Rebel Traders – Analysis Without The Hype

The markets continue to move lower, so ABK news must be issued!  Ambac (ABK) again:  CNBC, citing their infamous sources, says there is so much interest in this Ambac deal that it could be as much as $2 billion.  They say private equity may still participate and there is a backstop if investors walk away.  The backstop is the banks that don’t really want anything to do with this, if I remember correctly.  My main take on this added bit of news…..eh, whatever!

In 1984, Wendy’s (a fast food restaurant in the United States) came up with an advertisement that coined the phrase "Where’s the Beef?". The announcement today of the much awaited ‘deal’ to save the bond insurer Ambac (ABK) made everyone say "Where’s the Beef?"

At 12:01pm today trading was halted on Ambac with news pending. With this news, speculation that a bail out plan was finalized and the idea that the entire bond insurer mess would now be ending, the markets went higher in just seconds. It took almost 90 minutes before the market knew the details of the ‘bail out’ plan that had been worked on for many weeks. When the details were released it was a huge disappointment and the markets quickly sold down, losing 120 points on the Dow within 10 minutes.

So what was it that was so disappointing? In order to put this in the proper perspective, we have to rewind the clock a bit. First of all, the bond insurer crisis began many months ago. It accelerated around the beginning of this year as the ratings agencies were threatening to downgrade Ambac and MBIA which, if it happened, would create substantial additional losses throughout the financial sector. Both MBIA and Ambac were under pressure to find additional capital, maintaining enough liquidity to meet the requirements that the ratings agencies claimed was needed to have a AAA rating. Last month news was issued by CNBC reporter, Charlie Gasparino, that Ambac was working on a "plan" to rescue the company.  This involved government officials (NY Governer Elliot Spitzer and NY Insurance Superintendent Mr. Dinallo), sovereign wealth funds, and banks. Over the next 4 weeks or so we would receive updates from the media, mostly Charlie Gasparino of CNBC, that the rescue plan was being worked on…

2/18: Ambac Financial Group, Inc Ambac discussing plan to raise at least $2B in new capital; Plans to sell new shares at a discount to current investors as reported in the WSJ

2/22: Ambac Financial Group, Inc Making significant progress on recapitilization, announcement on possible bailout could come early next week as per CNBCs Charlie Gasparino

2/24: Ambac Financial Group, Inc WSJ says that Ambac inched closer over the weekend to an agreement with a group of bankers on its restructuring plan and effort to raise $3B

2/25: Ambac Financial Group, Inc Deal still likely today or tomorrow; negotiations with rating agencies are final hurdle as per CNBCs Charlie Gasparino.

2/25: (later in the day) Ambac Financial Group, Inc Any ABK deal would likely be early next week, not today or tomorrow – wire headline.

2/26: Ambac Financial Group, Inc – reports that private equity and unexposed banks will be participating in Ambac support plan as per CNBCs Charlie Gasparino.

2/27: Ambac Financial Group, Inc NY Insurance Superintendent Dinallo: We are in the 8th inning of a possible Ambac rescue – wires

2/27: Ambac Financial Group, Inc Cerberus among group of investors in bailout, declines to comment – CNBC’s Liesman

2/29: Ambac Financial Group, Inc Bailout has hit significant snag over last couple days over the amount of capital, talks ongoing as per CNBCs Charlie Gasparino

3/3: Ambac Financial Group, Inc CNBC’s Gasparino incremental update: Negotiations with a bank consortium are going slowly, no deal announcement expected tomorrow

3/3: Ambac Financial Group, Inc – Financial Times reports that Ambac has decided against splitting

- The company decided against splitting in two as it completes a $2-3B recapitalization

3/4: Ambac Financial Group, Inc – says no bailout deal quite yet as per CNBCs Charlie Gasparino

- Reiterates that progress is still being made

3/4: Ambac Financial Group, Inc – Says those working on the deal "may work through the night" to close a deal for some kind of announcement tomorrow as per CNBCs Charlie Gasparino

3/5: Ambac Financial Group, Inc CNBC’s Gasparino reiterates that banks seeking to have rescue package to be finalized today

And then came the "deal" that had been worked on for so long…

NEW YORK (Reuters) – Bond insurer Ambac Financial Group Inc (NYSE:ABK) said on Wednesday it plans to sell at least $1.5 billion of stock and convertible securities, to help preserve the top-tier credit ratings critical for its main insurance business.

That’s it! No consortium of banks, no sovereign wealth funds, nothing. Weeks of back room negotiations ended up being nothing more than a dilution of the company’s stock by selling $1.0 Billion of stock and another $500 million through the sale of equity units that would convert to stock in May 2011.

So what happened to all that talk of big bail outs, of banks injecting substantial amounts of money, and to the original plan to raise $3 Billion dollars?

Reuters reported the following comment tonight:

"It looks like (banks) had a close look at what was going on at Ambac, and they backed away. Things may be bad there," said Peter Kovalski, portfolio manager at Alpine Woods Capital Investors, which owns Ambac shares.

Shortly after the news was released by Ambac, Moody’s and Standard & Poor’s issued statements that Ambac would likely maintain their AAA rating.  But Fitch ratings said no way, leaving Ambac at AA.

So this entire soap opera had many in the media, especially Charlie Gasparino at CNBC, being played along the entire time. And every time there was another new update about the rescue plan (always from someone known only as "someone familiar with the situation"), it created a lift to the markets and to Ambac stock. Something about this entire situation does not sit right with me, there is something that does not smell pretty at Ambac!

Ambac’s stock sold off rapidly after this news and ended the day down 18.8%, and down another 3.4% in after hours trading. This bond insurer situation has to be one of the largest debacles in recent history. Where will this all end up? It depends on how many claims Ambac has to pay over time as the credit implosion continues to play out. We could be right back where we started in weeks or months down the road, if Ambac needs even more capital to maintain enough liquidity. The ratings agencies are still, in my view, disgustingly guilty of not being impartial.

Stay tuned for the next episode of the soap opera  "As the Bond Insurers Fail"

Then there is this tonight:

According to Bloomberg, almost 70% of the municipal auctions in the $330 billion auction-rate market failed last week. (Auction-rate securities represent about 13% of the total market for municipal debt.) Failed auctions create a vicious cycle: As municipalities are hit with penalty rates on their debt, it erodes their capital position, increasing the risk of a bond default. This further depresses demand for municipal securities, causing even more auctions to fail.

The market remains VERY jittery and the biggest economic data is still to come. The monthly unemployment report will be issued at 8:30am on Friday. We got a small taste of what it may show as the ADP report today showed a negative number for the first time in 4 years. ADP has usually been all over the map with regard to their accuracy, but the number was substantially lower than even the lowest of estimates. The market is still pricing in a significant rate cut from the Federal Reserve. We remain short the Dow Jones Industrials.

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:

Pre Market futures are up, but from what I am seeing thus far is that the advance in the futures is on weak volume. Not seeing a bullish rally here based on what I see so far and I would not be surprised to see the rally, if this is what it turns into to be faded quickly.

We are still short on the DOW by being in the Ultrashort symbol: DXD. See our post from February 13th for details of our trade. We are sticking with this plan and are using our entry price as our stop loss should any rally attempt try to take out that resistance level. However, this does not change our longer term view and we will quickly re-enter this short position of the DOW by taking a stand at the next resistance level.

There is not much of any substance this morning to justify the advance in the pre market futures. Wal-Mart had reported earnings this morning and were basically in-line with what they said they would have last quarter, no big surprise. And more importantly nothing great with respect to forward guidance. Wal-Mart earnings shown below…

REPORTS Q4 $1.04 (EX CHARGES) V $1.02E, R $106.3B V $106.8BE; GUIDES AT THE LOW END OF ESTIMATES
- Guides Q1 EPS $0.70-0.74 v $0.74e.
- Guides FY09 EPS $3.30-3.43 v $3.43e.
- Reports Q4 SSS ex-fuel +1.6%
- EPS items (+0.02 net add) included charges of $0.03 for approximately $70M in after-tax expenses for dropped U.S. real estate projects and an after-tax restructuring charge of $32M in the Company’s Japan operations, and a $0.01 benefit from the recognition of approximately $38M in after-tax gains from the sale of certain real estate properties.
- Customers more cautious in January spending

Anyone who views these numbers as being bullish may be in for a surprise down the road. Some say that if you build a better mouse trap customers will come, perhaps retails establishments are finding a way to create a better "bull trap". We shall see.

Bond insurers are yet again the topic De Jour. The CEO of MBIA has quit his position over the weekend and replaced with a former CEO, NY Insurance Commissioner Eric Dinallo is making statements that he hopes a resolution will be implemented soon. And on the rumor mill MBIA is believed to be working on a plan to divide the company into two parts, the good stuff, and the poison. Will this satisfy the ratings agencies? Can’t say… But if I were working at Moody’s or S&P it would not impress me.

So at this moment we are anticipating a higher open out of the gate. Lisa and I will be watching volume levels on the upside and downside throughout the day for clues into the strength, or lack thereof in today’s actions.

Oil is now approaching near $100 US dollars yet again and Gold is on another bullish rally upwards. A bit if a strange combination but with oil rising again this will only add to fuel costs in the near term and we will shortly be seeing higher gas prices yet again. Oil breaking $100 a barrel will send bulls into a slight shock as they reevaluate their positions given the circumstances of increasing commodity prices. Inflation is alive and well in the United States.