Bearish News

When banks crashed on Mr. Obama’s inauguration day, the obvious catalyst (in my mind) was Obama’s pledge for an open and transparent economy. I don’t think banks want transparency. His comments about “the greed of some” couldn’t have helped either. He seems to favor taxpayers over rich bankers… Odd.

His move today to reform the FOIA (Freedom of information act) is a good first step. He ordered the relevant agencies to change their M.O. to favor the taxpayer. According to Obama, these agencies “should act promptly and in a spirit of cooperation, recognizing that such agencies are servants of the public”. Interesting theory.

I like Obama, he was the first candidate I’ve ever donated money to. But my biggest question is this: is he willing to sit down with the fed, treasury, and say “it’s not in American’s best interest to be in the dark, despite what you think. So what exactly have you been doing with taxpayer dollars? We’re going to show everything to everyone.”

I hope so. But with Geithner, a Fed insider, in charge I’m…. puzzled. Transparency means letting us know where our money, not to mention our gold, is.

Trading note – Shorted some GS today at $66.73, new position. I think Obama may reveal information that these big banks don’t want to be public. This is just based on my opinion on Obama’s character, so please don’t trade on it. After all, I’m down 3 pts on this trade so far. Will probably cover around $75 if it gets there. But I just don’t see how those earnings are sustainable.

Remember: the market’s irrationality can outlive your liquidity. Imagine having shorted oil at $80 on the way up, only to see it almost double. The short would have been correct in his evaluation of oil’s true price, but it was an irrational speculator’s market. So he probably covered, or lost a lot of investment opportunity in the meantime.

Trend=friend. I’m being a little stupid here, basing my short on a new president. But it’s kind of a gut feeling, I don’t fully understand the balance sheets of these banks, like everyone else. I’ll cover for a loss if necessary.

Disclosure: short JPM (puts), SPG, GS.

Simon Properties Group (SPG) is the nation’s largest REIT mall operator. They sport a fat dividend of around 8%. They own full or partial stakes in hundreds of malls, some of the biggest and best.

I can almost see the allure, but in the current economy, SPG is a nightmare. Look at their balance sheet: debt/equity ratio is around 5.4, which is… leveraged to say the least. Total debt of $17.88 billion. Current market cap is $9.3 billion. And people want to buy this stock? It’s already down from around $120 in Feb of 2007. Maybe they think it has to be a bargain, since it’s down so much?

The most puzzling fundamental, though, is their trailing P/E of 23. What’s the justification? Will retail have a miraculous bounce in the foreseeable future? No. Is SPG a potential buyout candidate? Maybe, but I can’t imagine anyone wanting to take on their debt right now. With plummeting consumer spending, $17 billion in debt, and debt-laden tenants, the outlook is bleak.

Headwinds SPG faces include: Stores are going bankrupt due to the drop in consumer spending. Circuit City, for example, has 10 stores at Simon properties. KB Toys and other former retail juggernauts have shut down recently too. A lot more will follow. I don’t know about you, but my local mall has a few going-out-of-business sales running.

The effect on SPG could be catastrophic. This company is highly leveraged, and designed to operate in an easy-credit environment. They’ve built an impressive portfolio of properties, and part of me admires the scope of it all. But there’s too much debt, too little credit, and a consumer-frugality movement coming like we’ve never seen before.

I added to my short position in SPG last Friday, as I posted here. Haven’t covered any of that, and suspect SPG has much farther to fall. If you’re bullish on this stock, please post a rebuttal. I’m short, so need as much info as possible.

Disclosure: I am short SPG and JPM (puts).
Overall disclaimer: I’m an amateur investor, and may not know what I’m talking about. Do your own research.

More info:
Simon Properties Investor Relations
Circuit City collapse could hit real estate investors
Ghost Malls Will Be Appearing

These are the only long positions I feel are good values right now. There will come a time when the overall U.S. market is a great place to invest in. But we’re not there yet.

There’s a lot of bad business models and practices we need to kill first. The financial system needs to be demolished and rebuilt. There’s tons of necessary reform to be done. But will it get done right? I’m optimistic, but will mostly be on the sidelines until the picture is clearer.

I’ll keep holding decent-sized short/put positions in CRE (mostly SPG) and banks (JPM). But government intervention is the big nasty unknown. And I need to figure out how this flation issue is gonna play out, ASAP. Cause right now I’m torn about precious metals, like a lot of others.

How baffling is it that Analysts didn’t see the huge drop in consumer-spending coming? Are these guys idiots? Possible. There’s another theory floating around: Ratings are directly influenced by the analysts’ mutual-fund-managing colleagues.

Hypothetical situation: Bob manages a $30 billion mutual fund at Example Corp. Example also has hundreds of equity analysts that issue/sell their research/advice to clients. As everyone knows, a big firms’ recommendations can really move the markets.

Let’s say Bob’s funds are not performing well. But Bob has brought in billions in revenue for the company, so he’s got major power and influence. It’s easy to imagine a situation where Bob has enough power to influence analysts.

Jim Cramer was the first to educate me on this old fraud. He ain’t perfect, but I love the guy. I realize this is probably old news to market veterans.

An important question is: Is the interaction/influence between managers and analysts regulated or monitored? I have no idea. I despise excess regulation and bureucracy, but this seems like an area that could really harm market effieciency.

Editor’s note – I originally had a bunch of F-bombs in this post, but decided to remove them. I got excited when Clusterstock published a post with the F-bomb in it, and ran with it. But I think it might cause your site to get filtered by Google. And I’m vain, and want this site to be read. So I removed the F-bombs.

Update on an earlier post. I don’t think this has hit major media outlets yet. I can’t find it anywhere other than Etrade’s news feed (have to be logged in, and it’s not on the ticker page yet). State Street should be applauded for their timing on this one, the story has so far avoided major news wires. So I’m posting the whole thing here (source: Dow Jones):

State Street Corp. (STT) on Friday reported that it faces liquidity risks and potential financial losses as a result of issues related to its long-term securities portfolio, its commercial paper dealings, and the unregistered cash collateral pools it operates.

The Boston-based financial services company said that at the end of 2008, it had $5.5 billion in unrealized after-tax losses in its long-term portfolio of investment securities classified as available for sale and held to maturity.

The company said it must periodically determine if those losses are “other-than-temporary,” and said for the fourth quarter it will report $78 million in other-than-temporary losses.

A significant future charge could damage the company’s capital ratios, lead to credit ratings downgrades and “might adversely impact our ability to access the capital markets,” the company said in a filing made with the Securities and Exchange Commission. In the filing, State Street also detailed how the asset-backed commercial paper conduits it administers could expose the company to liquidity and interest-rate risks. State Street said that as of Dec. 31, it held $230 million in commercial paper issued by the conduits on its consolidated balance sheet – but said that figure doesn’t include $5.7 billion issued by the conduits under the Federal Reserve’s Commercial Paper Funding Facility.

At the end of 2008, State Street said, “there were $3.6 billion of after-tax net unrealized losses associated with portfolio holdings of the conduits.”

State Street said that because it may have to buy assets from the conduits under some circumstances, the company is exposed to the credit risks in the conduits’ portfolios.

State Street also identified a source of risk in the unregistered cash collateral pools underlying its securities lending program.

State Street said that it has transacted purchases and redemptions in those pools at a net asset value of $1 a unit, even though the portfolios underlying the pools often had lower values.

State Street said that as a result of those transactions it could be “exposed to customer claims, financial loss, reputational damage and regulatory scrutiny.”

Based on a net asset value of $1 a unit, State Street said, the value of its unregistered cash collateral pools was about $113 billion at the end of 2008.

State Street, however, said that the market values in those pools ranged from about 90.8 cents a unit to $1 a unit – with a weighted average net asset value of 95.5 cents a unit.

State Street said that its practice of continuing to conduct transactions at $1 a unit is consistent with industry practices and in compliance with the terms of the pools.

But the company also warned that if unregistered cash collateral pools are ultimately insufficient to support redemptions at $1 a unit, investors “may seek to hold us responsible for any shortfall” caused by prior redemptions above the market value.

I’ll post a real source when I find one.

Disclosure: No position in STT. I own JPM puts, and am short various indexes. I own two short mutual funds. But I am an amateur, so don’t take anything I say too seriously.

State Street (STT) just put out some gnarly news. It’s new, so I can’t find a linkable copy. Only seeing it on on Etrade when logged in, which is odd. The source is Dow Jones. Here’s a snippet of tonight’s release:

The Boston-based financial services company said that at the end of 2008, it had $5.5 billion in unrealized after-tax losses in its long-term portfolio of investment securities classified as available for sale and held to maturity.

They made the following statement at the end of 2008, which estimated a much smaller loss:

At the end of 2008, State Street said, “there were $3.6 billion of after-tax net unrealized losses associated with portfolio holdings of the conduits.”

Note the timing of this release. A Friday night, on a holiday weekend, after the close of after-hours trading, when only true losers like myself are obsessively analyzing the market and scanning for nasty pre-holday weekend news.

Looks like the loss was related to “stable value” type funds. I’m looking for more info and will post an update.

Note – The FDIC also chose this prime-time to announce the takeover of National Bank. Ugly, ugly, ugly. Releasing negative news before a long holiday weekend sucks all-around. It makes the whole system look dishonest and like they’re hiding something. A lot of something.