Random Thoughts for the Week
I was responding to CAK in the comments and decided to make it a stand-alone post, and comment on a few other events.
Potential Mortgage Fraud
CAK referenced this article in the New York Times talking about questionable loan practices, including potential fraud. I quickly glanced at that article. If fraud was committed against the insurers, they likely won't be liable to pay out claims. However, I personally don't put much weight to any of this. It's going to be difficult to prove anything; a lot of Ambac's risky obligations are derivatives (i.e. CDOs) and who knows what recourse is available for those; and by the time any of this works through the courts Ambac and MBIA will either be flying high in the skies, or bankrupt... if anything most of what the article talks about probably impacts the mortgage insurers like PMI, MGIC, TGIC, RDN, and the like.
Jim Grant's Prescient Article on Mortage Insurance
Oh, while I'm on the topic of mortgage insurance, here is a prescient article from Jim Grant. Not everything Jim Grant has said has come true; but most of it has (come true). He was thinking that TGIC might be the one that will fail but others like PMI and RDN are also being treated as if they will not survive.
The confusing thing for investors and non-investors alike is that, as one of the charts illustrating PMI's loss ratio in the article shows, the financial guranty business is a topsy-turvy world, remniscent of tidal waves cresting in the ocean. Things are sort of good and bad at all times in the business cycle. When defaults are low, competition is fierce and premiums are low; when defaults are high, competition falls by the wayside and premiums are high. As I pointed out in this post before, mortgage insurance premiums are skyrocketing and quality of mortgages are improving so things are actually better now than 3 years ago... that is, if all the bad insurance you wrote 3 years ago can be absorbed without bankrupting these companies.
Every time I read Jim Grant, I am always immensely impressed. I can't afford his subscription but anyone working in the industry should seriously check out his site and see if he is your cup of tea (the $850 he charges is probably worth a hundread times more than what the typical Wall Street or Bay Street firm puts out). He is like the Stanley Kubrick of investing. Obscure (casual investors probably never heard of him); writes well; boring as hell if you aren't into it, but keeps your attention if you like it (just like Kubrick's masterpiece, 2001: A Space Odyssey); intelligent (I can't understand half his stuff :) ); and uniquely insightful (covers topics that others just skim over).... OK, enough praise for the man for one day... I don't dig his Austrian Economist views though...
MBIA Note Looking Good
The $1 billion MBIA note looks better the more I read. Interest payments are tax-deductible so the true cost (probably around $90milion/year) will probably be similar to the dividend cut that MBIA made last week. However it does weaken shareholders ($1 billion claim above the shareholders if MBIA goes into run-off).
There is also a lot of confusion over ratings. Debt ratings refer to the underlying debt and not necessarily the company issuing it. Any company out there can issue debt rated above their company rating; or below their own rating.
Furthermore, some people, especially the bears, don't even realize that the holding companies of MBIA and Ambac are rated AA (always have been AFAIK). What is rated AAA is their insurance subsidiaries. For our purposes, as shareholders, this doesn't matter much. But I still find it annoying when people compare Ambac and MBIA to G.E, Berkshire Hathaway, ExxonMobil, Toyota, or Automatic Data Processing. News to everyone: the bond insurance holding companies have never been rated AAA in their life (as far as I know)!
Ambac & Las Vegas Monorail
A poster by the name of bxcapricorn posted this good write-up of the Las Vegas Monorail situation. For those not familiar, this is the story of how one of Ambac's insured bonds for the Las Vegas Monorail may default within a couple of years. According to the linked article, Ambac may take ownership of the rail and run it themselves. Not exactly good news for Ambac but this is a long-term situation and the mortgage problems are a more of a concern for the next or two. The total exposure for Ambac is around $500 million.
Shorting Bond Insurance
If anyone is curious about what the bond insurer shorts may be thinking, I think Jim Cramer provides some insight. Jim Cramer was supposedly one of the best short-term oriented hedge fund managers in the 90's (as with most hedge funds, claims are next to impossible to verify for small investors) so I think it's worth paying attention to his thinking regarding momentum investing. Cramer says the Gang of Four (ABK, MBI, MTG, PMI), not to be confused with Cramer's Four Horsemen of Technology, should be avoided by longs and the shorts should cover. He says that the shorts almost have to cover but he thinks the shorts should put on their trades later on after a short-covering rally. He was making this comment after the Berkshire joint venture/takeover rumours so who knows what his opinion is now. There has been some wild action in the monolines in the last 2 days so it'll be interesting to see what happens next week.
Economy & The Stock Market
Contrary to popular opinion, the economy and the stock market are not correlated very well (check out this article from Crestmont Research). Yes, when the economy does poorly, corporate profits weaken and the stock market declines. But the stock market has collapsed many times without much happening to the economy. Calculated Risk's chart below clearly illustrates how the market can decline without there ever being a recession (note that the chart shows year-over-year monthly changes and is not the same as calendar year returns):
The stock market had rough times in 1977, 1984, 1988, and 1994, without any recession. I'm not saying there won't a recession but simply saying that you can't use the stock market for that.
So the next time someone says that stock market is forward looking and a recession is imminent if stocks post negative returns, you know that's complete nonsense. One side of the thesis is true but the collorary is not, hence making the whole concept meaningless from an investment point of view. That is, you don't make money by predicting recessions; you make money by predicting stock market corrections.
Marc Faber Interview
FinancialSense carried out a radio interview with Marc Faber for their January 12th, 2008 show. He provides his expectations for the year (check out the MP3 version here). I don't agree with all of Marc Faber's views (don't dig his Austrian Economist gold-oriented views) but always find him insightful.
Potential Mortgage Fraud
CAK referenced this article in the New York Times talking about questionable loan practices, including potential fraud. I quickly glanced at that article. If fraud was committed against the insurers, they likely won't be liable to pay out claims. However, I personally don't put much weight to any of this. It's going to be difficult to prove anything; a lot of Ambac's risky obligations are derivatives (i.e. CDOs) and who knows what recourse is available for those; and by the time any of this works through the courts Ambac and MBIA will either be flying high in the skies, or bankrupt... if anything most of what the article talks about probably impacts the mortgage insurers like PMI, MGIC, TGIC, RDN, and the like.
Jim Grant's Prescient Article on Mortage Insurance
Oh, while I'm on the topic of mortgage insurance, here is a prescient article from Jim Grant. Not everything Jim Grant has said has come true; but most of it has (come true). He was thinking that TGIC might be the one that will fail but others like PMI and RDN are also being treated as if they will not survive.
The confusing thing for investors and non-investors alike is that, as one of the charts illustrating PMI's loss ratio in the article shows, the financial guranty business is a topsy-turvy world, remniscent of tidal waves cresting in the ocean. Things are sort of good and bad at all times in the business cycle. When defaults are low, competition is fierce and premiums are low; when defaults are high, competition falls by the wayside and premiums are high. As I pointed out in this post before, mortgage insurance premiums are skyrocketing and quality of mortgages are improving so things are actually better now than 3 years ago... that is, if all the bad insurance you wrote 3 years ago can be absorbed without bankrupting these companies.
Every time I read Jim Grant, I am always immensely impressed. I can't afford his subscription but anyone working in the industry should seriously check out his site and see if he is your cup of tea (the $850 he charges is probably worth a hundread times more than what the typical Wall Street or Bay Street firm puts out). He is like the Stanley Kubrick of investing. Obscure (casual investors probably never heard of him); writes well; boring as hell if you aren't into it, but keeps your attention if you like it (just like Kubrick's masterpiece, 2001: A Space Odyssey); intelligent (I can't understand half his stuff :) ); and uniquely insightful (covers topics that others just skim over).... OK, enough praise for the man for one day... I don't dig his Austrian Economist views though...
MBIA Note Looking Good
The $1 billion MBIA note looks better the more I read. Interest payments are tax-deductible so the true cost (probably around $90milion/year) will probably be similar to the dividend cut that MBIA made last week. However it does weaken shareholders ($1 billion claim above the shareholders if MBIA goes into run-off).
There is also a lot of confusion over ratings. Debt ratings refer to the underlying debt and not necessarily the company issuing it. Any company out there can issue debt rated above their company rating; or below their own rating.
Furthermore, some people, especially the bears, don't even realize that the holding companies of MBIA and Ambac are rated AA (always have been AFAIK). What is rated AAA is their insurance subsidiaries. For our purposes, as shareholders, this doesn't matter much. But I still find it annoying when people compare Ambac and MBIA to G.E, Berkshire Hathaway, ExxonMobil, Toyota, or Automatic Data Processing. News to everyone: the bond insurance holding companies have never been rated AAA in their life (as far as I know)!
Ambac & Las Vegas Monorail
A poster by the name of bxcapricorn posted this good write-up of the Las Vegas Monorail situation. For those not familiar, this is the story of how one of Ambac's insured bonds for the Las Vegas Monorail may default within a couple of years. According to the linked article, Ambac may take ownership of the rail and run it themselves. Not exactly good news for Ambac but this is a long-term situation and the mortgage problems are a more of a concern for the next or two. The total exposure for Ambac is around $500 million.
Shorting Bond Insurance
If anyone is curious about what the bond insurer shorts may be thinking, I think Jim Cramer provides some insight. Jim Cramer was supposedly one of the best short-term oriented hedge fund managers in the 90's (as with most hedge funds, claims are next to impossible to verify for small investors) so I think it's worth paying attention to his thinking regarding momentum investing. Cramer says the Gang of Four (ABK, MBI, MTG, PMI), not to be confused with Cramer's Four Horsemen of Technology, should be avoided by longs and the shorts should cover. He says that the shorts almost have to cover but he thinks the shorts should put on their trades later on after a short-covering rally. He was making this comment after the Berkshire joint venture/takeover rumours so who knows what his opinion is now. There has been some wild action in the monolines in the last 2 days so it'll be interesting to see what happens next week.
Economy & The Stock Market
Contrary to popular opinion, the economy and the stock market are not correlated very well (check out this article from Crestmont Research). Yes, when the economy does poorly, corporate profits weaken and the stock market declines. But the stock market has collapsed many times without much happening to the economy. Calculated Risk's chart below clearly illustrates how the market can decline without there ever being a recession (note that the chart shows year-over-year monthly changes and is not the same as calendar year returns):
(source: Calculated Risk)
The stock market had rough times in 1977, 1984, 1988, and 1994, without any recession. I'm not saying there won't a recession but simply saying that you can't use the stock market for that.
So the next time someone says that stock market is forward looking and a recession is imminent if stocks post negative returns, you know that's complete nonsense. One side of the thesis is true but the collorary is not, hence making the whole concept meaningless from an investment point of view. That is, you don't make money by predicting recessions; you make money by predicting stock market corrections.
Marc Faber Interview
FinancialSense carried out a radio interview with Marc Faber for their January 12th, 2008 show. He provides his expectations for the year (check out the MP3 version here). I don't agree with all of Marc Faber's views (don't dig his Austrian Economist gold-oriented views) but always find him insightful.
Actually, if you think about this, If the loss is big enough to sink the company, it would probably happen before the 5 years is up, and render the MBI note worthless. This means that there are a lot of investors out there that does not take the dim view of Mr. Ackman.
ReplyDeleteJohn
From Bloomberg today.
ReplyDeleteMBICDO
Thanks for visiting my site. I'll continue to monitor the LV Monorail situation, as there is even talk of a MagLev train from LA to Las Vegas. As for those with interest in AMBAC, I'd really focus on the links I added to the end of the story, that takes you to Bill Ackman's presentations. When I saw AMBAC investors coming to read the post, I thought I should tailor the post a bit with what I have been reading about Ackman and AMBAC.
ReplyDeleteDoes anybody know where bxcapricorn moved his excellent financial blog?
ReplyDelete