Great Post - My Sentiments Exactly

This post on Seeking Alpha represents my feelings on the market at this time.

The point by point summary (see post for explanation):

1. Not enough money for bond guarantees. 2. Covers financing needs through mid 2013. 3. A 20%-25% guarantee is insufficient. 4. The guarantee is not credible. 5. Germany doesn’t want to assume risk as guarantor. 6. Outside investors will not participate meaningfully.7. Bank recapitalizations not credible.8. Core credit risk. 9. Insane cost.10. EFSF as preferred creditor. 11. Fake Brady Bonds.12. No restructuring. 13. Reference interest rates too high. 14. Without ECB money creation, any plan will fail. 

From the conclusion.

Thus, I believe that the correct posture at the moment is for investors to be entirely in cash, or at least equity neutral via paired trades and/or hedges...  The question is this: Do you have the courage to stand aside and possibly leave 10%-20% or even 30% on the table? Or would you rather not take the “risk” of missing out on that gain -- even if it means assuming the possibility losing 30%-50% when and if the European plan unravels?

November 5th

V day, change your bank account day and the day, allegedly, that Anonymous will go after Fox News.

Prime Housing Market and BAC

There's some serious hating going on with Bank of America:

• Zero Hedge covers Value Investor Club's review
• Bill Black on BAC move of Derivatives to BofA FDIC backed holding company
• Yves Smith on same

The first article discusses the possibility of a Bank of America default. The second and third articles are about a move of risky Merrill Lynch assets into the Bank of America holding company which contains Bank depositors money and is protected with FDIC. These two authors propose that bank deposits are being used as collateral for the derivatives.

Should B of A customers be worried? What about Merrill Lynch customers? What if your bank clears through BofA (e.g. First Republic Bank), should you be worried about that?

What does this have to do with housing? I'm not sure unless the CDS book that Merrill held includes a whole bunch of subprime, alt-prime and prime MBS?

On another note, after reading quite a bit in the blogosphere (and not sure if I'm just looking for bad news), but I've come to the, perhaps, cynical view that the Fed is holding interest rates low to protect large banks; that is, to keep them from failing. Why? Because banks get to keep assets on their books without marking to market. If interest rates go up, housing prices will fall (it's the natural way of things). Banks aren't in the business of managing real estate, they hold the property as collateral, but want to be rid of it as soon as possible. It seems they are trying very hard to not recognize bad loans by (1) holding back on foreclosures and (2) not marking to market. Also, (3) lobbying government to hold rates low to keep prices high is not a bad move.

Back that up you say? OK:

Here's an article on lurking foreclosures (#1).

Here's an article that explores different options in the Mark to Market debate (#2).

It's pretty easy to find conspiracy theories that defend point #3.

On yet another note, here are two great articles on why right now (2011) is a bad time to buy an expensive house and how to determine if the house you're buying is too expensive (via prevailing rent rates): (a) terrible idea and (b) don't be suckered.

Finally, Zero Hedge believes Bill Gross front runs the Fed using contacts he has on the Fed. Here's an article proposing that he's buying up MBS because the Fed is about to start a program to do that (and he's trying to arbitrage that trade).

I've noticed that the PrimeX indexes have taken a breather from their downward plunge. Deutsche Bank put out a report on the PrimeX suggesting a BUY. Here are the last two paragraphs from that report:

Based on October 14’s closing PrimeX prices, we estimate that the market implied HPDs forARM.1, ARM.2, FRM.1 and FRM.2 are 16%, 19%, 27% and 30%, respectively. Those HPDscenarios are worse than most of the projections by market participants. Therefore, PrimeXindices are oversold at their current levels, according to our work.

Despite all the weak fundamentals and technicals, we believe that the PrimeX indices areoversold at current levels. The market-implied HPD in our analysis suggests that a massivedecline from current price level is not sustainable given the indication that future home pricedeclines have been mostly priced in. Furthermore, the high running coupons of the PrimeX indices are significantly more expensive to carry for shorting the PrimeX.

I'm not moved by this logic. The claim is that PrimeX is a buy because those default rates seem unlikely and shorts are too expensive (coupon). The coupon is only expensive if you don't believe there will be defaults.

Well, since I've first started watching this thing, it's dropped every single day. I caught Jeff Gundlach on CNBC last week (Strategy Session) who talked about this index and claimed that Hedge Funds were selling out of their leveraged positions in this and that was a likely cause of the drop in the index. He claimed there was room for 5 more points of drop (this was on Thursday morning, 10/13/2011). However, because banks didn't need to mark this index to market, you wouldn't see any changes in bank balance sheet values. Also, he said this CDS market only represented about $11B in float, so it isn't the huge $100B subprime market we had in 2008.

17-Oct-11 Overview
Index	Series	Coupon	RED ID	Price	Factor
PRIMEX.ARM.1	1	0.0442	7B579YAA3	95.042 [-4.770]	0.408221747
PRIMEX.ARM.2	2	0.0458	7B579YAB1	82.458 [-6.584]	0.436699618
PRIMEX.FRM.1	1	0.0442	7B57AKAA1	99.958 [-3.875]	0.468172369
PRIMEX.FRM.2	2	0.0458	7B57AKAB9	87.875 [-6.000]	0.488982221

So, explain something to me. How do banks avoid the need to mark assets to market prices? Right now, any (European) bank that owns PrimeX CDS and is using these assets as leverage just had the value of this asset fall 4-6% in seven days. However, if this really represents selling pressure only (double whammy of Hedge Funds and EU Banks divesting), then those on the buying end believe that the Prime RMBS market is great and they're getting a steal. If, on the other hand, Prime RMBS market is crap (or the loans underlying this index a crap, those are two different things), then the Hedge Funds and the EU Banks are getting out just in time and someone else will be left holding the bag.

Wish I had a crystal ball.

Another Down Day in PrimeX

OK, so I'm going to watch this thing, now, it has my attention. We have another down day for all Prime X Indexes (click on link for current).

12-Oct-11 Overview
Index	Series	Coupon	RED ID	Price	Factor
PRIMEX.ARM.1	1	0.0442	7B579YAA3	99.714 [-.098]	0.408221747
PRIMEX.ARM.2	2	0.0458	7B579YAB1	87.732 [-1.31]	0.436699618
PRIMEX.FRM.1	1	0.0442	7B57AKAA1	103.786 [-.074]	0.468172369
PRIMEX.FRM.2	2	0.0458	7B57AKAB9	92.768 [-.107]	0.488982221

The numbers in the brackets ([-.###]) indicate the change from, yesterday (Oct 11th).

More information I found on this topic:

• Zero Hedge blogs about European Banks selling assets (to improve capital on the books) and Prime X CDS are a large share of those assets.
• Financial Times Short View column points out that the markets are highly correlated.

It looks like EU Banks are under pressure to raise the amount of capital held on their books and are, therefore, selling assets including CDSs under PrimeX.  Does this create the selling pressure on that index and is that solely responsible for its drop?  That is, classic oversupply, little demand?

The FT article doesn't talk about this area of the market, directly, but is perhaps me being subject to me simply looking for facts that support my worldview.  Someone says the US market is getting highly correlated, meanwhile indexes critical to MBS are dropping.

Systemic Signal in the Prime RBMS Markets?

Recently, one of my investment advisors brought to my attention the sixth month drop in the PrimeX Index ARM 2.  He wondered if this was going to create a problem in the markets? I asked him how he stumbled across this item, and he pointed me to Zero Hedge's post on the topic. Today, there's been a second post.

What does all of this mean? What is the PrimeX index?

As far as I can tell, PrimeX (created by Markit) is a CDS built up from tranches of AAA (Prime) Residential Mortgage Backed Securities (RMBS).  There are restrictions on the type of RMBSs that can into a tranch destined for this index.  These include first mortgage, high FICO (730+), LTV below 73%, owner occupied (85-90%), among others.  You can find a summary of the types on page 12 here and details in the Prime X Rules Documentation here (Section 3.2 on pages 3-4).

The CDS (Credit Default Swap) provides insurance for holders of Mortgage Backed Securities, allowing those holders to lay off risk to someone else (buy the CDS) or allow those betting against RMBS (betting on defaults) to place their bets (sell the CDS).

Today, the Prime X indexes dropped 1-2% each.  Here's today's data.

11-Oct-11 Overview
Index	Series	Coupon	RED ID	Price	Factor
PRIMEX.ARM.1	1	0.0442	7B579YAA3	99.812	0.408221747
PRIMEX.ARM.2	2	0.0458	7B579YAB1	89.042	0.436699618
PRIMEX.FRM.1	1	0.0442	7B57AKAA1	103.833	0.468172369
PRIMEX.FRM.2	2	0.0458	7B57AKAB9	93.875	0.488982221

Yesterday, these prices were 100%+, 90%+, 104%+, 94%+.

For another data point, here's an article in which Barclays recommends buying MREITs because they are cheap.  Meanwhile, you have Zero Hedge's comment about a Barclays trader blasting Bloomberg with a message about not understanding "the sudden hate for the sector" and recommending some buying.  So, Barclays seems to have a uniform message about pushing RMBS in various capacities (on the Buy side of CDS and on the Buy side of MREITs), or at least, as Tyler Durden of Zero Hedge puts it, they are unable to pinpoint what others may have already.

So, the downward trend continues in insurance designed to hedge against RMBS risk.

Is this a systemic signal for the housing market, especially in the Prime space?  Should we expect another shock in the next 3-6 months?

Also, in my internet hunting around, I found an article by Gillian Tett of the Financial Times written back in 2006 and about "The Dream Machine: The Invention of Credit Derivatives".  It contains statements about how derivatives should soften financial shocks as they spread risk (Ha, that didn't work).  The most interesting part of the article (it is long) was the discussion of how the banks justified derivative use, as offsetting risk on their books, thereby, allowing higher leverage ("calorie-free chocolate: almost too good to be true").

Here's the thing, based upon descriptions in that article and thinking about issues raised here, I am wondering how much of the Prime Mortgage risk was pulled back into the banks and/or won't stay offloaded because the CDS market will fail.

Are we set for another drop after all?

Surviving Cancer, Part III

I have received an amazing gift from my cancer.  It took cancer, Livestrong and the Stand Up to Cancer movement to bring it out of me.

The movement, Stand Up To Cancer, encourages cancer survivors and their loved ones to stand up and be counted.  I first posted on Facebook in response to their campaign at the MLB All Star Game. Then, Livestrong ran their Wear Yellow campaign.  Owning my disease, writing about it, talking about it, acknowledging it makes me the master.  I can choose how to live my life and how I feel.  Thank you Stand Up To Cancer and Livestrong for giving me the chance to find my voice.

Prior to having a life threatening illness, I equated such an illness with a death sentence.  And, in most ways, it is.  However, it's what "death sentence" means to those that have not had one that's most terrifying.  Dying is a scary prospect.  Seeing death in others is a scary prospect.  It reminds you of your own death - a scary prospect.  Because we do not talk about death and we mention deadly things in hushed voices ("she has cancer...", "he has AIDS..."), we give these diseases more power than they deserve, amplifying them.

The thing is, that innocent pre-cancer world, the one where most people live feels (to them) like a safe world where life is good and secure.  Looking through the window at us cancer folk, they feel pity and concern for us and our families and wonder how we cope and just get through the day.  What a gray world we must live in, dragging that huge cancer rock wherever we go.  Speak quietly or you may remind them of their imminent death.

Not me, though.  That's not it at all.  You see, on my side of the window, I see color and life and vibrant passionate commitment to live in the moment.  Not a hedonistic live in the moment, but an appreciate every moment.  You could spend decades going to a Zen Center and never receive the understanding of how to live in the moment you get from a few months of coming to terms with a life threatening illness.  Sure, I would prefer a life in which this never happened, but I cannot change that.  I will speak loudly and without fear.  My only choice is to play the hand I've been dealt.

What is that hand?

Presumably, modern medicine has given me many more years, potentially many decades of life. Had my cancer (and its recurrence) not been detected and not addressed, surely it would have consumed my body and I would be dead.  Yet, here I am.

So, tonight, I sit at my table and my family eats food that I cooked for them and we talk and share and we are a family.  And, they don't think about my mortality, but I think about it and the world that isn't, and I look at them and enjoy them and am thankful for a simple meal and some good conversation.

Later this week and next, friends will come over our house and we will eat food and drink wine and enjoy each others company and I will view them with two sets of eyes: ones that see them as they are and others that see each of us as little flames that burn and then go out.  We are all bright and unique.  Bask in the glow of those flames while they are here before the storm takes them (or me).

This is not sad!

It is precious and fragile and to be appreciated... simple moments... the company of others... treasures all of it.

Brown Fox and Lazy Dog

I saw this video and it reminded me of my early computer days. My father owned a computer time share business; companies ran their business on software designed and built by my father's software team on computers maintained by the company. It was the first cloud. Of course, it wasn't called that then. It was called time share, which was invariably mistaken for vacation property.

How could this video possible trigger that?

The jump happens around 1:20 mark.

I worked at my dad's office in the summer between high school. They had IBM key punch machines. You'd bang out something in numbers and letters on the machine and it would produce a card with the characters printed on top and machine readable holes printed on the body of the card. My father's company produced a piece of hardware that meshed with the key punch interface and caused the machine to read or write cards. You had to pop a plate off the back of the machine and wire the device in there. There were hundreds of pins sticking up, but only forty or so were relevant.

The device converted card data back and forth into RS-232, which at the time was the new plug-in standard between computer devices. Now, we have USB, Parallel, Serial (RS-232 was serial), FireWire, Wireless, etc. To test each hand built device they manufactured, you'd have a stack of cards with the alphabet and numerals on them, each one shifted in a loop (A-Z0-9 then B-Z0-9A, etc.). Sometimes, if you wanted to do a quick check, you'd type in "The quick brown fox jumps over the lazy dog."

I helped build some of those devices, soldering them together at a workbench. The main builder, Freida, taught me how to solder. Earlier in her career, she worked on space hardware and missile electronics. When the electronics were soldered into boards for a missile special care had to be taken because of the vibrations from the missile's engine. Little double bends were made into each resistor, capacitor and inductor leg, that became springs to dampen the vibration. She built every device that way and made sure I did, too. Between her hardware production talent and the software designer who wrote the code that ran the box, those things were bomb proof.

Companies all over the world bought the device. The company saw the future of computers and realized that other companies would want to take all of their punch card data and convert it into some other electronic format (magnetic tape and disk drives). But, that's not exactly what happened. Many of their customers had processes that centered around punch cards. For a manufacturer, the cards represented a pick list and notes could be made on the cards by hand. They were a physical token that was also machine readable. Think of today's 1D and 2D bar codes.

These devices were built in the early 1970s and 1980s. I think years later one of the companies called him to ask if it was year 2000 compliant. Ha.

The smells in that office were stunning, not in a bad way. The company was located in the basement of an apartment building. They had three large HP computers, bays of disk drives that would be laughable today due to their very small storage capacity. There's more computer power and storage in an iPod nano than was in that whole basement. There were teletype machines, hardware workbenches, and free coca-cola, BBQ potato chips and pretzels. The place smelled of ozone and machine oil and solder flux and bbq. There was a constant churning and humming going on from the teletypes, disk drives and magnetic tape.

It's amazing what that little basement operation had going on inside of it. It was at the forefront of so many of the technologies that we see around us, today. Cloud, data centers, business accounting and manufacturing software, free goodies for the staff. All of that was going on forty years ago.

The quick brown fox jumps over the lazy dog, indeed.

RIP Steve

http://www.ted.com/talks/steve_jobs_how_to_live_before_you_die.html

Haiku Brew

Ever wanted to know how to make beer? Memorize this:

Boiling mash smells sweet
Wort, malt, hops, yeast fermenting
Wait four weeks then drink

Is Survival Enough - Redux

A couple of days ago, I blogged about surviving cancer. You may want to read that for context.

My post the other day was a partial answer. There is so much more to surviving (and wanting to survive) cancer than simply wanting to live. It is so simple to say, it is so much more complicated to explain.

I've had more than one experience to remind me that I'm meat.

In the summer of 2010, I had my own, non-cancer, near death experience. No, I wasn't eaten by a lion. I did have a terrific bicycle accident - landed on my head and shattered my collarbone. Despite having my brain's reset button pressed, I can recall every detail of those moments vividly (Thank you, helmet). The most striking memories that stand out are my reactions to the situation.

After I came to a rest and the world got quiet, I remember thinking, "I'm laying in the middle of the street. I can't move. I sure hope a car doesn't hit me. Oh, well, nothing I can do." Then, I cracked open my left eye and saw someone walking past me talking on a cellphone. I thought, "Hmmm, perhaps that man will protect me." I then shut my eye and laid there cooking on the hot, June asphalt just like the meat I was.

After a bit, I did a quick check running through my body parts to see which ones still worked and which ones didn't. Hands and fingers, check. Wrists, check. Feet and ankles, check. What's that bright shining pain in my left shoulder. Ouch! That cannot be good. Pain too much, need to turn over, someone please pull the bike away from me, bones grind and crunch in my shoulder, I don't like that sound - nope definitely not good.

Some time later the man told me he called an ambulance and asked would I want him to call someone. Only then did I remember I had a wife. Somehow, I rattled off a string of digits, and all I could think about was how upset she would be with me because I ruined her hike with her friends. Then, I remembered I had children. I didn't see faces, only silhouettes. When I remembered they weren't grown up, the silhouettes shrunk into kids and I thought how upset they would be that their daddy was hurt. I recalled I had parents and made a note that I had to call them before the day was over, they would be worried about me and upset if I didn't tell them right away. I remembered my brother and his family and knew I would have to call him, too. This was all before the police officer arrived and asked me for my name. "Hey, I think I have a name!"

There's a point, here, and I'll circle back to it, soon.

This morning, I went out for a run and saw a friend. He told me he had found out his daughter died. 26 years old. Very sad and I feel for him. We discussed how he found out, how she died and, most important, his memories of her. One memory he shared was of a time when he visited her at her mother's house, and she showed him her closet and how neat and organized it was.

And, that is my point about wanting more than just to be alive. Simply living isn't enough.

It's about being there for other people. It's the being there that matters most to them, and therefore, to you. When I was laying on that road surface, living wasn't even a concern of mine. I might as well have been a leaf on a stream. Only when I remembered I had loved ones, only then did I have concerns and those concerns were for them and their feelings. Of a lifetime of memories my friend could share, he chose to tell me about his daughter proudly showing him her closet. Why? Because he was proud of her, too, and she knew it.

If I don't live, then who will be there to watch my kids graduate high school and college. If I don't live, their lives will be diminished because dad was not there to pat them on the back say "Great game!" or "Good job on that paper." They will not have me there when they make their own way into the world or marry the person they love or have families of their own. I want to live so that my wife will have me to share her joy and sadness with. I don't want to think about the hole I will leave behind in the lives of those I love.

They make me who I am. Their eyes light me - enlighten me. And, I lighten them.

This is more than just surviving, this is more than just being alive.

I want to live.

Why Not?

Today (October 2nd) is Livestrong's "Wear Yellow Day". It's to honor those affected by cancer. I wore yellow. It's also Lance Armstrong's anniversary of when he he was told he had cancer. Today, while running I thought about the day I found my lump (December 2, 2009) or the day the doctor confirmed what I already knew (December 18, 2009). I thought about the meme going around Facebook, recently (the one with people reposting a note about folks with Cancer only wanting to survive). I thought about all of these things and more.

Do I only want to survive?

Ever see that documentary about the lioness who raised an african antelope from birth. She cared for the little thing. Watched over it. Kept it safe. Cleaned it like all cats do by licking it. Never once thought about eating it; she treated it like her offspring. Then, one day, along comes a male lion, finds the antelope and eats it. Boom. Dead, just like that - ripped open and with eyes glazed over. The female lion was clearly distraught, but what was done was done. It was sad - I teared up, felt for the lioness and the antelope and felt sick to my stomach at the coldness of it all. But, that's the world for animals like you and me. Most of the time, you're minding your own business, making your way through your life and, suddenly, along comes something that decides you're just a pile of meat and eats you.

Your eyes glaze over. Sucks for you; too bad for those around you.

If it just stopped there, then it would be pretty sad. But, it doesn't stop there. And, that's my point about wanting more than just to survive. I'm not that antelope! The mere fact that it's sad is uplifting. Somehow, we humans have been given the gift of moral vision - that the world could be a better place, if we could only make it so. Here we are, a little piece of animated meat given the ability to ask "Why Not?"

So, I ask you: Why Not? Can you change the world? Why Not? Can you make it a better place? Why Not? Can you cure cancer or AIDS or end world hunger? Why Not?

Am I asking you to be the next Louis Pasteur or create the next Genentech? To be honest, that would be great, but that's not what I'm suggesting. I think making oneself better is part of making the world a better place. Helping those around you makes the world a better place. If you have the means and the talent to change millions or billions of lives for the better, then go for it. However, even if you have only the ability to change your little corner, then don't wait, don't pause, just go ahead and make it better. But, really make it better. Don't just wish it better or pray for it to be better. Do the hard work, get dirty. Really, really, do it. You will never regret it.

I promise you, all too soon, you're going to find out you're only meat. By then, it could be too late to do anything.

Boggle Haiku

Family has been having a blast playing boggle, so much so, that I decided to write a couple of haiku poems about it.  Haiku is awesome.

Crashing cubes settle

The turn of the sand timer

Feel my heart quicken

Words spill from the air

Haikus build like boggle plays

Can I use that 'k'?

Haiku is Good For You

I'm in the mood for a little Haiku, one old, one new (sorry for the rhyming, this should be in Haiku).

Blackberries in a Haiku

Luscious blackberries
Little purple bubbles pop
Uh-oh, stained my shirt


Recently, I my wife and I were walking at Lands End (San Francisco); someone asked why her shirt read "Creative Edge"

The Creative Edge
Where plate tectonics meet sea
Watch out for earthquakes