Links:

Ben Jones' Housing Bubble
The Capital Spectator
The Yield Curve
Motleyfool.com.
Bankrate.com
Scotttrade. 

Flipping Houses...That is *so* 2005. How About Flipping Public Companies?   PART I  Comparing the 2002-2005 real estate bubble to PE M&A LBOs repackaged as IPOs

Hal F. Wit for the Drooling Oatmeal Investment Club Step 1: Buy public company with LBO              and take it private Step 2: Fix it up (optional)  Step 3: Flip it with an IPO Step 4: PROFIT Is this really happening? Perhaps.  But instead of sub-prime mortgage CDOs (Collateralized Debt Obligations) we have CLOs:  (Collateralized Loan Obligations) for LBOs  (Leveraged Buy Outs).  There is a lot of cheap money sloshing around right now.  The Black Stone (BX) group was a private equity firm.  They bought companies and took them private.  No SARBOX, no need for GAAP.  Private corporations.  Why did they go public then?

"If I have learned anything from the housing bubble: "Eventually, there is no 'greater fool'." - Hal F. Wit 7/7/7 DOIC

``There are some very scary analogies between high yield and the mortgage market,'' said Kevin Lorenz, a managing director who oversees $2.5 billion of high-yield assets at TIAA- CREF in New York. ``You cannot do fundamental analysis and believe that those are creditworthy companies.''  Bloomberg

So, let's make some money on this.  The easy and most obvious play is shorting BX.

"We also question whether there is sufficient evidence to prove that the higher returns ... are driven by stronger management teams or because, in a benign and liquid credit environment, leverage by itself can provide substantial returns.'"— Christina Padgett, Moody's

TWX20.99, -0.03, -0.1% ) music subsidiary was acquired by private-equity firms including Thomas H. Lee, Bain Capital and Providence Equity, the company distributed a dividend that paid off almost all the equity originally committee by the buyout group, Moody's said.

"Of concern to Moody's is the willingness of private-equity firms to issue special dividends despite commitments to reduce leverage, sometimes within 12 months of the transaction's closing," Padgett wrote in the report.The payment happened despite public comments by the company to the contrary, the rating agency noted."

"Celanese US Holdings, a chemical business bought by Blackstone, borrowed money within a year of the acquisition to pay a dividend to the private-equity firm, Moody's added, removing more than 95% of the cash equity originally invested in the deal."

Does that smell like "Cash back at closing" to anyone else? NOT criminal. Yet *too* savvy.  Taking advantage of us halfwits.

Here are the steps I took in intelligently speculating the housing bubble SHORT:

KBH:  Home Builders (+40%)
NFI:  Sub-prime lenders (+100%  could have been a 10 bagger if I was more patient)
CFC:  Prime Lender (Remains to bee seen.  Look at their "prime" foreclosure rate

AHM:  REIT (+100%)

NEXT WEEK: PART II:  Intelligently speculating the PEM&ALBO bubble 

Why I'm Short Countrywide Financial Corporation
CFC's sub-prime exposure is only 10% but losses may extend into exotics and prime.
Hal F. Wit February 25, 2007

Poodah asked me to explain my short position on Countrywide Financial Corporation (CFC).  Approached by  novice investors, as members of the Drooling Oatmeal Investment Club frequently are, he was asked "Why not consider CFC as part of a diversified portfolio?"  An excellent question.  Jim Cramer screams "Best of Breed".  Analysts recommend it.  So why am I short?  

Macro trend
I believe that we are on the down-slope of a real-estate bubble.  In 2000-2001 I was dismayed at not being able to do anything during the decline of the stock market.  It was certainly a well defined downward trend.  I now participate in the downside of these events by shorting using Options (Puts).  The downward slope of these bubbles was even easier to pick out, in my mind, because we had already seen the up-slope.  The down slope in real-estate was inevitable. Homebuilders first, Sub-prime lenders next, prime lenders next, and finally government sponsored entities (GSE).  We are in Phase II:  The sub-prime lenders.

Financial Bubbles When I use the term "bubble", I am referring to "irrational" bubble not "rational " bubbles. "A rational bubble," explains Richard Dale in his excellent history of 1720's South Sea Bubble - The First Crash - "is characterized by the continuing rise in the price of an asset, generated by the belief that this price rise will persist...Investors understand that the bubble will eventually burst...[but] they expect to be compensated for the risk of a price collapse." Safe Haven Never Mind the Price Tag, Part II  What we have seen in this recent real-estate bubble was "Irrational".  Investors we speculating without being compensated for the risk; real-estate always goes up, etc...  And when I say investors, I am referring to the bond holders, mortgage warehouses, hedge funds and pension funds that bought bundled (mortgage backed securities) MBS that were originated by commissioned brokers to borrowers who had no intent or capacity to repay.

My first tip-off was the preponderance of blogs and web sites that have popped up over the past two years about real estate bubbles.  Now I am seeing "mortgage implosion" web sites permeate my searches.  I began with a list of the industry or "sector" for mortgage lenders that have decent volume, have option contracts and are actively traded.  The list is at the end of this article. I then look specifically at sub-prime or non-conforming  (BBB- bond ratings) as a significant percentage of their holdings.  

Anecdotal evidence of the most egregious lending practices was gleaned from the weblogs (blogs), main steam media ( MSM), and message boards. CFC was part-in-parcel that lent 2.2 Million to a 24 year old "real estate Investor" that is now blogging about it at www.Iamfacingforeclosure.com  More came up on the list:  CFC, NFI, NEW, and LEND. 

Micro trends
 Using a simple moving average of 200 days, I chart a trivial technical indicator.  

Why a 200 day moving average?  Basically, I use my contract time frame as the moving average (MA) to see if the stock has already fallen below it or if it has downside potential.  The time frame for these moves gives me trouble sometimes.  I was short Homebuilders (KBH)  last year and a couple of lenders but only the homebuilders crashed.  This year, I am looking at sub-prime Alt-a (liar loans) and the GSE (FNM, FRM) but I think it still too early early in the cycle to short these.

CFC: Countrywide Financial is well above its 200 day moving average.  Could it be priced too high?  A candidate for shorting?

Contrasted with  NFI (Novastar Financial Inc.) which I also shorted at the beginning of the year.  I would not short it right now.   For this example, I will also use a 200 day moving average:

Fundamental Analysis
From CFC's Aug 2006 10-Q

The following table summarizes Mortgage Banking loan production by channel, by Mortgage Loan type, by purpose and by interest rate type:

                                     Quarters Ended
                                       June 30,(1)
                                    2006        2005
                                      (in millions)
Channel:
Originated:
Consumer Markets                  $  32,539   $  30,509
Wholesale Lending                    23,879      19,613
Full Spectrum Lending                 8,750       5,913
Total originated                     65,168      56,035
Purchased-Correspondent Lending      38,467      45,119
                                  $ 103,635   $ 101,154
Mortgage Loan Type:
Prime Mortgage                    $  82,229   $  84,609
Prime Home Equity                    11,235       6,875
Nonprime Mortgage                    10,171       9,670
                                  $ 103,635   $ 101,154
Purpose:
Non-purchase                      $  54,080   $  50,097
Purchase                             49,555      51,057
                                  $ 103,635   $ 101,154
Interest Rate Type:
Fixed Rate                        $  55,383   $  50,453
Adjustable Rate                      48,252      50,701
                                  $ 103,635   $ 101,154

Summary of COUNTRYWIDE FINANCIAL CORP - Yahoo! Finance

Non-Prime lending is only around 10%.  That doesn't look too bad.  Don't forget to look at "insider sales".  The CEO has been on a selling spree.

Let's compare to NFI's SEC report 10-Q

                                                For the Nine Months               For the Three Months
                                                Ended September 30,               Ended September 30,
                                               2006             2005             2006             2005
Net income available to common
shareholders                                $    80,689      $   106,026      $    25,252      $    34,630
Net income available to common
shareholders, per diluted share             $      2.40      $      3.60      $      0.73      $      1.12
Estimated taxable net income available
to common shareholders (A)                  $   154,450      $   219,689      $    59,130      $    62,105
Estimated taxable net income available
to common shareholders, per share (A)       $      4.25      $      7.14      $      1.63      $      2.02
Cash dividends declared per common share    $      5.60      $      4.20      $      2.80      $      1.40
Nonconforming originations and purchases
(B)                                         $ 7,587,290      $ 7,084,799      $ 2,935,879      $ 2,779,316
Weighted average coupon of nonconforming
originations and purchases (B)                     8.74 %           7.58 %           8.93 %           7.50 %
Nonconforming loans securitized             $ 4,265,688      $ 5,889,460      $ 2,174,900      $ 2,140,171
Nonconforming loans sold to third
parties                                     $ 1,486,832      $   717,262      $   693,776      $   490,067
Gains on sales of mortgage assets           $    51,027      $    60,462      $    27,709      $     9,691
Net interest yield on assets (C)                   1.25 %           1.63 %           1.12 %           1.81 %
Net yield on mortgage securities (D)              27.97 %          30.57 %          24.39 %          34.28 %
Weighted average whole loan price used
in the initial valuation of residual
interests                                        102.07           102.22           102.20           101.66
Costs of wholesale production, as a
percent of principal (E)                           1.90 %           2.43 %           1.79 %           2.18 %

Summary of NOVASTAR FINANCIAL INC - Yahoo! Finance

Entirely sub-prime (non-conforming)!  No wonder they got clobbered:

Disclosure.  I had a short position in Novastar Finacial.  Namely the Jun07 $20 Puts that I purchased at $2.45 per contract

I knew the trend was correct but not the 500% magnitude if I had held.  The .NFRID PUT is now trading at $12.90 (2/25/07)

Summary
CFC has enough exposure to sub-prime mortgages that its current stock valuation is questionable.  It is well above its 200 day MA.  If the lending problems move into prime or the entire sector comes under additional pressure, it is almost certain to fall to the $30 level and is subsequently a good short.  It is obvious that the pure sub-prime lenders and originators are getting clobbered.  The larger lenders, such as CFC, hold sub-prime mortgages representing a small but significant fraction of their holdings.  What if these mortgage problems move away from sub-prime and seep into Alt-A, or even into prime?  An interesting study might be to look at exposures to mortgage types:  ARMS, option-arms, stated income and others.

Is sub-prime melting down?  Yes.  Will it affect the rest of the non-sub-prime lenders?  Probably.  Would I buy CFC?  No.  I have a short position CFC January 08 $30 Puts at an average of $1.10 per contract.  I will sell some of these contracts when CFC moves 10% below its 200 day moving average.  There may be some more sub-prime originators out there but the smart money says that ship has sailed.  Watch carefully for the problems to spread.

While we wait, let's hope that these problems do not spread to the last phase.  A GSE bailout means we all pay.  There are plenty of other good stocks and good sectors for the Longs but stay away from the entire mortgage sector until this plays out.

Reporting for the Drooling Oatmeal Investment Club,

Hal F. Wit 
February 25, 2007

Top sub-prime lenders as of 2Q06, per the Mortgage Bankers’ Association:

1. Wells Fargo
2. HSBC
3. New Century
4. Countrywide
5. Fremont
6. Option One
7. Ameriquest
8. WMC
9. Washington Mutual
10. CitiFinancial
11. First Franklin
12. GMAC
13. Accredited Home
14. BNC
15. ChaseHome Finance
16. Novastar
17. Ownit [gone]
18. Aegis [just closed two subprime operations centers]
19. MLN [stopped accepting new loans]
20. EMC
21. ResMae
22. FirstNLC
23. Decision One
24. Encore [being acquired by Bear, Stearns]
25. Fieldstone [closing 7 of 16 ops centers, debt covenants modified thru 1/31/2007]

Further reading:

IBDArticles    NYtimes.com

11/13/06

Turns out I was right about KB Homes when I posted a report on suspicious insider activity on 2/14/06

"AP
KB Home CEO Bruce Karatz Leaving Firm
Monday November 13, 1:25 am ET
By Jeremiah Marquez, Associated Press Writer

2/14/06  by Hal F. Wit for the Drooling Oatmeal Investment Club

A report on insider activity at homebuilder KB Homes has some interesting observations:

Mortgage Fraud Blog.  It may be time to take a closer look at CFC, NEW, FED, LEND, FNM, and FMC for potential short positions.  Disclaimer:  I have a short position in CFC.  Again, the timing is the issue.  There is a wave of I/O ARM's that will reset starting this summer.  Ameriquest was ordered to pay several hundred million dollars after losing a class action consumer law-suit.  Must.  Resist. Schadenfreude.

The Drooling Oatmeal Investment Club

What is Fiat Currency?

http://www.forbes.com/markets/feeds/afx/2006/11/06/afx3147533.html

Credibility is the believability of a statement, action, or source, and the propensity of the observer to believe that statement.

In public speaking, Aristotle considered the credibility of the speaker, his character, to be one of the forms of proof. Contemporary social science research has generally found that there are several dimensions of credibility. Berlo and Lemert (1961) noted three: competence, trustworthiness and dynamism.

Credibility online has become an important topic since 1999, as the web is increasingly an information resource. The Persuasive Technology Lab at Stanford University has studied web credibility and outlined the principal components of online credibility and a general theory called Prominence-Interpretation Theory. This theory applies generally to credibility assessments.

Credibility - Wikipedia, the free encyclopedia

10/17/06

As Halfwit, It's not often that I find America's 67 million investors coming to such conclusions:

1. Make a will 2 .Pay off your credit cards 3. Get term life insurance if you have a family to support 4. Fund your 401k to the maximum 5. Fund your IRA to the maximum 6. Buy a house if you want to live in a house and can afford it 7. Put six months worth of expenses in a money-market account 8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement 9. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio source: Adams'

Thanks to Adams' formula, the average irrational investor can ignore Wall Street: "Everything else you may want to do with your money is a bad idea compared to what's on my one-page summary. You want an annuity? It's worse. You want a whole life insurance policy? It's worse. You want to invest in individual stocks? It's the DOIC. You want a managed mutual fund instead of an index fund? It's worse. I could go on, but you get the point.

[ED This is likely authored by a 30-something urbanite circa 2006 -Hal F. Wit]
"Source:'Dilbert' deserves the economics Nobel:'Unified Theory of Everything Financial' wins in parallel universe Paul B. Farrell
MarketWatch, Last Update: 7:46 PM ET Oct 9, 2006  http://tinyurl.com/myedd
The Big Picture Dilbert's Unified Theory of Everything Financial'

6/12/06
“A symptom of personality”
 The theory and practice of GAMESMANSHIP
 Stephen Potter 1948 –Bantam Books
Hypothetical interview by the Half-wit for the D.O.I.C. June 2006

 DOIC:  Why doesn’t the NYSE or the equities therein lend themselves to gamesmanship?

 POTTER:  Because a seat on the NYS Exchange = $4,500k USD

 DOIC:   There are obvious moral implications to "winning without skills" would you care to respond?

 POTTER:  Yes.
 DOIC:  Umm..OK Let’s discuss the particular implementations of “the art of winning without actually cheating”:

 POTTER: Thusly [ed- SIC]:

 DOIC:  Let’s discuss “Ruggership”

 POTTER:  “Of course this isn’t my game, this isn’t my area”

           “Under the heading of “ruggership” comes all of the great interplay of suggestions summarized in the phrase “Of course this isn’t my game”’.  My game (chess, golf, debate….) is grand, or dangerous; or classical… yours is inferior.

DOIC:  We’re going to intermission.

POTTER:  You’re conceding? [laughs].  I’m not going to intermission.  [sits with legs crossed waiting patiently].

            “Sitzfleish(1): A term used in chess to indicate winning by the use of the glutei muscles—the habit of remaining stolid in ones seat, hour after hour, making moves that are sound but uninspired, until ones opponent blunders through boredom”

            (1) Morely, F.  “My one contribution to chess” Faber 1947

DOIC:  When are you lucky?

POTTER: “The gamesman is famous for his sense of fun”

DOIC:  We were asking about your third posit:  “know when to be lucky”

POTTER: 

            “let the gamesman’s advantage over an opponent appear to be the result of luck, never of play”

DOIC:  Thanks for talking with us

POTTER:  Double or nothing?

####halfwit-061206####

Can I win without cheating even if my traditional game is inferior?   How to win games without being able to play them.  Potter says yes.  Begin with a “hamper”.  Something to get under the skin.  Confidence is paramount.

Business application:

Define cheating (legal vs. illegal vs. moral vs. immoral)

Stock picker = handicapper

The most common techniques of gamesmanship are the following.

1. Breaking the flow of an opponent's play.
2. Causing an opponent to take the game less seriously or to overthink his or her position.
3. Intentionally making a "mistake" which gains an advantage over an opponent.

While the first method is more common at higher levels of sports, the last two are more powerful in amateur games.

"I demur and delay – nothing to say."  -Poodah   
Holland Circa 1943

Curious ONEI.OB addendum.

(ONEIDA.H-W) XP-II and XP-I expended approximately $229,933.63 and $213,649.63, respectively, of their own investment capital to acquire the 1,500,000 and 1,500,000 shares of Common Stock held by them, respectively.XP-II and XP-I effect purchases of securities primarily through margin accounts maintained for them with Bear, Stearns Securities Corp.

This Amendment is being filed on behalf of Xerion Partners II Master Fund Limited, a Bermuda limited company ("XP-II"); Xerion Capital Partners LLC, a Delaware limited liability company ("XCP"); Daniel J. Arbess, a Canadian citizen ("Mr. Arbess"); Xerion Partners I LLC, a Delaware limited liability company ("XP-I"); Sunrise Partners Limited Partnership, a Delaware limited partnership ("Sunrise") and S. Donald Sussman, a United States citizen ("Mr. Sussman", and together with XP-II, XCP, Mr. Arbess, XP-I and Sunrise, the "Reporting Persons", and each, a "Reporting Person").

5/8/6
"I have no patience and despise greed." -halfwit

Lettuce  look back on the first half of the year.  Obviously Poodah has outperformed his peers while the Oracle of Jay

 Street has continued to provide Delphic Predictions.  I think that the Ojay would agree that Google = Click Fraud and will subsequently (no matter what Kramer says) decline in value

Eq1.    Google + click Fraud= --> GOOG PUTS

Eq2.     Enron=((Capitalism - Orwellian worries)/Sarbanes-Oxley)(tm)

The Enron trial is about to end.  

Curiously, Oneida limited ONEI.OB has risen to $0.33  The Creditors are trying to take the company PRIVATE.  Local shareholders are arguing that the Junior Creditors are being given too much and that the shareholders deserve compensation.  

Real-Estate/Credit bubble bursting.  Shorted profitable on KBH but, alas, I have no patience and despise greed.

Open positions:

LONG:  KUB, GE, MSFT, HE, RRPIX, RHAT, FNSR, DIS, MDY

SHORT:  CFC (Jan 07' PUTS)

  Scripophily!

I owe an apology to my readers.  Especially those  who hold ONEI.  They did indeed file a pre-packaged bankruptcy last night.  I "had a feeling" as early as Tuesday March 7th and I probably should have posted earlier. While, I'm not sure of my role  as the half-wit, if I can prevent shareholder from getting rooked by the (creditors) management, I think I will have at least provided some worthwhile service.  Some of this goes back to Buffet's comments about management that I discussed a couple of days ago.  The management just gave all of the stock to the "junior" creditors, including preferred, and there is nothing that the shareholders can do about it. 

Here's a summary of the announcement:
1.  A "pre-negotiated" Chapter 11 petition means that a company will have finalized its plan of reorganization prior to filing with the court and received the requisite support for confirmation.

2. All of Oneida's existing common and preferred stock will be cancelled and receive no recovery. Accordingly, the company believes that Oneida's currently outstanding preferred and common stock has no value.

3. Upon confirmation of the plan, all of the common stock of the company would be issued to the holders of Oneida's Tranche B debt.

Tranche B Lenders Agree to Convert 100% of Their Debt to Equity; Oneida Obtains Commitment For $170 Million in Long- Term Financing; Operations Continue as Usual

After consulting with the Oracle of Jay Street, he has informed me that in the event of a bankruptcy there is a "pecking order" as follows:

• Senior Debt (Tranche A)

• Junior Debt (Tranche B)

• Bond Holders

• Preferred Stock

• Common Stock

Oneida Limited Files for Bankruptcy Protection

Well, not yet, but it looks like they are going to.  The stock is dropping like a stone.  Rumors are that the inventory at remote locations are being returned to the centrally located Sherrill Warehouse. How did it come to this? 

In the Mid 90's Oneida was cash rich and a potential takeover target.  Peter Kallet, then the CEO, decided that in order to make the company less appealing to a hostile take over, they would put debt on the balance sheet.  And did they ever.  The borrowed $200Mil and  spent like a sailor on shore-leave buying several companies for the "complete table top".  Business took a downturn in 2001 and they blamed everything from 9/11 to S.A.R.S.  They now had $280 Mil of debt on the balance sheet.  What did they do?  Instead of filing for Chapter 7/11 with sympathetic management,  they agreed  to put the banker's management in charge.  Kallet and company quit and the board of directors and Executives were replaced with the bankers rep.  If they were going to file bankruptcy they should have done it then.  Now the stock is trading at $0.25 and the creditors have control.

Countdown to 100% Loss:

To all those in the Oneida/Sherrill area that have this stock, you have my condolences 
 --The Half-wit

Notes:  I have "bought to open" a Oct 60 PUT on KBH at $5.80 

Some excerpts from Warren Buffett's 2005 letter to Berkshire Hathaway shareholders:

On derivatives:
Long ago, Mark Twain said: "A man who tries to carry a cat home by its tail will learn a lesson that can be learned in no other way." If Twain were around now, he might try winding up a derivatives business. After a few days, he would opt for cats.

We lost $104 million pre-tax last year in our continuing attempt to exit Gen Re's derivative operation. Our aggregate losses since we began this endeavor total $404 million.

On executive pay:
Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won't change, moreover, because the deck is stacked against investors when it comes to the CEO's pay. The upshot is that a mediocre-or-worse CEO – aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo – all too often receives gobs of money from an ill-designed compensation arrangement.....

...Huge severance payments, lavish perks and outsized payments for ho-hum performance often occur because comp committees have become slaves to comparative data. The drill is simple: Three or so directors – not chosen by chance – are bombarded for a few hours before a board meeting with pay statistics that perpetually ratchet upwards. Additionally, the committee is told about new perks that other managers are receiving. In this manner, outlandish "goodies" are showered upon CEOs simply because of a corporate version of the argument we all used when children: "But, Mom, all the other kids have one." When comp committees follow this "logic," yesterday's most egregious excess becomes today's baseline.

Comp committees should adopt the attitude of Hank Greenberg, the Detroit slugger and a boyhood hero of mine. Hank's son, Steve, at one time was a player's agent. Representing an outfielder in negotiations with a major league club, Steve sounded out his dad about the size of the signing bonus he should ask for. Hank, a true pay-for-performance guy, got straight to the point, "What did he hit last year?" When Steve answered ".246," Hank's comeback was immediate: "Ask for a uniform."

On foreign ownership of U.S. assets:
The underlying factors affecting the U.S. current account deficit continue to worsen, and no letup is in sight. Not only did our trade deficit – the largest and most familiar item in the current account – hit an all-time high in 2005, but we also can expect a second item – the balance of investment income – to soon turn negative. As foreigners increase their ownership of U.S. assets (or of claims against us) relative to U.S. investments abroad, these investors will begin earning more on their holdings than we do on ours. Finally, the third component of the current account, unilateral transfers, is always negative.

The U.S., it should be emphasized, is extraordinarily rich and will get richer. As a result, the huge imbalances in its current account may continue for a long time without their having noticeable deleterious effects on the U.S. economy or on markets. I doubt, however, that the situation will forever remain benign. Either Americans address the problem soon in a way we select, or at some point the problem will likely address us in an unpleasant way of its own.

Read the full letter.

I am looking for a way to find book value using a stock screener to emulate Benjamin Graham's "Intelligent Investor"  Can Anyone help me with this?  I see the Poodah has scored big with FNSR.  I however will *not* send good money after bad, having learned on this particular issue in the past.

Syracuse NY newspaper, 1936.   Found in the wall of my 1901 house.  Probably used as insulation.  Coincidentally, I found it October 22, 2005.  "

"The more things change, the more they stay the same"

ENRON: The smartest guys in the room
"Come see where your money all went"

DVD 2005 Magnolia entertainment 110 Min Rated: R (Language/Nudity)

"The documentary could only have been worse if the RATING of nudity was for Ken Lay’s character." -- The Half-wit

MARK TO MARKET = Future sales marked as "profit" today. Accounting scandal
I was expecting this documentary to be mildly entertaining, along the lines of Barbarians at the Gate or Wall Street.  It was not. This is the pointedly biased documentary of Enron. The crux of the scandal is "mark to market".  Enron would post profits immediately and from shell companies.  The whole thing toppled when the analysts could not figure out where all the money was coming from.  

FREE power is expensive when you consider a free MARKET. Extortion, greed no oversight, no libertarians  I wonder if the "story" of Enron is being "pimped". Have I just contributed for someone’s retirement by renting this DVD? Women/fluff: High school bullies=Enron Skilling "incandescently brilliant" Death wish? Blah, blah, fluff… 26:47 p break Nu PI: stripers? Too personal. OP/MM, CO Greenspan and Lay  Power planet in INDIA?  No PROFIT from this PLANT. Dot Com Mania ensues

100% Enron 401K Employee contribution=  RELIGIOSITY
Religiosity: Blockbuster and Enron "Broadband". 53Mil on Mark-market future PROFITS. Getting down on the CEO or the for making TOO much money?  2002 the stock market fall begins to affect Enron.  "The numbers will always be good until they’re not".  "Black box" excuse for not reporting accurately  Fastow ?Jedi: scammed the banks..CFO Structured Finance -$30Bil

Suicide! Jan 30, 2002 Cliff Baxter. Jeff Skilling:  KENNY BOY (PhD Economics): Baptist preacher’s son (not there’s anything wrong with that.) PIC with GWB 42/44. GWB = 42 ? Vahalla Scandal 1987 (KEN LAY) Enron trader Borget Audited by: NEED COMPANY NAME (one(1) year Borget FED) "please keep making us millions "German arms dealer : BS"  You know, I’ve gotta ask where is the other side? Capitalist and the "zero sum game".

Useful Idiots
Bankers are supposed to say "no" but instead they love the deal. Show cash and don’t show debt on the balance sheet" ASK WHY A$$HOLE  California Rolling Blackouts  De-regulation: Unknown: capitalist: The joke’s on California (Stoel Rives LLP Esq)  CEO’s don’t resign "out-of the blue"  Ken Lay’s the FALL GUY (they say Fastow) Enron's Board:"are you on crack" Along time before we trust you again. 

It was a wonderful life
These employees thought they were going to get rich doing nothing "working for the company" Serves them right. Fastow Pleaded OUT. Arthur Anderson : Obstruction o f Justice. OUT. \Definitely "one-sided" we must remember the AMERICAN DREAM. Greed is good. Etc. The  Washington Post panned this as an OP/ED instead of a documentary and they were right.

Notes:  I have sold to close a short position in KB Homes on the January Housing Starts number.  I will short again when KBH in in the 70's.  Next week I hope to pick a stock based on Benjamin Graham's "Intelligent Investor"

--Half-wit

2/14/06

A report on insider activity at homebuilder KB Homes has some interesting observations:

Mortgage Fraud Blog.  It may be time to take a closer look at CFC, NEW, FED, LEND, FNM, and FMC for potential short positions.  Disclaimer:  I have a short position in CFC.  Again, the timing is the issue.  There is a wave of I/O ARM's that will reset starting this summer.  Ameriquest was ordered to pay several hundred million dollars after losing a class action consumer law-suit.  Must.  Resist. Schadenfreude.

+64.45% 

2/13/06

From Barron's (Grantham the founder and investment strategist of the Boston-based GMO)

" If you look at the interest-rate cycle, it seems to have culminated in extended price rises in the three great asset classes: real estate, bonds and stocks. Growth stocks are off their highs by a lot, as are the Internet stocks. But value stocks are at new highs, small caps are at new highs, bonds are at dazzling new highs from 2000 and real estate is at dazzling new highs.

Based on our data, housing is a classic bubble. It is well over a 40-year breakout, or a two-standard-deviation event. So this feels like the end of a cycle, the end of a delicious 23-year run from 1982 to 2005. The forces that went into it cannot be repeated. That's what is so interesting. If you go from 13% inflation to 2%, you pretty well know that game is over. The long bond goes from 15% to 4% and something, and that hardly allows for any inflation, so you know that game is finished.

In Boston, housing costs are at 6.3 times family income, while the long-term average is below 4; that's a huge difference, and it means young people can't afford houses. That can keep going for a while and the fat cats can afford to buy second homes, but in the end you need the kids to come along and be able to afford a house, and they cannot.

There are signs things are beginning to turn. Interest rates have turned and gone up a bit, although the longer rates have hardly moved. House prices look as if they are peaking now. Two of the last three months have been down in price, seasonally adjusted."

History Lesson (Today From Barron's)

2/13/06

I've added a couple of links for some stock basics.  A good general web-site for value investing is the Motleyfool.com.  For interest rates and CD's,  I recommend bankrate.com and finally for do-it yourself investors I would recommend Scotttrade for an on-line brokerage account.  This is also where I do my options trading.  If you would like a couple of free trades on Scotttrade, e-mail me and I'll give you the specifics.  I have heard a rumor that Barron's had an article on a home builder decline for the late summer of 2006.  Can anyone confirm this?  Found It

2/6/06

Homebuilders and Sub-prime mortgage lenders: SHORT
KBH, TOL, CFC, FED

And I am short KB Homes (KBH). I see so many similarities between the real-estate/credit Bubble and the tech bubble of the late 90's that it's too much of a coincidence. 

1. Rampant Speculation ("Flip this house" a series about flipping real-estate) 

2. Run-up in stock prices. 

3. Blogs. With the tech bubble it was a web site that described tech melt-downs (f@ckedcompany.com). Look at the housing bubble blogs. There is no doubt that there is a housing bubble. 

4. It's different this time.  When you hear people explain that this is a permanent situation rather that a normal cycle you know your at the top of the cycle.

5. Amateurs.  "When the guy who shines your shoes gives you stock tips, you know you're in a bubble."  In this case it was a playboy centerfold who explained how she was "flipping" properties.  Ahem.

The timing is the issue. KBH has a lot of California exposure. I think that the lenders are also a good short (Country-wide financial corp CFC, FED, NEW) and perhaps this bust will even affect the Government Sponsored Entities (GSE's) Such a Fannie Mae and Feddie MAC.. I am not a perma-bear. It's a tough market to make any money in. The clearest "trend" I see right now is the credit/homebuilder decline.  

For what it's worth.

The Half-wit
http://www.doic.net