Rebel Traders - Stock Market and Economic Analysis

A few hours ago I wrote that this "soap opera" that we call the bond insurers was not over yet. And it did not take long for another episode to be written. Tonight MBIA Inc. (MBI) released a statement that they will now eliminate their quarterly dividend and are now working on a plan that will break up the company sometime within the next five years. Lisa and I have discussed in great detail the events that have taken place today with regard to the bond insurers and the ratings agencies. We do not wish to sound like we are distrustful people by nature, but we are realists and will never take what is said as "well, if they say it then it must be true"… the world has enough "reporters" and not enough "investigators". Once was the day long ago that being a reporter meant you would dig for the truth, today reporters just echo was it told to them so as to maintain their contacts with those who feed them information. Reporters today don’t want to anger those who give them their information. But that is a topic for another night.

What is happening with the ratings agencies is fraud, this is how we view it. We have the Governor of New York involved along with his insurance commissioner. They are all working on a way to keep the bond insurers propped up on a pedestal so that the general public never realizes how bad the situation is. At some point in time, not now, but down the road this will end in lawsuits, bankruptcies, and perhaps even criminal proceedings. I realize this sounds a bit extreme, but you have to remember that Lisa and I bring to you our experiences and our extensive studies of market history. We want transparency, not cover ups.

The following was issued by Bloomberg.com tonight:

MBIA Will Halt Asset-Backed Business, Split Units (Update3)

By Christine Richard

Feb. 25 (Bloomberg) — MBIA Inc., seeking to stave off a crippling credit rating downgrade, will stop writing guarantees on asset-backed securities for six months and will separate that business from its municipal unit within five years.

Chief Executive Officer Jay Brown also said he has “questions” about the company’s 2007 preliminary results released last month and hasn’t yet signed off on the statements, according to a letter to shareholders today.

MBIA has raised $2.6 billion in capital in the past three months and earlier today said it would eliminate its dividend amid scrutiny from ratings companies. S&P today said it is no longer reviewing MBIA’s AAA rating for downgrade. The company, which insures $673 billion of municipal and asset-backed securities, faced criticism from ratings companies, lawmakers and regulators over its decision to expand into collateralized debt obligations.

“Everything we are working towards right now is centered on regaining stability,” Brown said in the letter. “We can expect a bumpy ride over the coming months and possibly longer.”

S&P today said the insurer remains on negative outlook, meaning that any ratings move may be lower, though not any time soon. Ambac Financial Group Inc., which ranks second to MBIA among bond insurers, is being given more time to avoid a downgrade pending the outcome of company’s plans to raise new capital, S&P said.

Shares Rise

S&P’s decision sent MBIA up 20 percent in New York Stock Exchange composite trading and Ambac of New York gained 16 percent. A credit rating cut would stymie their ability to guarantee debt and strip the AAA stamp from $1.2 trillion of insured municipal and asset-backed debt. MBIA rose $2.40 to $14.58. Ambac gained $1.70 to $12.41.

Brown said he has been reviewing the company’s 2007 financial statements, with a focus on MBIA’s loss reserves and mark-to-market losses. The markdowns reflect the difference between what MBIA charged to insure certain securities and what it could have charged based on a change in the value of the underlying security during the period.

“It is a difficult and complex task for both the internal teams and the company’s auditors to establish best estimates in the most volatile credit markets in the company’s history,” Brown wrote. “I have a few more follow-up questions that need to be answered for me to confirm the company’s preliminary results which were released a few weeks ago.”

MBIA increased its reserve for claims related to second- lien mortgages by $100 million for a total of $200 million less than a week after reporting its fourth-quarter results.

Record Loss

MBIA posted a record loss of $1.93 billion last year, its first loss at least 15 years, after losses on subprime securities. MBIA and the rest of the bond insurers are paying a price for expanding beyond the safety of municipal debt into securities such as CDOs, which repackage other pools of securities in to new debt with varying ratings.

MBIA’s ability to raise $2.6 billion was “a strong statement of management’s ability to address the concerns relating to the capital adequacy of the company,” S&P said.

Moody’s is still reviewing MBIA and Ambac for downgrades. Fitch cut Ambac’s insurance rating to AA last month and is considering cutting MBIA.

MBIA raised money through selling common shares and warrants to private-equity firm Warburg Pincus LLC and issuing $1 billion of surplus notes.

S&P estimated that MBIA may have losses of $5.5 billion before tax, eliminating its entire capital cushion.

MBIA replaced Chief Executive Officer Gary Dunton earlier this month after an 80 percent slump in the company’s share price and criticism from investors, lawmakers and regulators for the expansion into money-losing CDOs. The company replaced Dunton with former CEO Brown, who said last week he favored separating the municipal business from the asset-backed guarantees to protect the public finance debt from losses.

How is it that the ratings agencies are able to maintain a AAA rating on a company that is still in trouble?… a company that is now possibly going to re-state their previous earnings?… a company that has to eliminate their dividend in order to save money?… a company that according to the CEO does not even know the extent of their ability to value their assets? There is so much that just does not add up here.

The following statement is from the Standard and Poors  policy on ratings definitions:

A Standard & Poor’s issue credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion evaluates the obligor’s capacity and willingness to meet its financial commitments as they come due, and may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default. The issue credit rating is not a recommendation to purchase, sell, or hold a financial obligation, inasmuch as it does not comment as to market price or suitability for a particular investor.

Issue credit ratings are based on current information furnished by the obligors or obtained by Standard & Poor’s from other sources it considers reliable. Standard & Poor’s does not perform an audit in connection with any credit rating and may, on occasion, rely on unaudited financial information. Credit ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.

Also, the following is their own definition of what a AAA rating means:

AAA

An obligation rated ‘AAA’ has the highest rating assigned by Standard & Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.

Ok, lets see here now. MBIA’s CEO says they are having trouble calculating assets, have recorded record losses, can not even afford to keep its dividend payment, and needs capital infusions to keep the company going. Does this sound to you like a AAA rated company?

According to Standard and Poors ratings definitions, and the financial condition of the companies a more fair assessment of the bond insurers would be a rating of BB:

BB

An obligation rated ‘BB’ is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

After the news was announced this afternoon that Standard & Poors was maintaining their AAA rating, for now, the markets rallied. The rally was NOT on substantial strength as we saw it. There was much apprehension as the market was moving upwards in the last hour of trading. We have numerous economic bits of data to still contend with this week and these will be significant market movers.

This morning the existing home sales data was released. And it continued to show worsening conditions. The media has said that because the decline was not as bad as some had thought they say a ‘bottom’ may be forming. Every time there is the slightest bump in data the talking heads will jump all over it and claim the bottom is near. I want to show you the chart of the existing home sales data. The chart below is the current chart and includes the data released this morning. Notice the arrows I placed on the chart. Each arrow represents a time when the media and analysts said that "the bottom" was near. And each time they were wrong. I guess they figure if they keep saying it they will be right one of these days. We operate different here, we put all of the pieces together and bring to you our assessment of trends, other indicators, and technical analysis. We never make a claim on a "snap shot" like talking heads will do. So the next time someone says the housing market (or anything else for that matter) is now near a bottom… just remember that they said that many times before. You can confirm this by going back to previous Associated Press, or other news agencies, and view their  news releases and see what they said back then.

(data source: Moody’s Economy.com)

The Dow Jones Industrial Average closed right at resistance today. This is right where we entered our short position on the Dow on February 13th. We are still holding this trade (Ultrashort ETF symbol DXD). Right now we are at break even on this trade. If the markets advance tomorrow we will close the trade and then we will be jumping right back on and shorting the Dow at the next resistance level (~12,775). We are still in a bear market.

Year to date performance of the major indices: