Friday, February 27, 2009

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.


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


D said...

Rules for catching knives:

1) No leverage
2) Pat yourself on the back if you successfully catch it.

Timewise, we are getting there...I think. Pricewise, nope! Price pain is the only thing that will induce long risk aversion and make long risk attractive.

When I have random people telling me what the market can and cannot do I know we haven't reached critical pain. It's hard to describe in terms of price action because of the massive volatility we saw this fall, but we haven't seen capitulation yet.

It's not just about sentiment, but about true giving the-f-up! I want to see the market on its knees! If the market isn't brought to its knees the government's borrowing costs are going to ramp in the very near future and O-bomb Arbitrage Fund, LLC is finished before it ever completed the offering memorandum. Right now the government is only making promises, it hasn't funded them yet. Sit back, wait, and watch.

If they bring the market to its knees they can continue borrowing for a LIMITED time...months....maybe. Otherwise, make sure you've got that machete sharpened.

D said...

nemaste, shalom, etc...

D said...

PS - I owe you for figuring out the right way to post what you feel comes next in the market.

MTGSPY said...

Timewise, we are getting there...I think. Pricewise, nope!


That is the very definition of "pent-up anger". Seen mad max yet?

Stockfarmer said...

My wife is 1/2 Italian, some Sicilian. So that means she is part black. My internet access is spotty maybe we can get some free shit for my african american kids.

So when are the FHLBs going to start blowing up. They have got to be loaded down with some nasty stuff.

It looks like C, BAC and WFC dropped a nice one afterhours.

MTGSPY said...

Depends on which part of sicily. The western part was Carthaginian, and you can argue that is black. The southernmost part was greek before they were "adopted" by the romans. You can argue either one may not be entirely black.

Stockfarmer said...

Hmmm she has curly black hair. But that could come from the Greek side of the island too... My son tans well. I think he needs free internet.

Have you ever played Total War Rome on the PC? I love that game and the history of Rome.

MTGSPY said...

I stopped playing that game because I always ran out of citizens. :)

Stockfarmer said...

Haha. That is the only way to calm the conquered. My generals always had harsh traits...

qadi said...

Sicily's apogee was under the enlightened rulers of those inimitable Normans, the most talented rapists since the Mongols (Turks were just brutes who turned everything to shit.)

qadi said...

Mtg, I am annoyed: I had 50/50 bank puts for march and may/june. Why did I pay that premium for longer dated crap?

MTGSPY said...

fair guess: you supported obama and like to spread your wealth.

D said...

That is the very definition of "pent-up anger". Seen mad max yet?


I have had a problem with dumb people for a long time. I saw the first part of Mad Max around '99-00 and had to shut it off as it was unpalatable for me to watch. Just a bad movie. I watch Sea Biscuit for my great depression template.

They should do a Sea Biscuit sequel that includes ride-by shootings and throw-in stockfarmer's cavalry sword for a cool Last of the Mohicans type of scene. Rambo 1 is another relevant one to review.

qadi said...

Yea, I'm annoyed, since I added to my jpm mar puts this week, but got stt may's.

what a waste.

As for long ideas, can't you just short the 10-year, or do you think Plosser's announcement regarding moving stuff off Fed B/S was meant as a ruse? It indicates to me an effort to raise the FFR...

Writing calls on 10 yr for Jan 2010 doesn't seem a bad idea, imo.

qadi said...

Oh, and on TALF:

what's the leechfuck trade for the TALF? Any insights as to how TALF will work?

Would private capital buy something worth 20 for 80 if the government eats all the risk premium? Would the bank still be solvent if this occurred?

MTGSPY said...

dunno. I dont believe the white boyz in DC know either at this point.

Greenie said...

"Hmmm she has curly black hair. But that could come from the Greek side of the island too... My son tans well. I think he needs free internet."

If you can get their genomes sequenced (costs about 10K these days), I may be able to tell you whether they have legitimate claim on the free internet connection or not.

So you decide. Spend 10K for free internet? :) :)

Stockfarmer said...

Well it could be worth it. 10k to get a free public university education, free house, free car, free food and free internet.

Do you you think the 10k changes were because of gov auditors? Or just more corp bullshit?

qadi said...

Mugabe is moving ahead with his reforms:

Harare - Zimbabwean President Robert Mugabe has vowed to continue seizing land from white farmers after a spate of "farm invasions" over the past month.

Speaking at a rally to celebrate his 85th birthday, he also promised to push for majority Zimbabwean ownership of companies operating in the country.

Mugabe supporters raised $250,000 (£176,000) for a lavish birthday party in Chinhoyi, north-west of Harare.

Zimbabwe asked African states for $2bn (£1.4bn) in economic aid just days ago.

Morgan Tsvangirai, the new prime minister and former opposition leader, did not attend the celebrations despite earlier indications that he might.

Mr Mugabe's spokesman, George Charamba, said Mr Tsvangirai had opted out of the event after realising it had been organised by the president's Zanu-PF party.

"People should not read this as a snub - he excused himself," Mr Charamba said.

Mr Mugabe turned 85 on 21 February but his party is being held a week later.

Mr Mugabe told the rally in Chinhoyi there would be "no going back" on planned and
already executed seizures of land owned by white farmers.

Refugees in Johannesburg give their thoughts on Mugabe's birthday celebrations
The Southern African Development Community (SADC) tribunal in Namibia had no right to
intervene on the farmers' behalf, he said.

"Farms will not be returned back to former farmers," he told the audience.

"Some farmers went to the SADC... but that's nonsense, absolute nonsense, no-one will
follow that.

"We have courts here in this country, that can determine the rights of people. Our land issues
are not subject to the SADC tribunal."

In November, the tribunal ruled that Zimbabwe's plans to seize dozens of white-owned
farms were illegal under international rule and should be halted immediately.

Zimbabwe's Commercial Farmers Union says that, in the past month, operations at about
150 farms have been disrupted. Some farmers have been evicted.

Mr Mugabe said the new government would continue to push for a majority stake in
companies operating in Zimbabwe.

"We would want to see a greater participation of our people in them, not less than 51%, in
certain companies we would have designated," he said.,5337b300-44e6-4219-9e91-08d272760ced.html

MTGSPY said...

top soil erosion WAS actually an issue in 1929 - but no longer. As such, I think societal structure in the US may stay intact this time despite the upcompning debt default/repudiation.

D said...

There you go being bullish again MTG...


MTGSPY said...

well the structure may be intact, but it may look slightly different, such as 90% same sex couple, y'dig?

Greenie said...
This comment has been removed by the author.
Greenie said...

Re: Mugabe

MTGSPY said...

So I just tried to think like buffett and decided what company may still be open in 5 years, and i couldn't think of any....and if i could, the price drop implied is just so staggering given my projection of _real_ growth going forward. I just dunno what to do.

D said...

I think the gay movement topped out a couple years ago. Ellen D and her bitch split-up and bitch married a guy. The flamers still flying rainbows don't realize it's over with yet and they need to start thinking of how they are going to compete for resources with machete-wielding financial predators.

qadi said...

McDonald's will definitely be open in 5 years.

They have the secret to soylent green.

Greenie said...

"So I just tried to think like buffett and decided what company may still be open in 5 years."

Smith and Wesson.

D said...


"what's the leechfuck trade for the TALF? Any insights as to how TALF will work?"

It's called plunk down $600k+ into S-Corp LLC, get $10mm TALF funny-money, go yield shopping and ride the assets(lol) into default.

I do expect this to be highly "successful" the short-term. I don't see it surviving through Q1'10 though.

qadi said...

D, we need to be publicly traded, since then we can short ourselves using the profits from the leechfuck TALF trade.