The Second Wave, Too Big To Fail Legislation, Tech Bubble Redux, Wind Power and More!

by Addison Wiggin & Ian Mathias

  • Chris Mayer with one chart that proves “it isn’t over yet”… and a short play to match
  • Wave of weekend financial failures… Congress mulls scary-sounding “too big to fail” legislation
  • Dan Amoss explores the “recovery illusion” that’s approaching tech bubble exuberance
  • Plus, a “rare” reason why wind power might never serve the U.S.’ needs

 

  “This chart shows you it isn’t over yet,” Chris Mayer begins today. Chris, Dan Amoss and Addison Wiggin all made the trip to NYC last week to attend the annual Value Investing Congress. Here’s the bit that caught Chris’ attention, a redux of the famous Credit Suisse chart, courtesy of Whitney Tilson and Glenn Tongue of T2 Partners:

“These helped frame where we are in the mortgage crisis,” adds Chris, “which has been the main shark in the water over the past couple of years. You should know where that shark is and whether or not it is hungry…

“Clearly, it is not yet safe to get back in the water: Years 2010 and 2011 face big resets in so-called Alt-A and Option ARM loans. What this means is more write-downs and more losses for banks and others who hold these mortgages.

“The bounce in home building stocks looks ridiculous in light of what they have to look forward to. The T2 duo actually recommended shorting the home building stocks through the iShares Dow Jones U.S. Home Construction ETF (ITB)… I like the idea of shorting homebuilders. At the very least, I wouldn’t buy one.”

If you want to know what Chris would buy, you can find out today for just $1.

  A $20 billion commercial real estate operation quietly went under over the weekend. Capmark Financial filed for bankruptcy protection Sunday, a not-so-surprising turn of events for a real estate company with $20 billion in assets and $21 billion in liabilities. This will go down as a real home run investment for private equity giants Kohlberg Kravis Roberts, who bought 73% of Capmark at the height of the housing bubble for $1.5 billion in cash and $7 billion in debt. Ouch.

And most of the remaining (now worthless) stake is owned by GMAC — the financial arm of GM. Helluva track record for them too, eh?

  Seven more banks failed last weekend, bringing the yearly sum to 106. Three in Florida and one each in Georgia, Illinois, Minnesota and Wisconsin will end up taking a $356 million bite out of the FDIC’s deposit insurance fund… which ran out of real money months ago.

  Back in Washington, Congress is getting ready for the next crisis… in their own strange way: The House Financial Services Committee might introduce new “too big to fail” legislation as soon as this week. Led by our “favorite” representative Barney Frank, rumor has it that the new regulations would, in the words of the N.Y. Times, “make it easier for the government to seize control of troubled financial institutions, throw out management, wipe out the shareholders and change the terms of existing loans held by the institution.”

So rather than proposing legislation that might keep banks from becoming TBTF, Congress aims to make it easier to nationalize them upon their demise? We’ve even heard this rumored legislation explained as a “living will” for banks… scary.

  “We should be phasing out the government guarantees of the banking system’s liabilities,” says Dan Amoss, armed with a viable alternative. “That, I assure you, would discourage foolish risk-taking among bankers. Case in point: Goldman Sachs behaved in a much more responsible, sustainable manner when it was a privately owned partnership without government guarantees, rather than the high-frequency trading, TLGP-hogging, heavily lobbying institution that it is today.

“Like an addictive drug, today’s fiscal and monetary policies have made everyone feel better, but have further weakened the structural health and sustainability of the economy. If you doubt this, just look at the horror in most investors’ eyes when they are confronted with the prospect of a fed funds rate above, say, 2% — up from today’s range of zero percent. The addiction to E-Z credit and government support everywhere you look is one of the clearest reasons that this economic recovery is an elaborate illusion.

“Yet we still see examples of extreme inefficiencies in the valuation of certain stocks. It feels eerily similar to the tech bubble, with investors behaving as if today is the last chance they’ll ever get to buy Amazon.com stock at less than 80 times earnings. Whether it’s the sky-high multiple on Amazon’s maturing business, which seems to be discounting that every Chinese citizen will own a Kindle within five years, or the expectation that banks employing creative accounting have seen the worst of their credit losses, many investors are putting real money behind their belief in a super-bullish economic environment.”

  The stock market is still in stall mode. Despite all the big swings, the S&P declined 0.7% for all of last week.

  The dollar index is at 75.3 today, just off its yearly low, thanks mostly to this:

  “China should reduce the proportion of dollars and increase the proportion of the euro and yen,” Zhou Hai, a People’s Bank of China bigwig wrote in a state-sponsored newspaper early this morning. This is nothing new coming from prominent Chinese bankers… heh, but every time the FX community hears China preping to dump the dollar, the trading screens flicker to life. The euro rose to a 14-month high of $1.50. The yen is at 92, about 5 points from its strongest level this year.

  The beaten-down dollar is helping gold maintain its recent rise. The spot price is at $1,055 as we write, about $15 off gold’s record high.

The same way tempered enthusiasim is dragging down stocks, the recent oil rally is fading a bit today. After reaching as high as $82 a barrel late last week, crude is back to $79 today.

  Have you noticed rising gas prices lately? The national average price at the pump shot up almost 18 cents a gallon over the last two weeks, today’s survey from Trilby Lundberg claims. The typical cheap stuff now goes for $2.66.

  “There was quite a meeting in Washington, D.C., this week,” our resource man Byron King rounds off today’s forecast. “Some of the key players in government and the metals industry came together in the same room to discuss the looming shortages of critical elements that are coming down the road…

“Some so-called "technologies of the future" are destined to fail due to lack of critical metals with which to effect buildout. Take the rare earth, neodymium, for example. It’s a component of strong permanent magnets — which are made out of a mixture of neodymium, iron and boron.

“Strong permanent magnets are critical to gaining efficiency in rotating power-generation units like, say, windmills. Y’know… we’re going to replace burning fossil fuels with windmills, right? Isn’t that the idea? We’re going to live in the United States of Windmills, right?

“Except one fact of physics is that without strong permanent magnets, you can’t generate nearly as much power with each turn of the large blades. So neodymium — in the magnets — is critical to our windmill future. There’s NO substitute for neodymium, and believe me, people have tried to figure a way around it.

“But with neodymium, as with a host of other relatively obscure substances from the periodic table, the global supply is precarious. In some cases, the supply chain is at great risk because there are but a few sources. For some of those sources, we see things like a major mine playing out due to depletion (Baotou, China, for rare earths) or shut down due to environmental issues (Mountain Pass, Calif., again for rare earths). With other metals, many mines are effectively off-limits due to political problems (in the Congo, for instance).”

If you haven’t checked it out yet, Byron wrote an investment report on this meeting last week – including one “post strategic summit” play that could rise over 600% by this time next year. Read it for yourself right here.

“I’ll start by saying I paid cash for my home, a nice luxurious place,” a reader writes. “I don’t carry debt on anything and never really have.

 

“I fully support and encourage the walk-away home-‘owners.’ Both buyers and banks speculate on the ‘value’ of a property in a mortgage and it’s perfectly legal and moral for the ‘buyers’ to stop paying, which is why the contract details what happens next and why there’s collateral in the first place.

 

“My gripe is with the idiots that bid up property ‘values’ (including mine, which only costs me more in taxes for nothing) and the government that backstops them and gives freebies and incentives to only some buyers, at my expense. If any good can come to me from all this, it is that prices go down where they belong, much lower, and I thank all walk-aways for helping that along.”

  “I see credit rating agency Moody’s Investors Service has placed Bank of Montreal’s debt rating on review for a downgrade," a reader wrote on our blog late last week. (And by "wrote," we mean 95% copy/pasted from a Globe and Mail bit… shame on you.)

“The recent period of financial and economic stress has revealed weaknesses in the bank’s U.S. business, Moody’s said. BMO’s U.S. operations have had two consecutive years of losses, and in all likelihood 2009 will mark the third, it said…”

“Can we look forward to a comment from Dan in The 5 tomorrow?”

The 5: Dan did write his Strategic Short Report readers on Friday. Since his airing of BMO’s dirty laundry has become a bit of a public affair, we’re happy to share a portion of his comments today:

 

“Moody’s says that the review will focus on the following four factors:

· The potential for continuing volatility in BMO’s capital markets business

· The time frame for Harris Financial’s return to profitability on a consistent basis

· The prospect for continuing credit losses in Canada and the United States, and

· BMO’s prospective risk-adjusted profitability before and after loan loss provisions and taxes.

“These four factors are reason to be skeptical of BMO’s long-term earnings power. I expect that BMO’s cumulative credit losses through the rest of this cycle will surprise the complacent shareholders of BMO, who appear to believe that we’re past the peak. I’m evaluating BMO for another set of longer-dated put options, but for now, hold your December BMO puts. Do not add to them.”

Best,

Ian Mathias

The 5 Min. Forecast

P.S. An apology in advance: You won’t be getting your daily 5 Min. Forecast again until Thursday. All of Agora Financial’s editors and writers are meeting at our Baltimore HQ this week for our bimonthly editorial meeting. We’ll brainstorm. We’ll analyze. We’ll debate. We’ll eat the best BBQ in town. That’s a recipe for an enjoyable few days for this editor and — God willing — some great new investment and economic ideas for your digestion as well. We’ll be in touch on Thursday for the choice bits from our marathon meetings.

P.P.S. If you get FOX Business News, tune in today just after 3 p.m. EST. Our resource trader Alan Knuckman will be sharing his thoughts. But if you seek his advice – the kind that just brought his readers 106% profits trading crude oil – look here.

rspertzel

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