Thursday, November 29, 2007

Anderson Cooper wins Republican debate

Written impressions of last night's Republican debate seem impossible to organize or turn into something coherent, so don't expect that here. That said, here are some rambling reflections:
---First, how the heck did we get to the point in U.S. presidential politics where some news entertainer and his network get to dominate the format, pace and content of a supposedly serious debate. This is not a new thought, but last night's opening of thirty minutes just on the immigration issue was the last straw here. You know, let's spend thirty minutes on an issue that brings out the worst, shows how these candidates can compete to pander to resentment, and maybe even get a fight going. These debates seem to be scripted for the glory of the network entertainer. After immigration, guns(let's choose a You Tube clip of someone talking about big guns and getting a moose killer thrown to him, or whatever it was), abortion, gays and the Bible, there of course was some time for foreign policy, the domestic economy, and government resource allocation but that was the boring stuff, it goes at the back after we've got the viewers for the first hour and enough minutes into the second so they won't understand CSI if they switch channels.
---Romney---I don't know the name of the female character on Saturday Night Live in recent months who must always one up anything that anyone else says in a way that leads to the absurd, but Romney reminds me of her(except he doesn't play with his hair). When he's not more perfect than anyone else, he can't say what he thinks because it's "just not appropriate" for him to have an opinion on torture, on gays in the military, on whatever, but we do now know that he believes what the Bible says 100%. Even Huckabee answered that more intelligently. In Romney's short campaign clip, there was a final quick shot just of him rolling up his sleeve, not even his face, just his arm with the sleeve going up. I know what they meant to get across, but for a moment I just had the thought that we were about to see him tie off and get another starch fix. Isn't this a sad state of affairs when a man of his accomplishments has reduced himself to a caricature of some Dudley Do Right ideologue because that's how he thinks he can get elected president. He's served his religion, he's seemingly a fine family man, an accomplished businessman, and a hard worker who knows how to get things done, and what we get is a promise to double the size of Guantanamo?
---McCain---The man comes across as someone with conviction and compassion. His views on Iraq are crystal clear, agree with him or not, and calls for Congressional accountability are laudable, if perhaps implausible. On torture and immigration, he came across as the most rational and humane person on the stage.
---Huckabee---When he speaks of his "Christian" values and says "We believe in some things, we live or die by some things" he expresses absolute certainty. Now riding a wave of media publicity with every publication from Rolling Stone to The Economist, The New Yorker to People rolling out more stories, he is really scary. Charming in a down home way, a quick unscripted wit, self deprecating at times, compassionate at others, he's good copy. Unfortunately he knows very little. His tax proposal is beyond ludicrous, his knowledge of policy seems to be almost non-existent(which made Anderson Cooper's debate perfect for him), and his reign as governor in Arkansas has been reported by some as paralleling the behavior an old style southern religious hustler, or is one supposed to say preacher. I say scary because this guy could put himself into the position of getting the V.P. nod, and that's just one step away for the Arkansas ayatollah.
---Guiliani---Came across as feisty as ever and, while his ego is at times not attractive, he somehow survived attacks on his gun control policies, his pragmatic handling of immigration issues, his approach to abortion and everything else he did to succeed in multi-cultural cosmopolitan New York. Of course he's waffling under attack, but he does not apologize or have any Romney style conversions. His belief in himself is in some ways alarming and he has so many skeletons in his closet(but the door is open) that his squeamish opponents hardly know where to start. Where do you find a candidate of either party who gets kicked out of the house by his second wife and goes to live in an apartment with two male friends who are partners. Maybe it's this audacity, perhaps authenticated by 9/11, that has propelled him into an unlikely lead in national GOP polls but may not be so potent in the early states.
---Thompson---Leaves little impression. He is a player but he's the default candidate. That may be a strong position.

Did this begin with a warning that it might be an incoherent ramble. That's been delivered.

The Daily Yonder publishes "Walking downtown Danville"

The Daily Yonder, a web based journal covering the issues of rural America, has published last week's post on downtown Danville, with photos and an enhanced format. Take a look at

Wednesday, November 28, 2007

We are not alone

The regulatory statements by institutional investors for third quarter '07 have been filed and they show that even many investors with the best track records did not foresee the extent of the market declines in stocks impacted by the subprime mortgage issues and all of the related knock on effects. Here are a few examples:
---Countrywide Financial(CFC) had a 52 week high of $43. During the third quarter it traded within a range of $36 to $20. At that lower level it could look like a bargain and here are three of the firms that added to their positions: Capital Research, the powerful manager of the American Funds, bought 47 million shares in the quarter; Brandes Investments, the successful value investor, purchased 46mm shares; and UBS, the giant Swiss global asset manager added 21mm shares. Today CFC closed at $8.72. For Capital and Brandes that's a loss of at least $500mm in the last several months on their third quarter investment. Not small potatoes.
---Indymac Bank(IMB) had a 52 week high of $46. The third quarter range was $29 to $24. At those seemingly distressed prices, here a few buyers: Second Curve Capital, a hedge fund specializing in financials and run by well known securities analyst Tom Brown, tripled its position by adding 2mm shares; Legg Mason, the huge Baltimore based home of Bill Miller, added 2.8mm shares; and Maverick Capital, a trailblazing New York hedge fund run by a Tiger cub, purchased 3mm shares. IMB closed today at $7.65. These top investors have already lost around 70% of their third quarter investment.
---WaMu(WM) had a 52 week high of $46. Range in 3Q was $43 to $36, holding up rather well. At that level these are a few of the buyers: Dreman Value Management, 10mm shares; Alliance Bernstein, 6mm shares; and poor Brandes again, 12mm shares. WM closed today at $18.31. Do the math.
---Centex(CTX) is a real estate developer(the above are of course financial institutions with significant mortgage lending exposure) that has both a relatively large commercial real estate portfolio not directly related to housing and a residential portfolio. It had a 52 week high of $71. Third quarter range was $40 to $29. Way below its high for the year these firms added: Fidelity Investments, 9mm shares; Lazard Asset Management, 4mm shares; and Oppenheimer Capital, 3mm shares. CTX's closing price today was $19.44. Ugh.

Anyone who looked at the falling prices of many firms directly related to or dependent on residential real estate and decided to be "opportunistic" in the third quarter has some incredibly good company. Somehow that's not reassuring. Then again, with these big guys already in and presumably with some good reason, is now the time to join them. Throw them bones.

Tuesday, November 20, 2007

Pay for performance?

Today we received the Goldman Sachs Funds annual reports. Transparency is wonderful thing, if anyone pays attention.

Goldman has seven international equity mutual funds. Since the inception of each, none has outperformed their relevant index. The expense ratio on these funds ranges from 1.5% to 1.9%. Approximately $1.5 billion is in these aggregated funds. Goldman has four U.S. equity value funds. Since inception, none has outperformed their relevant index. The expense ratio on these funds ranges from 1.2% to 1.4%. Approximately $8 billion is in these aggregated funds. Goldman has five U.S. equity growth funds. Three have outperformed their relevant index and two have matched their index. The expense ratio ranges from 1.4% to 1.5%. Approximately $2.5 billion is in these funds.

The cumulative result is that with $12 billion under management in mutual funds, Goldman underperforms indexes with approximately $10 billion of that money. That is with funds that have just about the highest expense ratios that can be found in the mutual fund universe, and it is compared to indexes, where funds that match have expense ratios that range from 0.1% to 0.5%. Why would anyone buy these Goldman funds?

Can brokers just sell the magic of the Goldman Sachs name to their retail clients. Did I omit the fact that in addition to the stupendous expense ratios, these are load funds to retail investors, with a maximum up front load of 5.5% with some broker discretion reduce modestly. So it's obvious why someone would sell these funds, but why would someone buy?

Part of the answer to this mystery is likely that in the context of the overall mutual fund business, not many people do. The majority of the assets in the funds must be "legacy", or money invested around 15 years ago when the major funds were initiated, loads were waived, and expense ratios of this level for a premier brand name weren't completely strange. With accumulated capital gains, these investors are for the moment just letting their funds ride. The new activity is with the brokers, and the overall business is a "cash cow", being milked for good returns but not attracting significant investment or marketing. Goldman's primary asset management initiative today is alternative investments, aka hedge funds.

Monday, November 19, 2007

Walking downtown Danville

"Revitalization" is the word most often associated with downtown Danville, VA on, the local newspaper. From afar, that sounds hopeful, and talk of outside investors picking up structurally impressive buildings in the warehouse district as well as a few small businesses around town doesn't sound bad either.

Driving through the four blocks of downtown Main Street, ancillary streets on either side, and the warehouse district street, the downtown can look like an undiscovered investment opportunity. Wide well laid out streets, good sidewalks and everything tidy and orderly. There are gems of buildings interspersed with the mundane but solid, and only one clear Katrina-like 60's style hotel eyesore that a positive eye would view as something soon to be dealt with. Revitalization is just around the corner?

Walking through the downtown and taking it in, step by step, gives a more tenuous impression, especially perhaps to the eyes of someone who came of age there in the 50's, 60's and early 70's when downtown was the center of activity, commercial and to some extent social. This past Saturday afternoon, at 1:30pm, I walked the length of Main Street to downtown. Once there, I strolled the four main blocks without seeing another person, not one, on my side of the street, coming toward me or behind me. Some cars went by, a few pedestrians were walking down side streets, and at the bottom of the hill on the other side there was some activity. Otherwise it was pleasantly desolate in an odd sort of way.

The main reason for the downtown's existence today seems to be courthouse and bank support. There are at least three Danville sized bank office buildings, there is the courthouse and jail, and many law offices scattered around. So a weekend would not necessarily be busy, and it was not. In the overall downtown area, a conservative estimate by this walker is that at least 50% of the commercial space is vacant. Of the businesses that existed in the downtown's heyday, only three were found---an upscale women's clothing and shoe store that seems in fine shape, a mid-range men's clothing store that also looks active, and the run-down army and navy store. Apart from that there are at least six barber shops, three hair salons, the largest wig shop that I have ever seen and a good sized competitor across the street. Courts, lawyers, banks and hair, downtown Danville today.

There are two small and current looking coffee shops that weren't open on that Saturday, and one exceptional new sandwich and bagel shop opened by some metro New Yorkers in the last year. That was the activity at the bottom of the hill on the other, and sunny, side of the street.

The much discussed historic warehouse district does have one new over age 55 apartment building, a newly built loft style condo development and another one just under construction in the handsome old structures that are being renovated. There is, however, no one on the street and no retail whatsoever in the immediate area of the new housing.

That's the picture. The infrastructure for a downtown is in place, the buildings are available, it's clean looking, but people are not there. Everyone seems to be in their cars just across the river at the mall, not too busy most of the time but with three department stores and fifteen or so chain specialty stores, and at Walmart, K-Mart, Value City, Lowes and multiple other parking lotted businesses and chain fast food and dining, even a Starbucks. A walking impression of this area is impossible. Coming soon to this riverside area is a Target, Dick's Sporting Goods, Home Depot and lots of others in two new shopping complexes. For an economically challenged area, the grandiosity of this new investment seems amazing. The economic rationale must be that Danville, the largest town in the immediate area of several rural counties, will become the regional shopping center. It's central location, city services, and a population willing to take minimum wage jobs must be the rationale. It is estimated that the new stores will add around 900 new jobs of this type in the next year.

This leaves our subject, downtown Danville, even more challenged. "Revitalization" as a mainstream shopping area seems unlikely. A restaurant, boutique, crafts and antiques center might seem just the ticket in an area with more wealth, but feels like a pipe dream here at the moment. Can enough retirees, educated urban refugees, millennium gen non-conformists, dedicated and creative entrepreneurs like the sandwich and bagel shop folks, and even constructive transients be attracted to the downtown area and gel into something interesting? Is the current walking picture of downtown Danville signaling the perfect time to invest and create, or an inevitable demise despite good efforts and intentions?

The question is perhaps broader. Can Danville as a whole rebuild its economic life and energize its educational and social life after seeing its textile and tobacco town identity definitively become part of the historic past? Is there a unique next chapter? If not, does this mean that the city over time becomes just another distribution center of the national consumer culture, helping to deliver what the focus groups say is good to every corner of our country. Will people finally speak "proper" English and have nothing to say.

Don't count on that.

Sunday, November 18, 2007

Change coming in world equity market shares

Looking at the total of all equity market capitalization globally as of 12/31/06, the following is the percentage value by region:
United States---48%
Asia ex Japan---6%
This is from a source called "FactSet" and is included in Janus Capital's Fall 2007 update on its mutual funds.

It is likely that with the decline in the dollar this year and the continued ramp up of China and India that this has changed by a percentage point of two in some regional categories. That aside, this is a startlingly obvious picture of something that will continue to change over time. Asia ex Japan at 6% is hard to believe at first, but it reflects both the opportunity there and the significant amount of business activity that is either in government hands or in private family hands in that region. With more developed capital markets that will change. Japan at 10% doesn't seem out of line, but it is demonstrative of how this division of wealth can change as in 1988 Japan was around 50% of global equity market capitalization. Europe at 31% must represent some meaningful growth in the last decade as capital markets in Germany, France, Italy, and Spain have shaken off the dominance of the debt side of the business.

This is just interesting, and presented for only that reason.

Friday, November 16, 2007

Observations triggered by last night's Dem debate

Watching the presidential debates is always aggravating. A few thoughts triggered by last night's debate follow:

---Obama referenced with indignant authority the "raiding of the Social Security Trust Fund by George Bush", which will stop under his administration. Wait a second. The Social Security Trust Fund today is just a big batch of IOU's from the Federal government. There is no segregated account of wealth. The "raiding" started under President Reagan and has continued unabated under every succeeding President. Yes, during the vaunted budget surplus created by the technology hysteria of the late '90 it continued under Democratic President Clinton, which could lead one to ask whether in reality there really ever was a surplus.

---As to that praised surplus that is used by most of the Dem candidates to demonstrate fiscal responsibility by the Democrats, it was created as mentioned above by a stock market and investment land rush unlike anything since the 1920's. The tax receipts from that were unexpected and huge. Despite that windfall, a result of a seismic economic event beyond any one President's initiation or control, the Social Security taxes were still used for general current government expenses. Additionally, President Clinton turned down a proposal to address the AMT problem in 1999 when the fix would have been minor cost relative to today, and any simple math could show where the problem would lead. Finally, during the windfall period that led to the supposed budget surplus there was no signature legislation of investment in the future, in infrastructure, education or healthcare.

---The Democrats have an opportunity to win the Presidency and address important issues in this country. Whether people happen to be a big Democratic supporters or simply advocates of "throwing the rascals out" every so often, the electorate is currently their's to lose. If they choose to listen to the old style Democratic consulting machine that ran the Gore and Kerry campaigns, and the second term Clinton White House, they may eventually just succeed in blowing it. Here's a thought. Respect the American people. Stop being so patronizing. Don't rewrite history. Don't tell us that you'll put "Social Security in a lockbox" eight thousand times(just an example) as if we're only capable of understanding some stupid sound bite, or some old style Democratic cliche. But here's perhaps a cliched comment from Eyes Not Sold---there's too much at stake to keep playing the old game.

Tuesday, November 13, 2007

Mortgage mail cranks up?

Today's mail brought three solicitations for mortgage loans. Despite everything some mortgage players seem to be stepping up to the plate again. In fact today they barely lost, 4-3, to credit card. The credit card team now is playing with focus mostly on its usual rewards game with the more aggressive balance transfer tact not being pushed quite as much as before it seems. The mortgage team, despite its loss today, is continuing to play with some flair, demonstrating still that they'll go for the attention getting plays, win or lose. Those plays today were:
---Bank of America, the bank of opportunity, detailing their "GREAT RATE Refi Event". "You're pre-qualified" it says but this limited time offer ends on 11/30/2007. "Pre-qualified", thanks. The pitch stresses the trustworthiness of BofA , superior service, and its strength and stability. The sane side of this is that they promise reduced rates, but don't specify the rates and do not indicate amounts. This is, by any measure these days, a rational advertisement and it's somewhat nice to see some liquidity still being pushed.
---Play number 2 is a more entertaining. It's from Household Finance, "Member HSBC Group". It comes with a fake check, fake mortgage recording document, and offers to refinance $350,000 plus an additional $20,000 extra to pay off credit card debt. It's a fixed rate of 6.13%, can be funded in 10 days, and the proof of income required is "NONE". There's a P.S. that says "This program covers a wide range of credit scores and special situations, such as late payments, bankruptcy, over extended credit and employment issues, just to name a few."(What else is there---can someone live in Latvia, or be convicted of fraud, or be 12) Bring-em on. The last page of more dense and fine type does inform folks that the check is not real and that the loan quoted in all of the fake documents is only available to people with "excellent credit histories". And those are the people that would take this seriously and already cut out the check and call Mama about it? This is bizarre, and it comes out of something owned by those upstanding Scots. Odd.
---Play number 3 comes from Altis Home Funding Corp., "The Gentle Giant Spanning the Globe"(not making this up). It proposes an interest only $300,000 loan at 6%, plus an additional $35,000 to pay off car loans, credit cards, "or whatever". Bankrupcy, late payments, unemployed, "many of these situations are no longer an obstacle in today's lending environment". The firm is located in Orangeburg, NY, where apparently there is not cable service or newspaper delivery. Limited time offer so must "call within 5 days to secure rate".This looks like a bait and switch con, still going on. Come to think of it, the Household Finance offer is heading in the same direction.

Monday, November 12, 2007

It was "Just a guess."

Yesterday's Eyes Not Sold post, "Hypersensitive market week ahead", has a title that is unquestionably correct and a theme, "the markets are extremely unsettled", that was borne out by today's market action. The suggested scenario for the trend of today's trading, however, was unfortunately the opposite of what actually happened. The market was not exciting but modestly positive in the morning and sold off in the afternoon, dramatically so in the last hour of the market day. As the disclaimer says, comments here "may not be correct".

Sunday, November 11, 2007

Hypersensitive market week ahead

A Sunday perspective suggests that markets will remain hypersensitive in the coming week. Asia needs to follow through on Friday's terrible market close in the U.S., as does Europe to a lesser extent. The dollar's decline continues. One startling example. As this is being typed the dollar is down 10% against the yen over the last month, which feels like a stealth move with so much of the focus on the Euro. 10% is a very big move. The markets are extremely unsettled.

Not much in the newspapers and other financial news over the weekend will do much to soothe nerves. It seemed impossible to find any column or commentary that said don't worry be happy. There was a lot of I told you so commentary to fill the column inches and air waves. Where do we go this week?

More volatility is the answer. Mid week brings economic data that could shake the market in either direction, although the bias at the moment will be to punish disappointments more than reward any status quo report, or an unlikely pleasant surprise. Tomorrow, who knows, it will be a trader's market. One scenario would be a huge sell-off through the morning as everyone late to the scare and beaten up by the lack of positives over the weekend will sell and that will be followed by a radical afternoon rally driven by traders making a good buck for the day on the backs of the morning players. Just a guess.

Tuesday, November 06, 2007

A Discredit to Credit

The problems with credit in the U.S. may be pervasive. In the securities markets they are broader than had been anticipated just a few months ago and beyond that the questions are being asked. These credit problems are creating imbalances that lead to a weaker dollar today, tomorrow will lead to higher interest rates beyond the shortest term, and after that will lead to inflation. There is nothing intrinsically wrong with credit, or borrowing and lending money, if it's productively invested. That is, finance theory proven I think, unequivocally a good thing---but that's where the problem rests today.

To that point the following is a quote from the octogenarian portfolio manager, Marvin Whitman, of the Third Avenue Value Fund to its shareholders:
"Of itself, increasing indebtedness is not a huge problem, provided the use of funds created by the borrowing is used productively, i.e., to create wealth. Insofar as the use of proceeds do not result in wealth creation, or it creates only modest increase in wealth, i.e., there exist a negative multiplier, or a modest multiplier, the borrowing entity, sooner or later, has to face diminished credit worthiness."
"The U.S. is incurring massive debts. By and large, the use of proceeds from incurring this debt seems to be only modestly productive or even counter productive. These uses of proceeds seem to have been non-positive, or even negative, multipliers. Non productive uses of proceeds include the following:
...By the U.S. government: massive expenditures in Iraq.
...By Consumers: massive expenditures for consumer goods that depreciate rapidly
...By Corporate America: leveraged buy outs where most of the proceeds from debt incurred are used to make cash payments to stockholders, rather than to use the cash to build or acquire productive assets."

Speaking to each of Mr. Whitman's comments:
----The U.S. government borrows, and state govts as well, but they have not made the infrastructure investments that should be made. The comparison is striking. That's not a comparison with the obvious wealth and optimism being displayed in Dubai, Shanghai, or in a few other unique situations, that's a comparison with most of the G-7 world. Look at parts of continental Europe, cities across Germany and France, Scandanavia, even parts of Eastern Europe, and public works projects are apparent in urban life and activity continues. To those Americans accustomed to the status quo, apart from new shopping malls, it is in fact startling to see. Not much is happening to suggest that this government should be a net borrower. Then there's the health systems, educational systems, penal systems, environmental foresight for energy and water resouces, the investments have been maintenance style at best in most cases. Like any small business knows, no investment leads to no payback or worse.
---As to consumer, a large portion of the subprime loans now at issue were bought by or sold to consumers in decent financial shape to finance lifesytle improvement, or more likely staying at a lifestyle that was already not sustainable. This is not a good state of affairs. This comment is not aimed to solely the market segment in question. Many Americans of all stripes represent a spending mindset which propels our economy, but is not always based sound long term thinking.
---The LBO business has reached a crescendo in its rapaciousness in recent years with its payout schemes. What goes on now might even repulse Milken. The former rational purpose for LBO's, enhanced productivity and free cash flow, has been perverted into a notion of gamesmanship involving legal, tax and negotiating skills, and the accumulation of wealth measured competitively as in some major league sports standings.

It's true.

Monday, November 05, 2007

Financials falling indiscrimately

Financial stocks will decline again this morning after Citi's announcement that it will take up to $11 billion more in write-offs related to CDO's and other mortgage backed securities. There's the saying that "you don't know who's not wearing a swimsuit until the tide goes out" and that's how the market is approaching the group for now. At the moment it appears that Citi and Merrill, and perhaps UBS, were not distributing large portions of their originated CDO assets and if that's the case the recent departures of the CEO's are for significant management lapses as opposed to a Board seeking a "fall guy". In the last few market sessions, however, companies like Goldman Sachs, Morgan Stanley, and JP Morgan who had held up rather well in the turmoil have seen their stocks get trashed as they likely will again today. The market mentalities of these companies CEOs as well as their recent histories in capital markets risk management suggest that they are not guilty of the same mistake, but we don't know that for sure and the market hates uncertainty. When the tide goes out, these stocks might look like appropriately attired "screaming buys".

Sunday, November 04, 2007

Angst at Wamu

Wamu, formerly known as Washington Mutual, is under some serious pressure these days. Its stock has not traded at its current level since 1997, it's down almost 50% since January, and the dividend yield is now around 8.5%. As the nation's largest savings and loan and 7th largest banking concern overall, Wamu's treatment at the hands of the market is a big deal.

Wamu is an interesting company that has always had an ambitious agenda that bordered on audacious. Stepping beyond their home west coast markets into a national franchise with a unique culture was not an easy goal, but the Seattle based company has seemed to think it can do for consumer banking what their neighbor Starbucks has done for coffee. With the competition already entrenched and their product, money, being a commodity that's hard to dress up with whipped cream and chocolate, the challenge was big. Against the odds, in the minds of some, the company has persevered and often performed. That may be changing.

The investment thesis for Wamu has been based on their acceptable performance as a value stock, their generous dividend, and the expectation of a take-out if their strategy ever faltered. In other words, the investor gets paid well to wait, if the company is successful there's some capital appreciation as well, and if not the foundation they have in place will be as valuable if not more valuable to another player such that a premium might be paid for the company at some point if their growth ambitions prove unattainable.

Now that investment thesis is frayed. With the mortgage business under serious cyclical pressure and their retail franchise still half baked(at best) in many markets, the performance is expected to suffer, and it is unlikely that there are any players with the appetite for a takeover. Apparently subprime loans make up almost 9% of the company's total loan portfolio and their overall portfolio has concentrations in ARMs and home equity loans. In their broader consumer banking push they are in 15 states, and have a market share position in the top four in only four of those states. In the New York area that I observe, they have a 1.8% deposit share and rank 8th in the market yet they advertise heavily and even acquired rights to sponsor the 5000 seat Madison Square Garden Theater adjacent to the sports facility, now the Wamu Theater at Madison Square Garden. To be fair it should be noted the Wamu's New York strategy is primarily based in metro NY only and so the deposit share in their target area is likely better than noted above, but even if double what's noted they are facing a lot more investment to get to where they need to be.

The problem now revolves around the fact that financial institutions are heavily leveraged by definition. They depend on liquidity and ready access to borrowed funds. When the market turns on a financial company it can be fast and ugly. The fear of this can at times be self perpetuating and investors begin to play a game of chicken with each other to see who can stay in for the gains or who can get out to avoid the losses. It can go beyond a company's control. That's not to suggest that this is happening or can happen to a company as substantial as Wamu, but the fear is there in some quarters. So if the worst scenario even began to develop who could rescue them and at least save the initial investment thesis, and maybe get a great deal. That's the rub at the moment. Looking at some names:
---Citi---not in the game with everything that's going on in the firm it would seem, but once seemed like a decent match given their sub-scale U.S. branch network.
---BofA---deposit share already maxed out by regulation, and already committed pretty much as a take-out for Countrywide if that situation deteriorates.
---JPM---given the size of their mortgage business they don't need and likely don't want Wamu as a whole, although they would covet the West Coast retail branches.
---HSBC---several years ago they were the natural buyers, but with their bizarre purchase of Household Finance they are unlikely to want another taste of that kind of apple.
---Wachovia---bought Golden West at the peak, so they've got West Coast and mortgage already.
---Wells Fargo---already have better West Coast, same size mortgage, would not go east with Wamu's little footprint.

The usual suspects are not lined up. With the weakness of the dollar it's not impossible that an unexpected foreign buyer like a large Spanish bank could show up. The subprime mess, however, has created such bad news among investors globally that it's probably not the kind of thing a Board of Directors has the stomach for at the moment, especially one from another market.

The next few weeks will be telling. Wamu is well funded today, is making money, capital levels are ok and it should weather this storm. Sounds like a "buy", but the way the market is pricing the stock is worrisome.

Saturday, November 03, 2007

"Tree of Smoke"

I'm not sure how I stumbled upon this recently published novel. Denis Johnson is a well known writer in some circles but I had never read his work. It's quite a read. Twenty eight years after the release of "Apocalypse Now" this book seems to exist in a parallel universe. The pathos is more widespread, splinters through many lives and eventually resolves in anti-climax. Film and words take entirely different conduits into consciousness, but Kurtz, Willard, and multiple other players are all here in different forms, explored in the prose of Johnson.

This book requires faith. Johnson introduces characters left and right, and for the first hundred or so pages the "what have I missed feeling" had to be suppressed. Whether one page or twenty pages or fifty pages later all would become clear, or at least serve a purpose. As it evolves, getting a new character introduced on page 597 of a 614 page book is just fine. Lots of characters are lost on the way, no resolution is required, their destiny is apparent, their role played it seems. Maybe there will be spin-offs, you know Bill Jr. and James in L.A. or Minh does Mass, but that's tv trash talking.

The overall book develops from one that constantly seems on the cusp of being great, then gets to a point at which who cares if it's great or not because it's got mo, and finally to some passages that no longer seem at all forced and might be called brilliant. If the final page seems to wrap things up a little too neatly, with too much hope, I didn't care. I needed it. The book was over.

Friday, November 02, 2007

Sell-off on Citi downgrade?

Yesterday's significant sell-off in equity markets has been widely attributed to a CIBC analyst's downgrade of Citi and the suggestion that the C dividend is at risk. A factor, yes, but far from the catalyst that has been attributed to it. In fact, it's a securities analysts dream come true. Two weeks earlier on C's earnings writedowns, two other analysts also moved to a sell recommendation on the stock. The CIBC analyst was late, so what could she do to get attention to her call and cover her slow move. Hey, call for a dividend slash. That should do it. Then on the morning of the downgrade the following happens:
---A monthly government report shows that consumer spending has slowed more than expected
---Another such report shows that U.S. manufacturing grew at its slowest pace in 7 months
---Exxon reports earnings below expectations based on a "margin squeeze"(my God, says the market, this higher oil price is good for no one)

With the equity market being at toppy levels, this news would likely have led to a significant decline absent the CIBC analyst's report. With the financial sector already fragile the fortuitously timed report on Citi did unquestionably do some damage. You can bet, however, that there were high fives around the CIBC analyst shop when the economic reports and XOM's earnings hit the wire. Why not take credit. When asked after the close if she expected her report to have such impact the analyst is quoted as saying that she was the only one on Wall Street who had the "moxie" to make such a call. Oh brother.