Brace Yourself

Earlier in the week I had a meeting with a client. I’ve been swamped and I am just now getting a chance to sit and get this down. I imagine this is old news for a lot of you, but I thought a “yup, heard the same” or a follow up comment or two would assist in getting a handle on it. Also, maybe this is useful info to anyone who is hoping the bottom was [insert random day]. I’ve known her a long time. She is very smart, self made, and she has worked hard to get where she is. She has always been quite comfortable with risk. I have a lot of respect for her and I value her input. She is a VP at a ******* loan provider. I know they pool loans and issue ABS to raise cash, so on the walk to lunch I asked a couple of tame Q’s to fish for info. She wasn’t giving up a lot, but after we ordered a couple burgers she started to talk more freely. The Co. has attempted to auction securities, AAA, gov’t backed, and received no bids. The IB is stuck. The Co. just can’t get a handle on why or how a AAA issue fails. “We previously gave that a 1 in 300,000 chance of ever happening.” They may have to buy the issue for 90 cents on the dollar and just put them in the closet. The end result is that they are having a very difficult time raising cash to fund new loans. They first noticed the changes in Sept-Oct. (Umm yeah, I wish we had the discussion then) and in ’07 they went lean and cut x00 positions. She added that they have had conversations with several banks that they compete with and they are just now saying the things and making the changes that her co. began saying & making last year. She didn’t say that to make herself sound smart or important or ahead of the curve, but to express that the banks are not nimble. The size and layers of their bank competitors results in a time lag to analyze, plan and implement. She added that part of their concern w/ the banks is that even if we ignore the expected negative effects of delayed action, she fears that the recommendations to deal with the problems are formed by people entrenched in it. Those managers are likely resistant to acknowledging the full extent of the problem or in making a necessary painful adjustment because it would impact them personally and professionally. Everything she is hearing and seeing implies a time frame of 2-years. In response, the Co. is making changes in their strategy to account for a 2-year stretch of tight money. She presented 3 possible scenarios. 1.) New loan biz slows further, more cuts, a tighter budget and she needs cash, 6-mos. out. 2.) The owners sell the firm in a near fire sale to generate liquidity and she finds herself with some cash in her pocket but with a new boss or out of work and looking for a new gig, and 3.) Complete financial meltdown… [Note the obvious omission – 0.) the worst is over and in a few months it is business as usual.] To see this described firsthand with such visible concern was an eye opener. Here is a smart, young, successful VP with a long-term investment horizon and an appetite for risk seeking deposit accounts for FDIC. In our business you don’t often hear people say that they don’t care what the rate of return is. “I know a AAA muni yield looks OK, but I see AAA and that means nothing to me. I don’t care what the rate is. I want liquidity and I want FDIC. I have 2 kids.” This gets worse before it gets better. Brace yourself.

This and the daily barrage of bearishness a la CNN, CNBC etc. is only making me feel more bullish. I was always bearing out on this forum since last summer, but now that we see this sort of stuff I think it’s time to buy risky assets again, or it will be very soon.

Internal rumors from a credible source at my firm is that the axe is coming down starting Monday.

well, i work for a large commercial bank. i coulda told you that. i mean things are f-ed up big time. especially when you can see stuff internally from the front lines as an employee

Ouch: http://news.yahoo.com/s/nm/20080308/bs_nm/wallstreet_losses_jpm_dc_1

I think that woman is too close to the matter and frankly, liquidity squeezes are why Warren Buffett and other contrarians are so rich (CFA_halifax is probably buffett, I heard he posts here). We chatted about various A rated munis. On friday my bid came through on 2 of them. 381008AD3 Single A rated, Golden Empire, Kern County School — got a 10% yield! 768901SK7 Triple A rated, Riverside County — got a 6% yield! both triple tax free… don’t know when the party will end but I could care less about the liquidity issue so long as i’m getting a yield like that! When the liquidity problem is gone my yield will drop and I’ll cash out. I dug more into the Kern issue since I figured it’d have some serious problems to warrant a 10% yield. From the latest financial report on the Kern County website I see that their debt service is only .8% of their annual budget. From reading the prospectus on the bonds, their funding is backed by the state (not officially “guaranteed”, though). The debt is basically a 2004 refi of debt that was originally issued in the mid 90s. It is secured by school property. I did see how uncollected property taxes are spiking but that is only a small portion of the school’s funding and there is a mechanism in place for getting that cash (foreclosure or not, the property taxes will get paid or the property goes to a brutal courthouse auction) Here’s the part I think is funny…I found a website that tracks the volume of these reset bond auctions. Over the last few months the volume has been tiny thus the yields have gone up. Last week the volume was huge and the yield was still pretty high, thus, you have bidders who want a high yield cuz they think they can get it. You don’t have many bidders who just want 2-3% like they used to be thrilled they would get. Everybody is bidding low(for blood) and if you want to sell, you have to sell… the perverse thing is that the muni is paying for it, NOT the seller who wants out! The seller could care less what they are bidding because they only trade at par. So I think this party won’t last long as it’s pretty easy for them to refi…

^The auction rate turmoil is absolutely insane. I know of a few nonprofit hospital systems that have more cash then debt with DSC above 2x and some of their auctions are requiring them to pay 10%.

virginCFAhooker Wrote: ------------------------------------------------------- > I think that woman is too close to the matter and > frankly, liquidity squeezes are why Warren Buffett > and other contrarians are so rich (CFA_halifax is > probably buffett, I heard he posts here). > Give or take $60 billion yeah! But in all seriousness market timings IS a fool’s game, but when I start hearing non-stop barrages of bad news it emboldens my view that the worst has mostly past.

CFA_Halifax Wrote: ------------------------------------------------------- > This and the daily barrage of bearishness a la > CNN, CNBC etc. is only making me feel more > bullish. > > I was always bearing out on this forum since > last summer, but now that we see this sort of > stuff I think it’s time to buy risky assets again, > or it will be very soon. Really? …bearing out? >Re: Dow >Posted by: CFA_Halifax (IP Logged) [hide posts from this user] >Date: July 26, 2007 10:54AM > >I’ve beat this horse enough…but I would say NO. > >I personally think we’re entering a downward phase for a few months > >Re: Who’s long? >Posted by: CFA_Halifax (IP Logged) [hide posts from this user] >Date: August 6, 2007 02:39PM > >If I had the capital, I’d be longing financials soon, they’ll probably drop a little bit more. >BSC was close to $100 this morning, that seems to be getting on the cheap end I would >say, regardless of the company’s problems BSC closed at 70 on friday.

Do any of you think we are currently in a treasury bubble? Look at the 2 year, and then the 30-year. PS - I am under the premise that while in a bubble, it’s hard to know a bubble exists until the it starts to deflate (i.e., the Real Estate bubble in circa '05).

virginCFAhooker Wrote: ------------------------------------------------------- > I think that woman is too close to the matter and > frankly, liquidity squeezes are why Warren Buffett > and other contrarians are so rich agree 100%. That said, I consider her level headed and a realist. That Co. and her future hinge on how they navigate the current crisis. If they are developing their strategy to survive based on a scenario that considers this a 2-year problem… well from that I gather that this is not a issue that will be resolved in weeks. I didn’t intend to imply that I was ready to throw in the towel Mon morn, just that I feel this could drag on a bit longer than I did prior to eating that burger. …and nice job w/ those yields. we received the NY issues as well.

slouiscar Wrote: ------------------------------------------------------- > CFA_Halifax Wrote: > -------------------------------------------------- > ----- > > This and the daily barrage of bearishness a la > > CNN, CNBC etc. is only making me feel more > > bullish. > > > > I was always bearing out on this forum since > > last summer, but now that we see this sort of > > stuff I think it’s time to buy risky assets > again, > > or it will be very soon. > > > Really? …bearing out? > > > >Re: Dow > >Posted by: CFA_Halifax (IP Logged) > >Date: July 26, 2007 10:54AM > > > >I’ve beat this horse enough…but I would say > NO. > > > >I personally think we’re entering a downward > phase for a few months > > > > > > >Re: Who’s long? > >Posted by: CFA_Halifax (IP Logged) > >Date: August 6, 2007 02:39PM > > > >If I had the capital, I’d be longing financials > soon, they’ll probably drop a little bit more. > >BSC was close to $100 this morning, that seems to > be getting on the cheap end I would > >say, regardless of the company’s problems > > > BSC closed at 70 on friday. And I’d still but it today. It’s this thing called value investing. I hate to get into a pissing contest but here: Re: Bear Stearns Hedge Funds Posted by: CFA_Halifax (IP Logged) [hide posts from this user] Date: July 18, 2007 11:06AM how fittingly, a firm named Bear Stearns will start a Bear market! http://www.analystforum.com/phorums/read.php?1,580993,581007#msg-581007 S&P 500 closed July 18 @ 1546 (near all time high FYI) S&P 500 Friday closed @ 1293 16.3% down before divs. Well above the threshold for a bear market…

I don’t know - you post that you think financials are cheap, you’d buy them if you have the capital and then they drop 30%, then you say you were really bearish… I think a pissing contest starts with you facing into a stiff breeze and mopping your face with a towel.

Am I right when saying that in July of 1998, the S&P hit a high of 1175. 10 years later, we are at 1293. Now adjusting that for inflation, this means that the S&P has gone no where, and in fact has retreated, in the last decade.

JoeyDVivre: 1 CFA_Hali: 0 I guess I don’t have to type out a detailed response now. For the record I wasn’t trying to pick a fight. And I am familiar w/ value investing smarta$$ and IMO buying a stock @ 70 is not value investing just because it was @ 150 once. You need some estimate of the intrinsic value of the company. And that is more than a bit difficult if the info about the extent of this mess is not yet fully known. and that is the point of my initial post.

JoeyDVivre Wrote: ------------------------------------------------------- > I don’t know - you post that you think financials > are cheap, you’d buy them if you have the capital > and then they drop 30%, then you say you were > really bearish… I think a pissing contest > starts with you facing into a stiff breeze and > mopping your face with a towel. I actually saw this happen once. I was out shooting with my brother in a gale. He went for a pee with his back to the wind - but he was against a wall, so the flow of air blew it in a big circle and into his pocket. I laughed so hard I nearly peed myself. Just for the record, I thought some financials were cheap in august, but was chicken. I think they’re even cheaper now. But I’m still a bit chicken.

virgin, you buying for PA or for client accounts?

3 clients… me, myself & I Who would trust me with their money? I barely trust me.

Just out of curiosity, how did you go about doing it? I mean, i trade bonds for the accounts i manage and am fully comfortable bidding off dealers’ lists (both corporate and muni). But, for a retail person like you and me, trading my own account, I wouldnt know where to start (granted, i dont have enough money to play around in bonds, so it is a bit of a non-issue). What platform do you use? I can’t imagine calling my guys at my brokerage account and saying “hey, if you run into a bidlist, shoot me a list of cusips, i will bid some bonds”… or, were these offered on an inventory of theirs?

LOL Joey I admit it wasn’t a great call and I have piss on my face, I’ve made many poor ones on here I admit (bearish on bonds with 10 yr yield at over 5% for instance) but I’ve also made a few decent ones. I’ll man up and say when I’ve done bad on a call, but at the same time I still think Bear is very undervalued right now. I am just at a loss as to why the original poster has dug up a half-year old post to try and discredit me. I’m not sure what I said to warrant that sort of attack? My only point originally was that when stuff like this is going on in the market it’s probably a good time to buy LT