment of other assets.
Interviewer:
Mr. Himadeh you are famous for having called the top in the Dubai Property Bubble of 2003-2008 at a very young age. How did you do it?
Mr. H:
Real estate is really about the cost of capital. I try to buy when it’s high and sell when it’s low. Really it is not that complicated. I just try to anticipate what the cost of money will be. In 2008, I got the sense that eibor, which had been as low as about 1.9% if my memory serves me right, was going to be going much higher over the next 18-24 months.
Interviewer:
Sorry to interrupt you Mr. Himadeh…but in EIBOR…you are referring to the now defunct emirates interbank offer rate which was replaced with GIBOR in early 2010. Some of our listeners may not remember those days.
Mr. H:
Yes, exactly. Wow…am I feeling old. Anyway, since I thought Eibor was going much higher I started to synthetically short the real estate market. It wasn’t easy, but I found ways to do it.
And the rest as they say is history.
Interviewer:
How did you feel about getting knick-named the Dubai Demon or Destroyer?
Mr. H:
Look, it wasn’t pleasant, but it never is pleasant going against the crowd. The reward was worth it.
Interviewer:
Most people don’t realize it but the vast majority of your fortune was made going long real estate in the GCC. Particularly in Dubai.
Mr. H:
Yes, that is true. We were very opportunistic in 2009-2012 building a top notch portfolio of distressed assets. And it has paid off.
Interviewer:
What about your foray into government equities? Is it true you own 35% of the Ukraine? And 15% of Canada?
Mr. H:
Well, for disclosure reasons I can’t specifically comment on the size my government stakes. But yes we did participate once the governments of the world decided to incorporate and list themselves on exchanges to raise cash, and we have done very well getting into Canada as we did feel that potential alternative energy solutions and oil supply globally were over stated.
Interviewer:
Well, enough about the past. Care to comment on your new big venture the “Dubai FLOATS” the World’s first floating resort. Many people are saying this is a sign of a bubble and that it can’t be built.
Mr. H:
They said that about the Burj, they mocked the Palm, and then when we backed the govt in building an underwater luxury hotel; everybody said we’d lose our shirts. Then three years ago we finished the world’s only freestanding revolving residential tower. Every one of these projects has made me money, so I tell the naysayers…bring it on.
Interviewer:
On a more controversial note would you care to comment on your former friend, Anonymous A’s, “Moon Magic” development? There are rumors circulating that you have used your votes in the U.N.L.E (United Nations Legal Exchange) to block his group’s moon building permit, as you were jealous that he would beat you to the moon.
Mr. H:
That’s ludicrous. We were originally funding part of his project, but because Mr. A is stubborn; we decided to part ways. The moon is a waste of time. There is plenty of land on earth that still needs to be developed. For example, our Antarctica Polar Park project is selling very well right now.
Interviewer:
That’s not what we have heard. According to certain sources, you pulled the plug on his financing after he declined to name the iconic Dubai Moon Tower Rockopalooza 7 as he felt that the Rockopalooza chain had become oversaturated and too commercial.
Mr. H:
I am sick of this topic. If you want answers why don’t you ask him? I came here to talk about Himadeh holdings and all the exciting real projects we are working on and not about some crazy man who has sunk everything he owns and leveraged himself to the hilt buying small natural islands and moon property.
Interviewer:
Well, we would but after you pulled the financing on the moon project Mr. A, who was already very levered, started getting massive margin calls. And then on a routine site visit to the moon last week he mysteriously disappeared.
Mr. H:
Really? Kind of sad. He used to know what he was talking about, but he lost his edge a few years ago and became obsessed with this whole earth’s core is unstable and about to implode theory. (Sounds of explosion in the background)Hey, what’s going on?
We interrupt this broadcast for an emergency message. Apparently the world has been hit by a wave of unprecedented seismic activity. Millions of people have died, and large portions of the planet have become uninhabitable. Certain well situated property developments remained strangely unharmed and moon real estate prices have supposedly climbed through the roof as world governments have begun bidding for assets. Interestingly, almost all of these holdings are now controlled by the now missing investing guru/recluse Anonymous A. who increasingly was being mocked by the main stream media for his odd real estate purchases on earth and obsession with moon property.
(NOTE:The characters and content of this post are purely fictional, although in some instances they may refer or represent people or places that have influenced the author in some way. Any resemblance to actual person or places, living or otherwise is purely coincidental.)
"Operation Dinner Out"
Operation Dinner Out is a Go!
Just thought I’d highlight the action in one of my favorite sector of the US economy. For those who don’t pay much attention to this group, the stocks of American Casual Dining chains have been on fire for the past two months. What’s going here? Granted some of these stocks fell too far too fast, but by in large most of them were stil a little pricey before this rally started. So, how does one rationalize these multiples? It is not like we are dealing with some sort of groundbreaking technology or potential revolutionary business model here. And this is not the financials; you don’t need to worry about lack of transparency on the balance sheet or off balance sheet obligations. The valuation game here should be pretty cut and dry.
Ahh, but this is the stock market and rarely does anything make sense. One would think that with unprecedented unemployment and an overleveraged US consumer that casual dining chains would be facing less foot traffic in the immediate term and the prospects of continuing declines in foot traffic over the long haul, a shrinking pie if you will. And one would further conclude that any group facing a shrinking pie is going to have a hard time generating any meaningful earnings growth, and thus should trade at below the average market multiple and also below historical multiples for the peer group. One would be Wrong!! Well, at least for now.
What has transpired with this group is in my personal opinion nothing more than a basic short squeeze, and is by in large completely unjustified. There are those that will argue that people are trading down into this group, and that they are thus not as affected as upscale dining chains or high end retail in general. I agree with this argument to the extent that on a relative basis I’d rather be buffalo wild wings or Chipotle Mexican grill over let’s say Ruth's Chris or Morton’s, but that doesn’t mean I want to pay anything over 15x earnings for either of them. There are others that will argue that this bunch has been cutting costs and that this will allow them to drive compelling eps growth despite declining comps. This argument probably by in large sparked the momentum trade in this sector. Once people started realizing that q1 was going to be better than analysts expected because cost cutting more than offset declining sales, the whole group went parabolic. I won’t deny that the sell side (and many of us who tried to short) clearly missed how much operating leverage some of these chains would see in their first quarter because of declining commodity prices, lower rents, reduced wage expenses, lower advertising spending (in some cases mgmt pushed the majority of ad spending into q2 or q3), and in some instances the carryover effect from small price increases that were put in place early q4. Management at all these chains(I expect the story at the ones who have not reported yet will be the same) has responded fast and taken out costs, and in this business that means they will see the bulk of these savings immediately feed through into the bottom line because declining sales trends in casual dining are a long-term phenomena. However, at the end of the day the average name in this group is trading at above 20x earnings and not below 10x. This means that without very strong long-term growth they will need to be re-priced sometime in the near future. The sales trends from almost every name in the group are nothing to write home about. Comparables are mostly down year over year, and consumers clearly seem to have begun a trend of making fewer visits and spending less money at these chains. Not what you want to see when you are paying over 20x earnings.
To be clear when I recommended betting against this group last year I did not think we were going to see numbers fall off of a cliff. That was not what this trade was all about. What I was betting was that the multiples in this group needed to decline to quickly reflect the fact that it was becoming patently obvious that the whole sector was going to be facing a challenging sales environment for the next few years. (I define challenging as the exact opposite of the sales environment over the past 20 years) I expected this to be a gradual story that played itself out over the next 12-24 months. Instead, I ended up with a momentum short trade as everyone started to assume that this group would collapse as quickly as every other cyclical sector tied to the US consumer. And when a bunch of people who have been shorting a group start seeing the exact opposite of what they had expected they start running for the hills, and when they start running for the hills, a whole new momentum trades surfaces to squeeze the life out of them. Again, all psychology, very little fundamentals.
So, after 6 months most of these stocks are right back to where they were before this whole mess started. Some are even close to all time highs. The trailing multiple on the bunch probably has not been this high since sometime in 2006 or 2007. What’s changed since then or since the time I felt shorting these stocks was a good idea? The entire global economy fell off a cliff, US unemployment took off, and financial markets nearly ceased to function.
Doesn’t make much sense does it. But then again these things can happen once a trade gets too crowded. In my personal opinion, what you have now is more evidence of weakening sales trends going forward which should allow you to make an even stronger case for long-term multiple compression in this group. Moreover, the market has already responded to and management has already taken advantage of aggressive cost reductions to protect the bottom line. This means that going forward the entire focus will be on sales and that q1 2010 will offer for very tough year over year comparisons as the huge boost in operating margins we just saw won’t be there. I don’t know if there is an etf for this group, but if there is one I’d be looking to buy May 2010 puts sometime soon.
Monday, April 20, 2009
"Follow the Leader"
What a strange day. Oracle bought Sun, BofA lost a quarter of its value, and everything that had been going up all of a sudden started going down again.
What caused yesterday's sell off?
Most pundits will probably tell you it was Bank of America’s 50%+ sequential increase in loan loss reserves combined with managements somewhat pessimistic(or realistic depending on your point of view) outlook on the future of the US economy that triggered the sell-off. Others will tell you that’s nonsense, and that the market was just overbought. They will point to the fact that BofA beat the consensus number by 1000% which meant that they basically turned in the best upside surprise of any reporting financial company. BofA knocked the cover off the ball and yet it dropped like a rock. That makes no sense, so this clearly had to be a technical sell on the news and BofA was just a scapegoat. The perma-bears will counter that this rally has always been about temporarily suspending reality, and thus was destined to end badly. They will argue that BofA like all other financials reported a ludicrous number, and that their share price, which is trading at 30c or so on the dollar is evidence of the fact that anyone with a brain doesn’t believe that bank’s reported balance sheets are anywhere remotely close to reality. While these are all plausible explanations for yesterday’s move, they are all wrong.
To truly understand why Europe, the US, and now all of Asia sold off over the last 24 hours you will need to venture into Expat Purgatory. Only in a land filled with traders and bankers that live out of range rovers and spend their days dodging debt collectors on the beach will the correct explanation to the current sell-off be found. Out here, in a world that is now commonly referred to as the ‘dark side’(thanks Johann), the bear market rally died. The time of death was roughly 2pm Dubai time on April 19th. According to most dark siders, the cause of death was a 4% decline in the Tadawul. It would appear that Saudi traders tired of chasing international markets decided to flip the switch on the rest of the financial world and do a little leading for a change.
So, if you are looking to make money trading markets, get ready for a little game of follow the leader. Because from now and on….
As goes Saudi, so goes the rest of the Planet.
What caused yesterday's sell off?
Most pundits will probably tell you it was Bank of America’s 50%+ sequential increase in loan loss reserves combined with managements somewhat pessimistic(or realistic depending on your point of view) outlook on the future of the US economy that triggered the sell-off. Others will tell you that’s nonsense, and that the market was just overbought. They will point to the fact that BofA beat the consensus number by 1000% which meant that they basically turned in the best upside surprise of any reporting financial company. BofA knocked the cover off the ball and yet it dropped like a rock. That makes no sense, so this clearly had to be a technical sell on the news and BofA was just a scapegoat. The perma-bears will counter that this rally has always been about temporarily suspending reality, and thus was destined to end badly. They will argue that BofA like all other financials reported a ludicrous number, and that their share price, which is trading at 30c or so on the dollar is evidence of the fact that anyone with a brain doesn’t believe that bank’s reported balance sheets are anywhere remotely close to reality. While these are all plausible explanations for yesterday’s move, they are all wrong.
To truly understand why Europe, the US, and now all of Asia sold off over the last 24 hours you will need to venture into Expat Purgatory. Only in a land filled with traders and bankers that live out of range rovers and spend their days dodging debt collectors on the beach will the correct explanation to the current sell-off be found. Out here, in a world that is now commonly referred to as the ‘dark side’(thanks Johann), the bear market rally died. The time of death was roughly 2pm Dubai time on April 19th. According to most dark siders, the cause of death was a 4% decline in the Tadawul. It would appear that Saudi traders tired of chasing international markets decided to flip the switch on the rest of the financial world and do a little leading for a change.
So, if you are looking to make money trading markets, get ready for a little game of follow the leader. Because from now and on….
As goes Saudi, so goes the rest of the Planet.
Sunday, April 19, 2009
"Long in the Tooth"
Just some thoughts for those who think this rally is getting a little long in the tooth.
Last week I had about six people( regionally) call me up asking about going long Citi and BofA. Over the previous 6 months I had exactly zero calls regarding this type of trade.
The most popular stock is of course the one that has fallen the most. By early last week, it felt like everyone I knew was long citi... My neighbor, a cousin in Dubai, a cousin in the states, a couple of non-financial services friends, a colleagues good friend and his brother. Everywhere I looked there were citi longs popping up left and right. So, I was not surprised by the fact that I also ended up answering a few professional enquiries going into the earnings release. The icing on the cake though was an email I received on Wednesday from an uncle in Beirut who also wanted to know whether citi could beat expectations and whether or not the stock could pop. This was the most surprising inquiry as based on my knowledge this relative never trades US equities.
Considering that the average Joe in the financial services industry probably did not understand what was going on with citi stock and its arbitrage driven short squeeze, explaining this to your average retail investor was next to impossible.
Here is what a typical citi exchange went like....
X (family member, friend, client, colleague): What do you think of Citi stock into earnings?
Me: It is going up because of an arb trade gone awfully wrong, it should be really trading much lower.
X: So, if they beat earnings this week it will go up won't it.
Me: No, not necessarily, earnings don't really matter here, what matters is whether or not they complete the equity offering.
X: So, it’s going go down then.
Me: Umm, again not necessarily, it could go up a lot more because of this squeeze if they delay the offering on Friday.
X: Are they going to delay the offering?
Me: I don't know, but if had to guess, probably yes, as it’s been a good thing for financial stocks.
X: So, it going up.
Me: Again, not necessarily, because many people have gone long the stock based on this squeeze already, and they might sell into this news irrespective.
X: So, it's going down.
Me: Again, I can't say for certain because they could change the terms of the conversion and raise the price, and then the stock would potentially be justified in rising somewhat further.
X: Do you think they will do that?
Me: No, there is a clear agreement in place, and thus I doubt they would change the terms, as any modification would only hurt the preferred holders.
X: If there is an agreement in place then it must eventually go down, why would you even suggest this.
Me: Good point. I don't know, but it seems other people are speculating on this potential outcome.
X: So, basically you have no idea what is going to happen. What is it exactly that you actually do again?
Me: Exactly. As for your second question, I'll have to get back to you on that one.
Here is an excerpt from the Citi CC courtesy of Seeking Alpha. I found it interesting considering the conversations I had last week.
Sam Saba] – JP Morgan
Regarding the press, you have the three buckets, the government, the private, and the public. If you did consider the idea of raising the stock price so its say 450 you’ve cut the dilution on your equity by about 6% and it would affect the probability of getting your TC up to $81 billion. Considering that I don’t really understand why you wouldn’t do that.
Ned Kelly
We have certainly considered that dynamic. As you know, we have agreements with the privates and we have an agreement with the government at 3.25%. The fact is that leaves the $15 billion of public. Having considered pros and cons as you suggest I stand by the earlier statement which is at this stage we can’t envision changing either the stock price or the conversion ratio, understanding your point.
[Sam Saba] – JP Morgan
What’s the downside for doing that, for not increasing the stock price?
Ned Kelly
As I said, we have an agreement with the privates, we have an agreement with the government and we’ve thought about precisely what you’re thinking about and we’ve concluded that we can envision circumstances in which we wouldn’t leave the stock price and the exchange ratio where they are. You’re not going to draw me out any farther so we might as well just.
What's interesting about this exchange is that the JP Morgan analyst doesn't seem to 'understand why citi' wouldn't break an existing agreement with preferred stock holders for the benefit of current common equity holders. This is a reflection of the times we are in. Everybody seems to think that nothing is set in stone. Now that citi's stock is rising instead of falling, you have analysts encouraging mgmt to do something that would benefit common stock holders at the expense of the taxpayers and preferred stock holders that have kept Citi afloat. It’s really quite amusing when you think about it. Citi common holders would have nothing left if the taxpayer and these sovereigns had not come and provided capital to absorb losses over the last 18 months at a time during which every common stock holder was running for the hills. Now, the common stock rises 350% off of its lows, and everybody who’s recently gone long the common wants a free ride on the backs of the investors who are further up the capital structure ladder. Call me crazy, but isn't it supposed to be the other way around.
I now truly sympathize with the arbs who put on the long pref/short common trade. They have been blown up by day traders and momentum chasers who literally do not understand that Citigroup's common stock has been diluted by over 70%. All of them are seeing the dollar signs associated with a stock that could rise a 1000% in a few months turning citi back into one of the most valuable companies on earth again. Moreover, the longs that do understand this are hoping that the recent rally in financials will allow Citi mgmt to take advantage of those investors who saved the company when it seemed to be on the verge of collapse. A do over so to speak for all citi common holders. At the $4.6 share price citi hit last week the company was hypothetically worth over $90 billion again if all the preferred shares are converted as expected at the agreed upon price. That means that for a brief moment Citi was the second most valuable publicly traded US Bank. I'd call that pretty shocking development or a really bad print if I had a short memory that didn't extend beyond the Volkswagen debacle.
Citi longs are playing a dangerous game as their bank is clearly worth less than the non-diluted BofA or WFC. Personally, I don't see how it trades anywhere over three dollars. If I believed in riskless trades anymore, I’d be long the other big money center US banks and short citi. That way I benefit from the fact that citi needs to find its rightful place on the mkt cap ladder sometime in the immediate future.
Last week I had about six people( regionally) call me up asking about going long Citi and BofA. Over the previous 6 months I had exactly zero calls regarding this type of trade.
The most popular stock is of course the one that has fallen the most. By early last week, it felt like everyone I knew was long citi... My neighbor, a cousin in Dubai, a cousin in the states, a couple of non-financial services friends, a colleagues good friend and his brother. Everywhere I looked there were citi longs popping up left and right. So, I was not surprised by the fact that I also ended up answering a few professional enquiries going into the earnings release. The icing on the cake though was an email I received on Wednesday from an uncle in Beirut who also wanted to know whether citi could beat expectations and whether or not the stock could pop. This was the most surprising inquiry as based on my knowledge this relative never trades US equities.
Considering that the average Joe in the financial services industry probably did not understand what was going on with citi stock and its arbitrage driven short squeeze, explaining this to your average retail investor was next to impossible.
Here is what a typical citi exchange went like....
X (family member, friend, client, colleague): What do you think of Citi stock into earnings?
Me: It is going up because of an arb trade gone awfully wrong, it should be really trading much lower.
X: So, if they beat earnings this week it will go up won't it.
Me: No, not necessarily, earnings don't really matter here, what matters is whether or not they complete the equity offering.
X: So, it’s going go down then.
Me: Umm, again not necessarily, it could go up a lot more because of this squeeze if they delay the offering on Friday.
X: Are they going to delay the offering?
Me: I don't know, but if had to guess, probably yes, as it’s been a good thing for financial stocks.
X: So, it going up.
Me: Again, not necessarily, because many people have gone long the stock based on this squeeze already, and they might sell into this news irrespective.
X: So, it's going down.
Me: Again, I can't say for certain because they could change the terms of the conversion and raise the price, and then the stock would potentially be justified in rising somewhat further.
X: Do you think they will do that?
Me: No, there is a clear agreement in place, and thus I doubt they would change the terms, as any modification would only hurt the preferred holders.
X: If there is an agreement in place then it must eventually go down, why would you even suggest this.
Me: Good point. I don't know, but it seems other people are speculating on this potential outcome.
X: So, basically you have no idea what is going to happen. What is it exactly that you actually do again?
Me: Exactly. As for your second question, I'll have to get back to you on that one.
Here is an excerpt from the Citi CC courtesy of Seeking Alpha. I found it interesting considering the conversations I had last week.
Sam Saba] – JP Morgan
Regarding the press, you have the three buckets, the government, the private, and the public. If you did consider the idea of raising the stock price so its say 450 you’ve cut the dilution on your equity by about 6% and it would affect the probability of getting your TC up to $81 billion. Considering that I don’t really understand why you wouldn’t do that.
Ned Kelly
We have certainly considered that dynamic. As you know, we have agreements with the privates and we have an agreement with the government at 3.25%. The fact is that leaves the $15 billion of public. Having considered pros and cons as you suggest I stand by the earlier statement which is at this stage we can’t envision changing either the stock price or the conversion ratio, understanding your point.
[Sam Saba] – JP Morgan
What’s the downside for doing that, for not increasing the stock price?
Ned Kelly
As I said, we have an agreement with the privates, we have an agreement with the government and we’ve thought about precisely what you’re thinking about and we’ve concluded that we can envision circumstances in which we wouldn’t leave the stock price and the exchange ratio where they are. You’re not going to draw me out any farther so we might as well just.
What's interesting about this exchange is that the JP Morgan analyst doesn't seem to 'understand why citi' wouldn't break an existing agreement with preferred stock holders for the benefit of current common equity holders. This is a reflection of the times we are in. Everybody seems to think that nothing is set in stone. Now that citi's stock is rising instead of falling, you have analysts encouraging mgmt to do something that would benefit common stock holders at the expense of the taxpayers and preferred stock holders that have kept Citi afloat. It’s really quite amusing when you think about it. Citi common holders would have nothing left if the taxpayer and these sovereigns had not come and provided capital to absorb losses over the last 18 months at a time during which every common stock holder was running for the hills. Now, the common stock rises 350% off of its lows, and everybody who’s recently gone long the common wants a free ride on the backs of the investors who are further up the capital structure ladder. Call me crazy, but isn't it supposed to be the other way around.
I now truly sympathize with the arbs who put on the long pref/short common trade. They have been blown up by day traders and momentum chasers who literally do not understand that Citigroup's common stock has been diluted by over 70%. All of them are seeing the dollar signs associated with a stock that could rise a 1000% in a few months turning citi back into one of the most valuable companies on earth again. Moreover, the longs that do understand this are hoping that the recent rally in financials will allow Citi mgmt to take advantage of those investors who saved the company when it seemed to be on the verge of collapse. A do over so to speak for all citi common holders. At the $4.6 share price citi hit last week the company was hypothetically worth over $90 billion again if all the preferred shares are converted as expected at the agreed upon price. That means that for a brief moment Citi was the second most valuable publicly traded US Bank. I'd call that pretty shocking development or a really bad print if I had a short memory that didn't extend beyond the Volkswagen debacle.
Citi longs are playing a dangerous game as their bank is clearly worth less than the non-diluted BofA or WFC. Personally, I don't see how it trades anywhere over three dollars. If I believed in riskless trades anymore, I’d be long the other big money center US banks and short citi. That way I benefit from the fact that citi needs to find its rightful place on the mkt cap ladder sometime in the immediate future.
Tuesday, April 14, 2009
"Preannouncements and GS Earnings"
Anyone starting to pick up a pattern out of financial companies? That’s back to back preannouncements out of the major financials. Seems like a concerted effort to create short squeezes as these reports could easily be released on the scheduled date. The goldman one is particularly amusing as they preannounced a few hours early and are out with a $5billion equity offering overnight which looks like a well timed call on their share price. If you recall they did the same thing when they got buffet to invest, announce the investment at night and then use the momentum to sell shares before the open.
No knock on Goldman, they are clearly the best hedge fund on the planet, and these numbers show you that. Ib revenues down 30% yr/yr, financial advisory down 21%, asset mgmt down 29%, securities services down 30%, equities down 20%, trading and principal up 64%, and ficc was up over 100%.
Basically what is considered ‘core investment banking’ was down across the board. Yet, gs got to go out and make money off cheap funding courtesy the US govt. Compensation is up 18% year over year and the payout ratio is up to 50%(it was 48% last year). Surprising? Goldman's head count came down by 7%. That means that anyone that is still at the firm is doing even better than he was before this whole collapse started. I won’t fault them for that. At least they take care of their people. But at the end of the day how can the US Govt justify bailing them out and not saving lehman brothers or bear stearns. Furthermore, if a firm has tier three assets of 60 billion and total shareholder equity of 63 billion, how are you going to let them out of tarp. Or maybe the question should be why did you ever let them in in the first place. If GS is a hedge fund, then why does the fdic need to back their debt issuances. Let them borrow at the type of cost that a firm with this type of leverage/risk appetite should be borrowing at, and maybe, just maybe, they will start to worry about the risk of the whole house burning down one day.
My view-Core profitability from stable recurring revenue streams has clearly been impaired, while volatile earnings from their ability to consistently outsmart everyone else as well as their ability to ‘manage accounting’ is at record high. Still a best of breed, but i don't even know what that phrase means anymore.
I was contemplating being long Morgan Stanley on this news but now I am starting to think that maybe being long a former broker-dealer that doesn’t run its own hedge fund is a very bad idea.
No knock on Goldman, they are clearly the best hedge fund on the planet, and these numbers show you that. Ib revenues down 30% yr/yr, financial advisory down 21%, asset mgmt down 29%, securities services down 30%, equities down 20%, trading and principal up 64%, and ficc was up over 100%.
Basically what is considered ‘core investment banking’ was down across the board. Yet, gs got to go out and make money off cheap funding courtesy the US govt. Compensation is up 18% year over year and the payout ratio is up to 50%(it was 48% last year). Surprising? Goldman's head count came down by 7%. That means that anyone that is still at the firm is doing even better than he was before this whole collapse started. I won’t fault them for that. At least they take care of their people. But at the end of the day how can the US Govt justify bailing them out and not saving lehman brothers or bear stearns. Furthermore, if a firm has tier three assets of 60 billion and total shareholder equity of 63 billion, how are you going to let them out of tarp. Or maybe the question should be why did you ever let them in in the first place. If GS is a hedge fund, then why does the fdic need to back their debt issuances. Let them borrow at the type of cost that a firm with this type of leverage/risk appetite should be borrowing at, and maybe, just maybe, they will start to worry about the risk of the whole house burning down one day.
My view-Core profitability from stable recurring revenue streams has clearly been impaired, while volatile earnings from their ability to consistently outsmart everyone else as well as their ability to ‘manage accounting’ is at record high. Still a best of breed, but i don't even know what that phrase means anymore.
I was contemplating being long Morgan Stanley on this news but now I am starting to think that maybe being long a former broker-dealer that doesn’t run its own hedge fund is a very bad idea.
Monday, March 2, 2009
"Singularly Minded: Jeremy Siegel and the S&P 500"
"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."
-Mark Twain
Jeremy Siegel is back at it. Yesterday’s Wall Street Journal Opinion Column contained an article by Professor Siegel titled “The SP Gets its Earnings Wrong: Stocks are Cheaper than they Look”. For those individuals that follow Siegel, his conclusion that stocks are cheap is no surprise. About every three months or so for the past couple of years Professor Siegel writes an article/blog in which he argues why the S&P 500 is a fantastic bargain. What is surprising is that he has now shifted tactics. With reported earnings being decimated by over $300 billion in write-downs and operating earnings cracking across the board, the empirical evidence does not lend itself to the Professor’s bread and butter argument. Thus, instead of writing a piece titled ‘How I Missed the Finance Based Economies Shenanigans’ or ‘How My Equity Got Buried Under a Mountain of Debt’ or even ‘Deleveraging: Why I was the Last Person in the Room to See it’ (yes, the professor has not once addressed the issue of debt-driven deflation or even uttered the words deleveraging in one of his sp500 is cheap articles) Professor Siegel has decided to go after S&P and their method for calculating the indices P/E. Like all talented academics, the professor knows that valuation is an art and not a science. As the saying goes, if you can’t win the game, change the rules.
Professor Siegel believes that S&P’s ‘bizarre’ approach of aggregating earnings is making stocks look deceptively more expensive than they really are. His logic is really quite simple. The firms that lost all the money over the last twelve months were finance companies or automakers, and since those firms now make up a very small percentage of the S&P500; their disproportionately large losses are distorting the earnings power of the index. See, Professor Siegel wants to relatively weight the earnings of S&P 500 firms based on market capitalization. This way Exxon (which makes up 5% of the index) Mobil’s profits are not wiped out by AIG or GM’s (both of which now represent a tiny fraction of the index) losses. Since super large cap companies most likely are still super large caps because they are capable of making money or have yet to get hit hard by the downturn, relatively weighting their earnings will raise the S&P 500’s overall reported earnings. This in turn will lead to a lower reported P/E. To be frank, I have no problem with this approach. It would be nice to have weighted earnings data reported. What bothers me about this argument is that Professor Siegel was not recommending we market weight earnings when finance companies were producing a disproportionate amount of sp500 earnings growth or when technology stocks climbed to ludicrous valuations in 1999-2000. The professor doesn’t seem to consider the fact that the earnings multiples for the S&P500 in 1999/2000 would have been much higher than is historically recorded if a relative weighting approach was used. As all the NASDAQ listed companies in the index with little to no earnings, but insane market capitalizations, would have dragged down the indexes overall profitability.
We could play this game all day long, and I doubt that professor Siegel does not realize this. What concerns me is his flawed logic. S&P has a method for measuring earnings that is consistent, and that they have not significantly altered over the years. This allows us to make historical comparisons. Valuation has never been an absolute game. If the Professor is going to use a market weighting approach to comment on the relative attractiveness of the S&P500, then he must have a consistent historical data set to compare it to. You cannot use a new approach to come up with a more favorable current P/E and still compare that P/E to the average historical multiple that was calculated by the old approach.
If you want to make a persuasive argument attacking an established method, then you should be armed with some serious historical data. As a world-renowned finance professor, this would not be very hard thing for Mr. Siegel to do, and he could then publish his findings and have them out there for his peers to review. That would make for an interesting piece.
Instead, he seems to enjoy the role of Ben Stein or Jim Cramer in which he gets to publish quick notes to back up his “financial ideology” or “market cheerleading” and continue to monetize the media personality that he has created.
-Mark Twain
Jeremy Siegel is back at it. Yesterday’s Wall Street Journal Opinion Column contained an article by Professor Siegel titled “The SP Gets its Earnings Wrong: Stocks are Cheaper than they Look”. For those individuals that follow Siegel, his conclusion that stocks are cheap is no surprise. About every three months or so for the past couple of years Professor Siegel writes an article/blog in which he argues why the S&P 500 is a fantastic bargain. What is surprising is that he has now shifted tactics. With reported earnings being decimated by over $300 billion in write-downs and operating earnings cracking across the board, the empirical evidence does not lend itself to the Professor’s bread and butter argument. Thus, instead of writing a piece titled ‘How I Missed the Finance Based Economies Shenanigans’ or ‘How My Equity Got Buried Under a Mountain of Debt’ or even ‘Deleveraging: Why I was the Last Person in the Room to See it’ (yes, the professor has not once addressed the issue of debt-driven deflation or even uttered the words deleveraging in one of his sp500 is cheap articles) Professor Siegel has decided to go after S&P and their method for calculating the indices P/E. Like all talented academics, the professor knows that valuation is an art and not a science. As the saying goes, if you can’t win the game, change the rules.
Professor Siegel believes that S&P’s ‘bizarre’ approach of aggregating earnings is making stocks look deceptively more expensive than they really are. His logic is really quite simple. The firms that lost all the money over the last twelve months were finance companies or automakers, and since those firms now make up a very small percentage of the S&P500; their disproportionately large losses are distorting the earnings power of the index. See, Professor Siegel wants to relatively weight the earnings of S&P 500 firms based on market capitalization. This way Exxon (which makes up 5% of the index) Mobil’s profits are not wiped out by AIG or GM’s (both of which now represent a tiny fraction of the index) losses. Since super large cap companies most likely are still super large caps because they are capable of making money or have yet to get hit hard by the downturn, relatively weighting their earnings will raise the S&P 500’s overall reported earnings. This in turn will lead to a lower reported P/E. To be frank, I have no problem with this approach. It would be nice to have weighted earnings data reported. What bothers me about this argument is that Professor Siegel was not recommending we market weight earnings when finance companies were producing a disproportionate amount of sp500 earnings growth or when technology stocks climbed to ludicrous valuations in 1999-2000. The professor doesn’t seem to consider the fact that the earnings multiples for the S&P500 in 1999/2000 would have been much higher than is historically recorded if a relative weighting approach was used. As all the NASDAQ listed companies in the index with little to no earnings, but insane market capitalizations, would have dragged down the indexes overall profitability.
We could play this game all day long, and I doubt that professor Siegel does not realize this. What concerns me is his flawed logic. S&P has a method for measuring earnings that is consistent, and that they have not significantly altered over the years. This allows us to make historical comparisons. Valuation has never been an absolute game. If the Professor is going to use a market weighting approach to comment on the relative attractiveness of the S&P500, then he must have a consistent historical data set to compare it to. You cannot use a new approach to come up with a more favorable current P/E and still compare that P/E to the average historical multiple that was calculated by the old approach.
If you want to make a persuasive argument attacking an established method, then you should be armed with some serious historical data. As a world-renowned finance professor, this would not be very hard thing for Mr. Siegel to do, and he could then publish his findings and have them out there for his peers to review. That would make for an interesting piece.
Instead, he seems to enjoy the role of Ben Stein or Jim Cramer in which he gets to publish quick notes to back up his “financial ideology” or “market cheerleading” and continue to monetize the media personality that he has created.
Sunday, February 22, 2009
"Dubai's Debt Repreive"
After weeks of feeling like the international presses doormat, Dubai Inc finally caught a bit of a break as it would appear that big brother (he of 8.5% of the world’s oil reserves) has decided to step in and shoulder some of the debt burden. The news, coming on the heels of a week’s worth of speculation in the local equity markets, is that the UAE Central Bank will be subscribing to $10billion worth of a $20billion dollar bond issuance by the Government of Dubai. This puts Dubai Inc in the unique category of first globally bailed out Emirate.
So, what are the ramifications of this? Seeing as we’ve been living in a world of speculation for the past two months, it’s nice to finally get some tangible news to analyze.
From a Dubai Inc debt perspective the news is extremely positive. Dubai Inc has about $80billion in mostly short-term debt outstanding. $15 billion is roughly due to mature this year. Now, while 80+20 does equal 100, Dubai’s big problem is short-term liquidity. To quote Irving Fisher, “Debts due at once are more embarrassing than debts due years hence, and those payable at the option of the creditor, than those payable at the convenience of the debtor. Thus debt embarrassment is great for call loans and for early maturities.” Thus, if we were to analyze this news within the context of Dubai’s total debt embarrassment; we could conclude that Dubai has drastically improved its ability to meet its near term obligations (that 4% coupon looks very generous if you look at Dubai CDS spreads). Will some difficult decisions need to be made down the road? Of course, but now Dubai has secured some flexibility to ride out the storm.
The equity story is a little different, but should be all too familiar for those following the global economic crisis. Dubai’s debt obligations continue to leave little room for shareholders chasing corporate profits. It is unlikely that this money will be used by the government to purchase preferred stock or even dilutive stakes in corporate entities. I also think it is unlikely that this money can address the root problem of incredible overcapacity in a real estate driven economy. Dubai has built it, and the will come, but odds are “they” won’t get here fast enough to save private capital that was betrayed by hopelessly unproductive works. Banks, facing on oncoming tsunami of non-performing assets, will continue to be reluctant to lend to the real estate sector. Why? The answer is quite simple. Banks, like everyone else in the world continue to expect unemployment to rise and asset prices to fall. Moreover, when you expect to continue to pay for past mistakes, you try very hard to avoid making new ones. Sadly, shaking a deflationary bug is just not something that equity markets do very well.
I believe the Dubai Government will be very selective when it comes to allocating this money. I presume that they will focus on streamlining operations, infrastructure projects, and debt obligations tied to “key” strategic assets. Basically, they will continue to focus on restructuring and positioning themselves for the long haul.
That being said, a little good news can go a long way, coiled springs like to pop, and dead cats do bounce. Trade accordingly.
So, what are the ramifications of this? Seeing as we’ve been living in a world of speculation for the past two months, it’s nice to finally get some tangible news to analyze.
From a Dubai Inc debt perspective the news is extremely positive. Dubai Inc has about $80billion in mostly short-term debt outstanding. $15 billion is roughly due to mature this year. Now, while 80+20 does equal 100, Dubai’s big problem is short-term liquidity. To quote Irving Fisher, “Debts due at once are more embarrassing than debts due years hence, and those payable at the option of the creditor, than those payable at the convenience of the debtor. Thus debt embarrassment is great for call loans and for early maturities.” Thus, if we were to analyze this news within the context of Dubai’s total debt embarrassment; we could conclude that Dubai has drastically improved its ability to meet its near term obligations (that 4% coupon looks very generous if you look at Dubai CDS spreads). Will some difficult decisions need to be made down the road? Of course, but now Dubai has secured some flexibility to ride out the storm.
The equity story is a little different, but should be all too familiar for those following the global economic crisis. Dubai’s debt obligations continue to leave little room for shareholders chasing corporate profits. It is unlikely that this money will be used by the government to purchase preferred stock or even dilutive stakes in corporate entities. I also think it is unlikely that this money can address the root problem of incredible overcapacity in a real estate driven economy. Dubai has built it, and the will come, but odds are “they” won’t get here fast enough to save private capital that was betrayed by hopelessly unproductive works. Banks, facing on oncoming tsunami of non-performing assets, will continue to be reluctant to lend to the real estate sector. Why? The answer is quite simple. Banks, like everyone else in the world continue to expect unemployment to rise and asset prices to fall. Moreover, when you expect to continue to pay for past mistakes, you try very hard to avoid making new ones. Sadly, shaking a deflationary bug is just not something that equity markets do very well.
I believe the Dubai Government will be very selective when it comes to allocating this money. I presume that they will focus on streamlining operations, infrastructure projects, and debt obligations tied to “key” strategic assets. Basically, they will continue to focus on restructuring and positioning themselves for the long haul.
That being said, a little good news can go a long way, coiled springs like to pop, and dead cats do bounce. Trade accordingly.
Monday, February 16, 2009
"DUBAI RIP: DON'T BET ON IT"
Dear Robert,
I am writing to inform you that the rumors regarding our demise are greatly exaggerated. Having come across your article(Laid-Off Foreigners Flee as Dubai Spirals Down) the New York Times I thoughts I’d take this opportunity to provide you with some color on the situation out here. First, the Palm is not sinking and the Burj is not collapsing. Also, last time I checked there were no cockroaches coming out of the faucets at the hotels on the island. Not exactly sure who or what entity are the sources of these rumors, but if I was a conspiracy theorist I might just blame the London-Moscow-Mumbai-Hong Kong-NYC Axis of Evil, commonly referred to as the Five Fathers of Fear.( If you don’t know them, you should. Rumors have it that they were intimately involved in spreading the rumors that brought down Lehman…as they were looking to cause a global crash to accumulate all assets on the cheap)
Though I will have to say that we got a kick out of the rumor regarding 3000 abandoned cars with nice little apology letters accompanying the maxed out credit cards. I’d like to believe that Dubai Debtors maintain a high level of etiquette when they skip town, but the fact of the matter is I have yet to see any evidence of such nonsense. Maybe these letters include forwarding addresses and IOU’s too.
As for poor Sofia, I hope she finds a job along with the millions of other people around the world who have been laid off in the past month. I also hope she can hang onto that home she bought just like I hope everyone in NYC who is at risk of losing a home can too. And as far as the debtor’s prison situation goes, it exists for a reason, to deter reckless borrowing. Clearly, it didn’t work very well.
The fact of the matter is that Dubai clearly is facing its fair share of economic challenges as it is not immune to this global economic collapse. The real estate market will suffer, and the booming growth will disappear for a while. The experiment will need to be tweaked, rethought in some instances, and tempered. But at the end of the day Dubai could never have become Dubai if it didn’t over do it. To put an empty desert on the map you need to create a spectacle, and when you create a spectacle you are bound to eventually hit a period were the excess catches up to you.
Five years ago nobody in New York would be writing an article about this city let alone contemplating moving here or buying a home here. So, to a certain extent Dubai has already accomplished its goal. Now, it just needs to ride out the storm.
When you build a dream on sand, you’d have to be a fool to let it slip through your hands…….
P.S. The decline in traffic is something that most of us are enjoying. The situation out here was getting a little ridiculous, but we are nowhere near ‘ghost town’ status yet.
Regards,
DUBAICAN
I am writing to inform you that the rumors regarding our demise are greatly exaggerated. Having come across your article(Laid-Off Foreigners Flee as Dubai Spirals Down) the New York Times I thoughts I’d take this opportunity to provide you with some color on the situation out here. First, the Palm is not sinking and the Burj is not collapsing. Also, last time I checked there were no cockroaches coming out of the faucets at the hotels on the island. Not exactly sure who or what entity are the sources of these rumors, but if I was a conspiracy theorist I might just blame the London-Moscow-Mumbai-Hong Kong-NYC Axis of Evil, commonly referred to as the Five Fathers of Fear.( If you don’t know them, you should. Rumors have it that they were intimately involved in spreading the rumors that brought down Lehman…as they were looking to cause a global crash to accumulate all assets on the cheap)
Though I will have to say that we got a kick out of the rumor regarding 3000 abandoned cars with nice little apology letters accompanying the maxed out credit cards. I’d like to believe that Dubai Debtors maintain a high level of etiquette when they skip town, but the fact of the matter is I have yet to see any evidence of such nonsense. Maybe these letters include forwarding addresses and IOU’s too.
As for poor Sofia, I hope she finds a job along with the millions of other people around the world who have been laid off in the past month. I also hope she can hang onto that home she bought just like I hope everyone in NYC who is at risk of losing a home can too. And as far as the debtor’s prison situation goes, it exists for a reason, to deter reckless borrowing. Clearly, it didn’t work very well.
The fact of the matter is that Dubai clearly is facing its fair share of economic challenges as it is not immune to this global economic collapse. The real estate market will suffer, and the booming growth will disappear for a while. The experiment will need to be tweaked, rethought in some instances, and tempered. But at the end of the day Dubai could never have become Dubai if it didn’t over do it. To put an empty desert on the map you need to create a spectacle, and when you create a spectacle you are bound to eventually hit a period were the excess catches up to you.
Five years ago nobody in New York would be writing an article about this city let alone contemplating moving here or buying a home here. So, to a certain extent Dubai has already accomplished its goal. Now, it just needs to ride out the storm.
When you build a dream on sand, you’d have to be a fool to let it slip through your hands…….
P.S. The decline in traffic is something that most of us are enjoying. The situation out here was getting a little ridiculous, but we are nowhere near ‘ghost town’ status yet.
Regards,
DUBAICAN
Sunday, January 4, 2009
"Tansitionary Betrayal"
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us.”
-Charles Dickens, A Tale of Two Cities
It was for all intensive purposes as good as it could get and as bad as it could possibly get all at the same time and the entire world over. And it is for this reason that 2008 will go down as one of the greatest transitions years in global economic history. By the time that last extra second had ticked off, (as if we needed any reason to make 2008 longer) the world was already a very different place. The great financial panic of 2008 wiped out more than $30 trillion in global market value. But to blame this wealth destruction on a panic or foolish crowd would be a serious mistake because at the end of the day, “Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.” This fantastic quote comes from John Mills’ paper titled Credit Cycles and the Origin of Commercial Panics, and I can’t think of one sentence that more appropriately sums up this tumultuous year.
Investors discovered just how carried away they had become in their obsession to chase the economic miracle that was globalization. And while this last bubble probably won’t lead to Great Depression II, it is the first truly global asset bubble and thus is bound to be somewhat unique in its scope and with respect to the challenges it creates for policy makers.
Thus, I have decided to skip the 2009 forecast for now as I have read way too many good notes on the topic. Instead, I have decided to offer up some of what I think were the “great revelations” of 2008.
1) Barbarians Slaughtered at the Gate-
We discovered that Tom Wolfe’s “Masters of the Universe” couldn’t even “Master their own Domain”. The utter collapse of the stand-alone investment banking model in a matter of months surprised even the most pessimistic market pundits, but at the same time it exposed the great folly that had become high finance. Those who thought their names were worth their weight in gold quickly discovered that in a debt driven deflationary cycle everyone is vulnerable. The fab five quickly turned into a terrified twosome, and then with Goldman and Morgan Stanley’s conversion into bank holding companies on September 22nd; the United States stand alone investment banking industry all but disappeared. Masters of the Universe brought to their knees and undone by a mountain of debt and a crisis of confidence, and all it took was seven months.
2) Real Estate gets Debunked-
If there is any good thing that came out of 2008 it is that maybe, just maybe, a few people realized that real estate is not everywhere and always a good investment. Yes, unlike a stock a home is tangible. You can touch it, put stuff in it, and even sleep in it. It’s a good inflation hedge, and in some jurisdictions it’s an efficient tax shield. But just like a stock, if it is bought at the wrong price, and at the wrong time, it can lose you a lot of money. Over the last couple of years I was starting to feel like the national association of realtors had discovered some sort of mind control device. Trying to convince a person that there is a price point at which renting makes a lot of sense or that buying a home is not a no brainer investment was an exercise in futility. I guess enough commercials of people flushing money down a toilet with the words “why rent” in big bold letters will do that to a nation.
3) Decoupling gets De-listed-
We discovered that the world’s consumption engine can’t falter without taking everyone else down with it. If the level of global aggregate demand has been artificially and unsustainably inflated by the illusion of limitless free credit, then capital will be hopeless betrayed by overinvestment in unproductive works. Too many dry bulk shippers, too many new mega-casinos, too many niche retailers, too many flat panel screens, too many textile mills, too many cement factories, too many residential units, and of course too many leveraged buy outs. Too much of anything can be a bad thing. Too much of everything financed with insane levels of short-term debt can be disastrous. Ironically, through the use of clever derivatives the US managed to export a lot of their land of too much to the rest of the world. And when you consider the fact that the bulk of global capacity for just about everything outside of financial hocus pocus rests beyond the borders of Uncle Sam, you quickly start to realize that the brunt of a crisis that was made in America will most likely be felt in the developing world. Who would you rather be a US consumer who now has realized he has to consume less or the producer who was making goods for this consumer? There are of course two answers to this question. In the short term, you’d rather be the consumer. In the long term, you’d probably rather be the producer. But if we are all dead in the long run….well I think you get the picture.
4) Free Markets get Fracked
Nobody wants a free market on the way down. Adam Smith’s invisible hand is there alright, and if left alone it will sort things out with razor sharp precision. So, much so that massive wealth redistribution would become the norm. Sadly, to reach that point the world must enter chaos, and many of the great masters of industry would be swallowed whole. And this my friends will never be allowed to happen. As we have recently witnessed, even the most ardent free market proponent, your ruthless trader or B.S.D, will scream uncle when he finds the invisible hand wrapped around his throat.
-Charles Dickens, A Tale of Two Cities
It was for all intensive purposes as good as it could get and as bad as it could possibly get all at the same time and the entire world over. And it is for this reason that 2008 will go down as one of the greatest transitions years in global economic history. By the time that last extra second had ticked off, (as if we needed any reason to make 2008 longer) the world was already a very different place. The great financial panic of 2008 wiped out more than $30 trillion in global market value. But to blame this wealth destruction on a panic or foolish crowd would be a serious mistake because at the end of the day, “Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.” This fantastic quote comes from John Mills’ paper titled Credit Cycles and the Origin of Commercial Panics, and I can’t think of one sentence that more appropriately sums up this tumultuous year.
Investors discovered just how carried away they had become in their obsession to chase the economic miracle that was globalization. And while this last bubble probably won’t lead to Great Depression II, it is the first truly global asset bubble and thus is bound to be somewhat unique in its scope and with respect to the challenges it creates for policy makers.
Thus, I have decided to skip the 2009 forecast for now as I have read way too many good notes on the topic. Instead, I have decided to offer up some of what I think were the “great revelations” of 2008.
1) Barbarians Slaughtered at the Gate-
We discovered that Tom Wolfe’s “Masters of the Universe” couldn’t even “Master their own Domain”. The utter collapse of the stand-alone investment banking model in a matter of months surprised even the most pessimistic market pundits, but at the same time it exposed the great folly that had become high finance. Those who thought their names were worth their weight in gold quickly discovered that in a debt driven deflationary cycle everyone is vulnerable. The fab five quickly turned into a terrified twosome, and then with Goldman and Morgan Stanley’s conversion into bank holding companies on September 22nd; the United States stand alone investment banking industry all but disappeared. Masters of the Universe brought to their knees and undone by a mountain of debt and a crisis of confidence, and all it took was seven months.
2) Real Estate gets Debunked-
If there is any good thing that came out of 2008 it is that maybe, just maybe, a few people realized that real estate is not everywhere and always a good investment. Yes, unlike a stock a home is tangible. You can touch it, put stuff in it, and even sleep in it. It’s a good inflation hedge, and in some jurisdictions it’s an efficient tax shield. But just like a stock, if it is bought at the wrong price, and at the wrong time, it can lose you a lot of money. Over the last couple of years I was starting to feel like the national association of realtors had discovered some sort of mind control device. Trying to convince a person that there is a price point at which renting makes a lot of sense or that buying a home is not a no brainer investment was an exercise in futility. I guess enough commercials of people flushing money down a toilet with the words “why rent” in big bold letters will do that to a nation.
3) Decoupling gets De-listed-
We discovered that the world’s consumption engine can’t falter without taking everyone else down with it. If the level of global aggregate demand has been artificially and unsustainably inflated by the illusion of limitless free credit, then capital will be hopeless betrayed by overinvestment in unproductive works. Too many dry bulk shippers, too many new mega-casinos, too many niche retailers, too many flat panel screens, too many textile mills, too many cement factories, too many residential units, and of course too many leveraged buy outs. Too much of anything can be a bad thing. Too much of everything financed with insane levels of short-term debt can be disastrous. Ironically, through the use of clever derivatives the US managed to export a lot of their land of too much to the rest of the world. And when you consider the fact that the bulk of global capacity for just about everything outside of financial hocus pocus rests beyond the borders of Uncle Sam, you quickly start to realize that the brunt of a crisis that was made in America will most likely be felt in the developing world. Who would you rather be a US consumer who now has realized he has to consume less or the producer who was making goods for this consumer? There are of course two answers to this question. In the short term, you’d rather be the consumer. In the long term, you’d probably rather be the producer. But if we are all dead in the long run….well I think you get the picture.
4) Free Markets get Fracked
Nobody wants a free market on the way down. Adam Smith’s invisible hand is there alright, and if left alone it will sort things out with razor sharp precision. So, much so that massive wealth redistribution would become the norm. Sadly, to reach that point the world must enter chaos, and many of the great masters of industry would be swallowed whole. And this my friends will never be allowed to happen. As we have recently witnessed, even the most ardent free market proponent, your ruthless trader or B.S.D, will scream uncle when he finds the invisible hand wrapped around his throat.
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