Another Rescue Package, “It’s Not My Fault,” Favorite “Distressed” Plays, and More!

by Addison Wiggin & Ian Mathias

  • Days after Bernanke pronounces the worst over, here comes another rescue package
  • Greenspan says, “It’s not my fault,” as if he hadn’t already made himself clear
  • Chris Mayer lays out his favorite “distressed” plays to BusinessWeek
  • Mainstream media picks up on our end-of-cheap-food theme
  • New commodity boom: Fast-food grease

Here we go again. The private equity firm TPG announced this morning it’ll be tossing Washington Mutual, the nation’s largest savings and loan, a $5 billion subprime lifeline.

Seems like only Thursday Ben Bernanke testified before Congress he thought Bear Stearns was the worst…and that the worst is behind us. Oh yeah, it was only Thursday. Granted, “The government was not directly involved in forging a deal as in the recent purchase of Bear Stearns,” reports The Wall Street Journal,
but still…

The plan would dilute current WaMu shareholders’ shares, which are already down 74% over the last year. But in keeping with today’s market logic, WaMu is up over 18% since the opening bell.

“The core of the subprime problem,” comments Alan Greenspan in this morning’s Financial Times, “lies with the misjudgments of the investment community.”

Since the end of his book tour, Greenspan has been busying himself trying to deflect blame for the global housing bubble away from the U.S. Federal Reserve.

“Subprime securitization exploded because subprime mortgage-backed securities,” he writes, offering the entire sentence with a gravity-defying two monosyllabic words, “were seemingly underpriced…at original issuance. Subprime delinquencies and foreclosures were modest at the time, creating the illusion of great profit opportunities. Investors of all stripes pressed securitizers for more MBSs.

“Securitizers, in turn, pressed lenders for mortgage paper with little concern about its quality. Even with full authority to intervene, it is not credible that regulators would have been able to prevent the subprime debacle.”


Dr. Googly defends his tenure at the Fed

“We have tried regulation ranging from heavy to central planning. None meaningfully worked. Do we wish to retest the evidence?” Indeed. We happen to agree with him…but still wonder, aren’t arbitrary interest rates also a form of regulation?

In the wake of those “misjudgments,” Greenspan’s recession-o-meter still reads greater than 50%…meaning he expects the U.S. to contract for a couple of quarters in 2008. But so far, he hasn’t found any evidence in the data to suggest the recession has begun. Yet.

For what it’s worth, Greenspan endorsed Sen. John McCain for president last week. Perhaps he’s returning a favor. “The issue of economics is something that I’ve really never understood as well as I should,” McCain said a few months ago. But he’s trying to make up for it by reading Greenspan’s biography. At least we know this Republican candidate can read.

“Pundits calling for a housing and financial bottom have been wrong for six months,” writes our Dan Amoss. And they “will probably keep making the same ‘Fed/Congress/Fannie Mae will save housing’ argument well into 2008.”

“Here we advise: Be wary of these arguments. “Comparisons to 2001 and 1990 bottoms are misplaced: They fail to address the still-enormous gap between household incomes and house prices.”

The continuing difficulty of the middle and working classes to afford their homes is causing what you might call a “balance sheet depression” among banks. Dan’s Strategic Short Report
readers have already generated healthy returns from put options on unhealthy financial and housing shares. See what banks he’s got in his sights next, here.

Traders are feeling optimistic as the week begins — a carry-over from last week, when the Dow industrials rose 400 points. The S&P 500 starts the new week about where it left off after a big-time rise last Tuesday.

Asian traders, too, are feeling their oats. The Shanghai Composite jumped nearly 4.5% overnight. And India’s Sensex rose by 2.7%.

A volatile market like the present one is the perfect environment for holding companies investing in “distressed assets,” our nimble managing editor Chris Mayer told Business Week this morning. “Bear markets are often when these guys plant the seeds for their next big winners.”

“Such scavengers,” the magazine glows, “scour the market for stocks, bonds or whole companies to buy on the cheap, paying less than they think the company’s assets are worth. A subspecies, known as vulture investors, aims even lower. These investors pick at carcasses of companies in or approaching bankruptcy, often amassing sizable stakes in order to wield influence in a restructuring or liquidation.”

That is to say, they follow the philosophy Chris lays out in his book Invest Like a Dealmaker. The BusinessWeek
piece highlights some of Chris’ favorite plays in this sector, including Leucadia National, which is up 142% from his initial recommendation, and Brookfield Asset Management, up 82%.

Oil prices have begun the week edging upward. Light, sweet crude is up nearly $1.75 per barrel, to $107.94. OPEC’s chief blamed the weak dollar for expensive goo yesterday, squelching any talk of raising output to ease prices.

“Oil supply to the market is enough,” says OPEC Secretary General Abdullah al-Badri, “and high oil prices are not due to a shortage of crude, but rather it is because of the decrease in the dollar’s value, shortage of refinery capacity and some political tensions in the world.”

Why should OPEC increase production? We ask innocently.

For the first time, planned “infrastructure” projects in the six Gulf Cooperation Council nations — Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain and Oman — will top $2 trillion in value…double the combined GDP of those countries.

The biggest single project — a new city in Kuwait — will cost $77 billion. What better way to spend all the petrodollars flowing in from the West?

“Cheap food, like cheap oil,” writes Paul Krugman in The New York Times today, “may be a thing of the past.”

Despite our best efforts, we like Paul Krugman. Granted, the solutions he proposes to economic conundrums are silly, but they don’t hold a candle to those proposed by his brain-dead compatriot Thomas Friedman. And he’s often on the same wavelength as we are.

“There have already been food riots around the world,” he writes, picking up on a theme we were exploring last week. “Food-supplying countries, from Ukraine to Argentina, have been limiting exports in an attempt to protect domestic consumers, leading to angry protests from farmers — and making things even worse in countries that need to import food.

“How did this happen? The answer is a combination of long-term trends, bad luck — and bad policy.”

“The basic premise of corn-based ethanol’s expansion was flawed from day one,” wrote Kevin Kerr in Outstanding Investments
a month ago. “The vast amount of water, arable land, fertilizer, transport, etc., etc., that goes into creating corn-based ethanol is mind-boggling. The idea of transporting ethanol from Iowa to Los Angeles, or Illinois to New Jersey, in specially designed rail cars and tanker trucks is absurd. There are so many problems with this concept it’s hard to imagine how it ever got the traction it did.

“Playing with our food supply in order to reduce oil prices is simply too much of a gamble, and the consequences of such a wasted effort may prove to do far worse damage than anyone ever imagined.”

Kevin, for what it’s worth, will be a featured guest discussing this very subject on CNBC Asia today…and on Larry Kudlow this evening, since he’ll “be hanging around in 30 Rock this evening anyway.”

Gold inched up to $914 over the weekend.

“I believe that gold will find strong support above $850,” wrote our gold man Ed Bugos on Friday, countering cable news chatter that gold is in a bubble, “regardless of what the U.S. dollar does. The major gold share index, HUI, will find support above 415.”

In the near term, a rising stock market should be very good for the junior miners.

“Small-cap precious metal shares are likely to rally with the Dow,” says Bugos. “The risk-to-reward ratio and relative valuations favor small over large caps. This correction might be just what the doctor ordered to broaden the rally and fix the enormous gap between large- and small-cap returns.”

In an era when thieves are stripping copper pipes from foreclosed homes and stealing wheat from Kansas grain bins, we guess this next bit should come as a no surprise. And yet…

Police in Morgan Hill, Calif., arrested a tanker truck driver last week after he was seen siphoning grease from a storage tank behind a Burger King. Officers figure he was planning to take it to a nearby refinery, where a full tanker of the glop — 5,000 gallons worth — would’ve fetched $6,750.

“Our guess is it’s a biodiesel fuel thing,” the Morgan Hill police chief said. “It’s like someone stealing copper wire. This might turn into something that starts to occur more frequently.”

Yummy.

“After this deal is consummated, the shareholders will lose 93% of their stock value as of last June,” writes a reader, objecting to the media’s use of the term ‘bailout’ when referring to the Fed-backed, but as yet unconsummated, J.P. Morgan/Bear Stearns deal.

“Employees and managers invested in Bear stock have big stock losses, most of which was earlier compensation. They predict that only 7,000 of the 14,000 Bear employees will be out of a job. The former CEO sold his stock that had been worth close to a billion dollars last summer for $60 million recently.

“The idea that Bear Stearns’ business partners have benefited is absurd. As with any bank, once the Fed stabilized the company, it could withdraw any cash or securities it had on deposit; however, if it has losses on those securities, the losses still remain.

“Owners, managers, employees and customers all got hammered, so where is the ‘bailout’?”

The 5: We can only surmise they either work for or owned shares in Bear, which is unfortunate.

“Since the taxpayers indirectly will be paying for the Bear Stearns bailout,” another reader writes, “I suggest the Treasury just buy all the shares and distribute them to all of the U.S. taxpayers. I would imagine most people would sell them for cash and spend it, creating a glut of stock supply. The brokerage would have windfall commissions, the economy would be stimulated and astute investors could buy the shares on the cheap. Win-win-win. Bloody brilliant, eh?

“On the other hand, I dread that Congress will elect itself as the board of directors.”

Lastly, Whiskey & Gunpowder’s Greg Grillot forwarded this bit of levity from The Washington Post this morning:

Best,
Addison Wiggin
The 5 Min. Forecast

P.S.: Byron King’s play on the Chinese attempt to corner the “rare earth” market is already up 5% in a week. Stranger things have happened. Look for more on Energy & Scarcity Investor later today…cheers.

rspertzel

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