Financial Disasters and Opportunities

There are thousands of pieces of information that we look at every week.  We’re not all accountants or economists, so when we read government documents and don’t understand them, we have to consult with those who do.  Still, we have to try and figure out how it all fits together.  We have to do our best to look past the mis-information that’s out there, too.  Verifying news items isn’t easy and I’m finding that it isn’t a bad thing to wait before I repeat (or act on) information.  Today, it was reported by two different sources that, according to filings, Bill Ackman (the infamous “shorter” and critic of Ambac and MBIA) had taken a stake in the bond insurers.  That would be quite a turnaround for him and both stocks’ share prices responded.  However, less than 30 minutes later, the news was corrected to reveal that Ackman had in fact bought more puts.  Big difference!  Rumors and manipulations happen in the market.  No surprise there.  But, understand that with all of the upheaval we are experiencing, rumors will increase.  All of the rumor spreading isn’t intentional.  The pace at which the financial crisis has unfolded is mind-numbing. News events are being fired at us at an alarming rate.  We’ve gone from “sub-prime is contained” to “Project Lifeline” in record time.

I’ve listened to company conference calls and government hearings.  I’ve read thousands of pages of information relating to mortgages and financial instruments.  Then, I watch mainstream news shows to see what’s being said to the general public.  I’m here to tell you things are not adding up. 

 One day we’re told that everything is going to be OK, the next day the sky is falling.  The whip-sawing of the markets is just showing how much confusion and fear is in the financial community right now.  Everyone says we need transparency, but I think that’s the last thing some people really want.  There are banks/brokers/mortgage lenders/other businesses out there in some real financial trouble and they (and the government) want time to figure out how to keep things from blowing up in their faces.  Some businesses won’t make it.  I think the truth is that nobody really knows how this is going to play out,  or what will be the final consequences.  Many have admitted as much. 

As bad as all of this sounds, I need to say this:  The business of America has not shut down.  American’s are going to work, paying bills, raising children, buying clothes, eating out, going to movies and falling in love.  The world hasn’t stopped spinning.  The stock market isn’t going away, either.  That doesn’t mean that things won’t get difficult down the road, so we have to take care of ourselves the best we can. 

There are those who say this is the worst financial disaster ever.  It may end up feeling that way, but I’m sure the people who lived through past financial crises felt the same way.  Global financial problems are nothing new, either.  “Globalization” isn’t something that just started a couple of decades ago, so let’s keep things in perspective!  Our regular readers know that I will not ignore facts and can still be an optimist  I will not just sit around bemoaning the awful state we’re in, but will find the opportunities within the chaos.  Chuck and I are unhappy with the “spin” from the government officials, but we’ll keep searching for the truth.  Facing reality makes us better prepared to take advantage of upcoming opportunity. 

Edited for clarity 2/15/08

FGIC Ratings Cut by Moody’s

The hearings on the bond insurers is ongoing.  Gov. Spitzer is hoping to avoid downgrades of the bond insurers by recapitalizing them, perhaps in a couple of days.  I could have sworn the rating agencies said raising capital wouldn’t matter.  Oh, well.  NY Insurance Commission Dinallo says the state has the legal ability to place bond insurers into ‘rehab’, which is a form of bankruptcy.  Listening to the CEO’s of Ambac and MBIA, they say they are well capitalized and will have no problems paying claims.  So what’s the big deal with these hearings and talks of bail-outs?  Somebody needs to get these guys the same playbook!

FGIC’s Senior debt has been cut to junk by Moody’s,  and a cut to their financial strength from AAA to A3.

The Dow closed at 12376,  close to support of 12350.  The Nasdaq lost 41 points to close at 2332 and the S&P closed at 1348.  Talk about lack of conviction in this market.  Bids keep drying up along with volume.  More later!

The FBI, SEC and Ringing Bells

The FBI is investigating two additional firms, for a total of 16, in the subprime mortgage industry crackdown.

The SEC says investment banks have adequate capital and liquidity to deal with any bond insurer problems.  But, he also says some large investment banks’ exposure to bond insurer risk is material.  Huh?!

Governor Spitzer says there are no plans for a government bailout of bond insurers, but a Federal guarantee for them is a "very worthy" idea.  Again, huh? 

"Transparency" is the big word of the year. It’s so transparent no one can find it.

Mr. Ben Bernanke says any new erosion in credit markets would be a warning bell.  What do you think that sound is?  The dinner bell? 

Congressional Testimony on Economy, Etc.

Here are some notes from Bernanke’s testimony: Forecast due next week will show slower growth than prior forecast
- Need to be open minded about new mortgage measures
- Need to be sure private sector being aggressive in dealing with rising delinquencies
- still sees systematic risks for GSE’s
- says FNM and FRE need to raise more capital
- says it is likely there will be additional subprime writedowns by banks

Bernanke looks like he isn’t getting enough sleep. He looks nervous. He says it’s difficult to get proper evaluations on Level 3 assets.   Says banks are well capitalized, but he’s worried about them not lending.  Treasury Secretary Paulson and SEC Chairman Cox are also before Congress.  They are all being grilled and this is not a very cheery group of people.

The dollar is selling down.  The market is weak here, but the testimonies are almost done.

Stock Market - Pre Open Report for Feberuary 14th 2008

Today is going to be a very interesting day with all the testimony taking place in Washington,D.C. concerning the economy and the bond insurers. MBIA (MBI) is very upset about short sellers and has been making a stink about it. Short sellers and short selling in general can be the topic all in itself (note to self, write an article about the history of short selling).

The study of the markets goes well beyond just reading charts and technical analysis. It is important to have a broad knowledge of how the economy and the markets work. And Lisa and I have studied much about the economy and markets in our years of experience. Knowledge of history is always important in predicting the future for while every day is different it is the knowing of where one has been to help understand where one is going. Throughout the history of the stock market it is short sellers that bring a balance to the markets. Without short sellers there would be nothing to offset the ’stock pushers’. Short selling is an integral part of how the markets operate and without them the markets would resemble a Marxist Government. For MBIA to complain about people who short sell their stock and those who do it I say to MBIA "nothing to hide… then nothing to worry about". In history it has always been the companies that have been in trouble that have complained about short sellers.

The weekly initial jobless claims data came in this morning and were down, but the average continues to increase. Futures are flat to slightly negative so far.

Expect volatility today on the comments taking place in Washington today…