JasonC
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Latest Comments343 Comments
The Credit Spreads Blow-Up
If it were currency risk it would appear in T-bill yields, which instead are zero, and in spreads of inflation adjusted treasuries over straight treasuries - instead those are reversed. It is not inflation expectations, there is no expectation of inflation, there is actual and prospective deflation at ferocious rates.
The wide spreads reflect both a fear of high rates of default and the destruction of all risk taking capital in the credit markets. Either the Fed steps in and takes credit risks, or nearly every existing company is bankrupt.
I can personally, today, lend money to major banks for twice the rate they are willing to lend money to me. Meanwhile those with nearly unlimited funds are only willing to lend to the US government, and are willing to do so at 1%.
Citigroup: The End Draws Near
Not only is Citi not dead, it has doubled since my post.
Shorts are fighting the Fed. Don't get in a money-watering contest with the people who can print it.
Citigroup: The End Draws Near
I spent the day analyzing Citi's financial statements looking for what they were doing wrong. They aren't doing things wrong. The present sell off is irrational and unjustified.
Their loan loss reserve is bigger than the share price. Their operating cash flow is positive $45 billion per *quarter*. All of the recent losses are purely non-cash, due to filling up their loss reserves and marking to market assets declining in price but paying higher rates on their lower prices.
Their cost of funds is 3% and they have pushed out the average maturity of their debt to 7 years. They can get through the next year without selling a single dollar of debt. They are earning over 6% on their book, for an interest margin over 3% - and their funding costs are falling, not rising. Yes, distress in the aftermarket has sent their bond yields to 10%, but the Fed has sent their short funding costs in the other direction and it is a bigger portion, since they don't have to refinance debts at the higher rates.
Frankly, they could instead restore the magical tangible book everyone worries about by buying in their own debts at 75 cents on the dollar, out of free cash. Or their stock, come to that. All of it, in about 6 weeks.
When a company could take itself private without exterior financing and fairly be worth 11 figures after doing so, Mr. Market's brains have left the building.
This Is Not Financial Meltdown
Nothing is being wiped out except some panicking idiots' remaining sanity. All the financials are screaming buys at these levels.
Bond Market: Unsafe at Any Yield?
Berkshire Hathaway Credit Risk, Index Puts Are Overblown Worries
CDS speculators are the new Enron pirates and they are simply attempting to create self fufilling prophecies anywhere they can. The sooner authorities wake up to this and close down the entire CDS circus act, the better for everyone. It is an entirely fantasy market unmoored from real anything at this point, and its gyrations have no more to do with underlying financial realities than a pinpall machine does.
Is Citigroup Failing?
Bear speculation in Citi is brainless and just that. It is no more an indication of underlying anything than $147 oil was an indication that oil was about to run out. Citi has operating cash flow of $45 billion per quarter, positive, in the worst financial environment in our lifetimes. It is simply calling in debt by allowing loans to run off, forcing an epic cash flow in its own favor, and using it to retire debt. It isn't going to go bankrupt doing this. It is going to satisfy creditors and improve liquidity, to any degree anyone wants.
When they decide they are safe enough, they aren't going to need to ask anyone's permission on earth. They can just buy the rest of the common and go private out of 3 month's cash flow, and thumb their noses at the short sellers and CDS speculators all day, every day.
Throwing in the Towel on This Market?
kurt - BBB corporates hit 11% in the summer of 1932, with AAAs at 5.4%. T-Bills were basically at zero, the discount rate was 2.5%.
Mostly the AAAs held up in the 4.5% area throughout, expect for the final spike down. There just weren't many AAAs left in 1932. Most corporates sold off extensively. Spreads widening dramatically is a characteristic result of deflation --- it makes any company that stays solvent a gold mine (it pays very well and the money buys a lot more to boot). But falling prices and earnings uncover some credits, cause defaults, leave some bondholders with the equity instead, etc.
It pays to do fundamental credit analysis in a deflation.
You can also just average back into stocks using the coupons - it will build an equity position at excellent average prices over the right time scale for one of these things. I mean, you buy a basket of bonds yielding 10%, and invest the coupons in stock exclusively. 5 years later if the market is still depressed, you will still be over 50% in the bonds. If it is up instead, you will be overweight the stocks. Either way, on a return to normalcy the bonds get their yield-drop increase and the stocks pop.
It is shooting fish in a barrel right now. Some companies can go bust, but they are not all going to go bust.
You can also buy rate insurance cheap using discounted floaters with floors. E.g. Goldman Preferred A (assuming it doesn't go bankrupt) pays 75 over LIBOR or 3.75 floor, on a $25 liquidation preference. It is under $9, to yield 10.25% on the lowest floor rate. If short rates ever rise again, it'll pay 3 times the floating rate, just from the discount.
Similarly, you can buy 10 year TIPS for the cost of straight treasuries, or 20 year ones for 1% more a year. Short the straight side with a future in proportion to the ratio of the coupons, and you have a straight inflation payment for which you will pay next to nothing.
Those are just hedges to add to a basic bond position, while doing the "coupons buy stocks" approach above.
Betting on Goldman's Future
Um, who do you think stiffed the banks for $1 trillion, martians?
The taxpayers are reckless insurance underwriters - they wrote huge acres of credit default swaps on all banks, and they had to intervene to save their position in those swaps. Sure, they called it the FDIC, but that is exactly what it is.
The taxpayers are reckless lenders; they hold CDs at banks, and that is reckless.
Pick which hat you want to be wearing when you take the loss. That the loss is yours is baked in.
Trying to allocated a $25 billion loss to the bondholders of Washington Mutual instead of the FDIC was sufficient to close the bond market for all banks.
You *will* pay for *all* of the costs of the services of capital, or there flat isn't any. Lenders do not pay credit losses. Borrowers pay every cent of them, in higher rates in real terms.
This isn't a policy decision and your political powers and agitations and hatreds are utterly irrelevant in the matter, as are your stridently pointless moralizing principles.
Capital *value* is supported by only one thing, real returns to capital risked. Take away the returns and you pay them twice over plus a doubled risk premium, but you pay them. If you don't, capital evaporates and you will receive none of its services.
Law of nature. You can't repeal it, you can't fight it, you can't command it. The banks will be paid, in full, for every dime of their credit losses past and to spare, or you go straight to hell.
Can Central Bankers Prevent a Great Depression?
A long winded contentless article that ends only with a concern whether his gold will go up in nominal terms in a deflation. Answer, no, nothing will go up in a deflation.
Next idiot, please be less long-winded.
Betting on Goldman's Future
Goldman has a $1 trillion total asset base, and US banks routinely net 1% on assets in ordinary times. In the past Goldman has exceed that by a factor of 1.5 routinely, but ignore that. In ordinary times, one can expect Goldman to earn something like $10 billion. Since they made $11.6 billion in 2007 and $9.5 billion in 2006, this is clearly an achievable figure.
Now, suppose they make nothing for the next 2 years. Suppose they never grow at all, forever. Suppose you require a 15% rate of discount. Then they are worth 6.67 - 1 - .85 times their typical $10 billion earning power or $48.2 billion. The market cap this instant is half of that, $24 billion.
Meaning, the present price discounts a 50% chance of the above zero growth outcome and a 50% chance of an outright bankruptcy and value of zero. And returns an expected 15% on that coin toss, plus any growth in the event of a "heads".
Or, if you want to express it as a higher discounting rate on those cash flow assumptions, then Goldman is currently priced at a 24% rate of discount, plus any growth ever achieved.
The smashed to heck financials are screaming buys unless they go bankrupt. All the current pessimism is unjustifiable in any value analysis, it is the result of pure news and momentum trading perspectives, not value perspectives. They might go bankrupt. Or some might, and some might not. I sincerely doubt half of them will or that those that survive will never grow again, ever.
Value investors are already buying. That isn't calling a bottom but it is calling a level.
7 Key Points About Deflation
Wrong again, braintrust. The overriding rule is, instead, that all crowded trades lose, and that sentiiment was as crowded as "real estate only goes up", "land, they aren't making any more of it", "tech is the future", etc, etc ad nausem.
The quantity of money doesn't go down in fiat systems. But the *demand* for money is *not* a constant, and it can and does go up, and stay up, for extended periods. Ask the Japanese, or look out your window.
Meanwhile, trying to distinguish between collapsing bubbles as supposedly not monetary and a separate monetary deflation, ignores the reality of different real interest rates in every commodity or asset type or claim. Falling prices of claims against future cash flows are real interest rate increases. There are two things traded in every trade, and only one of them can be that most fetishized commodity, money.
"In view of the tremendous losses suffered by the general public, there is a real danger that excessive deregulation will be succeeded by punitive reregulation. That would be unfortunate because regulations are liable to be even more deficient than the market mechanism." - George Soros
Citi's Desperate Straits
Citi had operating cash flow of plus $45 billion last quarter.
It repaid $28 billion in debt and grew cash $18 billion.
The shrink by loan run-off strategy they are pursuing it working just fine, and is forcing epic cash flows in their own direction. Main street may not enjoy the fallout that can cause for final demand, but there is no way you go bust raking in $180 billion a year in cash.
Gas Price Decline: How Much Are We Saving?
Yes, it is perfectly meaningful. A gain of 2% of GDP that had to be imported and financed by foreign lenders, is a meaningful number any way it is sliced.