Letter to the Bear Council

I am preparing to go all out long, in a time frame that may not be very far from here. Trust me it does not mean very well for those happened to be net long at this time.

But before I do that, I want to ask a question to otherwise very rational, intelligent people, that have in the past 3 months invested in the belief that 1) given the cost of PRIVATE capital is higher than the range of possible returns, and 2) the cost of SPOT government borrowing is lower than the range of PAST returns, decided to invest in the direction indicated by 2). That meant going long.

There were arguments in WSJ showing S&P chief economist, Mark Zandi, saying that for every $1 stimulus, $1.64 return will be earned. Bill Miller of Legg Mason, earlier today gave a speech recoginizing Mark's remarks and the currently low cost of SPOT govt borrowing as it relates to Keynesian spending. Obama presentation showing a lack of internet penetration among minorities argues also for expansion of infrastructure.

What I observed today:

1. Nationalization of C, and perhaps BAC as early as Monday. That means everybody else will also be nationalized, as nobody can compete with the US govt and if they tried to do so, will go BK.
2. Realization that a huge ETF, USO, may be a ponzi scheme that relies on new investors.
3. Announcement by the government to settling the debt of a gambler who bet on unregulated CDS market (same as dog racing), AIG. The last interest payment (quarterly) on this was $37B.
4. A possible announcement of some kind from UK/Europe this weekend.
5. The most massive liquidation of hedge fund that will ever happen.
6. A possible 50% shortfall on income taxes in 2009.
7. USSR did not earn 64% return on its investment between 1950-1989 in any given year.
8. Spot yield curve is not a predictor of future interest rate.

Item #1-5 supports the idea of going long in the near future for a massive dead cat bounce. #6-8 is the invisible hands that kept writing on the walls of my cube.

Therefore, I pose the question as to how the most rational investors I have known decided to believe #1-5 was irrelevant THREE months ago and were on the same side of Bill Miller and Mark Zandi today.

This is not meant to be a satire, but more of an honest response so we all may learn how we think over time and the events that correspond to that thinking.

In closing, I would like to quote Warren Buffett, that he "never bought a stock". Within the context of today's realities, would you say that is a good thing?


Thanks and have a good weekend.

-MTGSPY

PS: 9. I have used internet for 13 years now and I am not a Google Brother.

The same man said these words:

2007:
"My view is that the evidence is overwhelming that most people are too risk averse. And that therefore they should be taking a lot more risk than they feel like is right. "

2009:
" The problem with credit is that it is far too expensive to make
it economic to use it to grow. With investment grade debt
having yields greater than the growth rate of nominal GDP,
the cost of new debt in the system exceeds the ability to earn
enough to pay for it. Hence, the deleveraging going on. The
government on the other hand, can borrow at half the growth
rate of nominal GDP, and hence, it is the government that
will, and should, borrow aggressively to invest in the country’s
future.
All of this was explained a generation ago by Keynes when
we last had a crisis like this, and anyone seeking to
understand it should either go to the source, or to the second
volume of Robert Skidelsky’s monumental three-volume
biography.
I remain optimistic that the new administration, which is
staffed with first rate financial talent, coupled with the Fed,"

The point:

The 2009 post is identical to the psychobabbles you have been hearing recently from everyone in the government and "analysts" on TVs.

Having not lived 1929 nor trust anyone including unknown financial bloggers, you began to have doubt, hope, uncertainty: could it really be the magic bullet? Print $1 and get $1.64 back?

There is only probabilities regarding the truth, the best a statistician can do is to look for OBSERVEABLE events that correlates very well with the answer you are seeking. Thus the photo and quote from 2007. :)

Remember this again in April, who said it and when.

In your mind of mind, don't you realize the only person knowing the size of your paycheck is the only one who could determine who could afford to pay what? That is in addition to technical issues, such as actually holding the loans for say, 30 years, and not beholden to investors for a quick flip profits. And that person is who? That's what I thought.

I was a grasshopper who asked if the cost of originating and portfolioing that loan was $108, how come the borrowers only pay us something worth $101-102? The answer is never that complicated, as one learned later in life.

HOLY SHITTTTT!!!!! Fuehrer HAS failed to save us now. Everyman for himself!!!!

O-Fuehrer only sent rumanian and hungarian rabbles with sharpened stick to rescue us from this pit of hell!!!!!!!!



The early part of this man's speech reveals the Fuehrer has been misled or at least completely unaware of the situation.

He does not know the difference between exchange traded futures contract with CDOs!!!!!!!!!

Aaaaiiiiieeeeee!!!!!!

I have no reason it was limited to just this Gibb, because the speech was prepared. O-tay didn't know.

We are completely doomed.

People screaming and running back from the front gave stories of incompetence by General Timmy and O-tay himself getting trapped into choosing to i)retract his servicer "bribe" or ii) get a market collapse to SPX 200-300 in the attempt to save us the other day.

I didn't believe it when I first heard it. I drank the kool-aid religiously. I only read propaganda to make my life more straightforward and easy to comprehend.

But now my blind faith to O-tay the savior has been proven to be my biggest and possible the last folly.

Obama Sir: While retreating, the best course of action is ...

Leaving behind a few understrength companies to set up ambushes and sacrificed themselves for the fatherland.

That means you nationalize the banks this VERY minute. This will leave nobody LEFT TO DEFAULT. You don't get any worse than it already is. Get $0 for the bank equity and jam the losses to the taxpayers, if that is needed (and I believe that will be somewhat huge).

Then the market stabilize, overall it will go up a bit but then it stops crashing and number crunchers can go out there and figure out the fair values of everything. Commodities will be up, basic industry will be up, homebuilders will be flat to down, banks will be zero, autos will be zero.

It's the only fool proof idea I got, and my fingers started numbing down from the cold down here sir.

Dear Commander-in-Chief Obama,

This will be my last telegraph from the "kessel", like the one that is around Stalingrad, but instead of a city, I am talking of an entire nation and it's FUTURE.

Please take a moment to light a cigar, pour some wine, or whatever it is that helps make the living room more comfortable, my message will be mostly calm and not tainted with euphoric calls for riots this time. I am sober today and I think I am not hearing voices in my head right now as I typed this.

As we fire our last few artillery rounds, it becomes clear that the only remaining road left out of this trap is to:

1. Run a stress test on EVERY bank. That stress test will yield an asset value for which the bank equity is zero. We shall refer to that as the "breakeven" price.

1b. If the bank is inadequately capitalized (for example - STT is at 1.19% capital ratio, may I remind you of Freddie Mac who was at 2% capital ratio when they became a Federal Institution :) then ...

2. Empower the treasury to start an auction of the mortgages and other investments at that breakeven price. Every $ above that price goes to the equity holder of the bank and at the end of that you have a healthy bank, owned by the original private institution.

3. If no buyer was found at the "breakeven" price, I implore you to sell it at the highest bid.

4. Then recapitalize the bank and have it run as a government institution. I am not sugar coating here - it means the taxpayers pony up the amount required to just settle the trade and move on. Pay your bills, sir. It's a good thing.

Either way, you have resolved the so-called depression and we are ready to move out of the siege.

I have plenty of money to deploy as a private investor, sir. And I know that you are VERY MUCH aware that there is a capital formation starting as of November last year, PRIVATE CAPITAL, that is ready to deploy for EXACTLY that purpose. Pardon me for being blunt there, it's not exactly a secret out here.

However I cannot invest in ANY non-bank sector at this point because I know I will lose them all as the siege moves to its final conclusion - the annihilation of everything else that the banks have taken hostage along with them.

The private capital you are aware of, will also go away and close the last gap we have for saving ourselves. Where will they go, sir? Trust me, nothing good.

There are many excellent investments out there Herr Obama, but we do not want our heads blown off by snipers that are really just INSOLVENT BANKS.

In closing, for failing to heed my last non-vodka laced letter, by April this year, you may have to salute back to your followers this way:


















Sincerely,

About-to-be POW, Your humble servant MTGSPY.

PS: Please keep Gitmo open. I have early arthritic tendencies and I hate chancing Siberia. Global warming has not exactly been very apparent out there since February (!!) of 1943.

http://en.wikipedia.org/wiki/Battle_of_Stalingrad


PSS: Did I see rescue????!!!! Are we going to really avoid the Gulag this time?

http://www.nytimes.com/2009/02/12/business/12stress.html?_r=1

Update, Valentine's day - 2:

It appears that the entire left flank has been, err, liquidated.

Banks are not worth $40, 30, or $20, or even $10, or $5. It's zero sir. I know it cuz I was there marking it up myself. This is NOT a secret. Please, I don't want to go to Siberia, please. Force the equity in the banks to pay for all the losses and nationalize them and the overall market will be just fine. Otherwise, off to the east we go.

Also, please stop chatting about loan mod over the phone. The static crackles from 1-800-hopele$$ usually lead the snipers to our foxholes.

Not looking good ........