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Where's Andy? Questions on Credit and Airlines

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MountainFreak

Well-known member
Joined
Feb 5, 2006
Posts
101
Haven't seen Andy post in a while. He has (unfortunately) been spot on in his predictions over the past year or so concerning the credit markets.

So, if you are reading give us your opinions!

Is the bailout necessary?
Is so, in what form? And will it do any good?
Finally, any WAG's on the fate of airlines through this mess?

Thanks, and maybe you can tell us all you told us so...
 
Warning! If you're looking for cute puppies, blue skies, and apple pie reading, don't read another word. My post is human sacrifice, dogs and cats living together... mass hysteria, real wrath of God stuff. (Paraphrased from Ghostbusters)


Sorry, I haven't been here in a long time; I started a hedge fund in mid-Aug and it sucks up all of my free time.
I did take the time to travel to DC on Sat for an organized protest against the bailout.

Bailout necessary? I suppose; what is the goal? To save Paulson's buddies' bacon? If that's the goal, it'll be an unqualified success; they'll sell into any rally. To stop the credit markets from seizing? $700B doesn't do it; you need north of $3T to even try to hold the line on credit markets seizing at this point; probably closer to $5T. You get into numbers that big and you're looking at the US defaulting on our debt.
To be quite honest, I think it was game over last spring for the credit markets; it's just that now people are waking up to the fact. Had Bear Stearns been allowed to fail instead of costing the taxpayer $29B (I bet most people forgot about that bill), there would likely be more order in the markets and less overall pain. Instead Paulson opted to delay that pain. As for Bernanke, he's a clueless poindexter who's being played by Wall Street.

To get down to basics on the problems in the credit markets, three core problems got us here:
1) Lax lending standards
2) Lack of transparency on financial institutions' balance sheets (a lot of Level 3 and off balance sheet transactions)
3) Excessive leverage
Problem 1 is solved. Banks have finally tightened lending standards now that no one will buy their paper. That is, unless some Mensa candidate in the govt decides to have Fannie and Freddie buy a bunch more worthless MBS (mortgage backed securities) paper.
Problem 2 was supposed to be fixed after Enron, but it wasn't. Account standard reforms are the solution to that problem, not money.
Problem 3's a killer. Morgan Stanley delevered all the way 'down' to 24 times this last quarter. That means for every dollar in book value, the company had $24 of assets on their books. That's great in an up market; you make a boatload of money. In a down market, a 5% decrease in asset value makes you insolvent. Hence the reason why so many financial institutions have moved most of their stuff over to level 3; rather than mark to market, they mark to model (known as mark to fantasy).

As far as a bailout, it won't do any good. The markets are obscenely overpriced based on realistic forward earnings - most analysts haven't marked down forward earnings anywhere close to reality yet. The markets are going to tank. A bailout merely kicks the can down the road by a month or two, and results in a deeper crash when it occurs.

Here's an e-mail that I sent to the rest of my family last Thursday:

I want to keep everyone informed of what I see day to day. Please feel free to challenge me on any statements/assumptions that I make that you think is wrong or need further clarification.
Starters: We are very close to the beginning of a depression. And it's not going to be pretty. In more than a few respects, we're in worse shape than 1929. To put this in perspective, it took until US involvement in WWII in 1941 in order to pull the US out of the prolonged economic slump. Depending on how everything plays out, this could last significantly longer. Keep in mind that there were a lot of financial opportunities along with adversity.
Over the last year, I've urged everyone to sell excess real estate. I'll give that one last shot. If you've got extra real estate, it would behoove you to sell it. Due to negative household creation, a large housing surplus due to rampant speculation, and extremely tight credit requirements, real estate prices are going to correct extensively starting this winter - and it is likely to last through 2012. From my best guess, the drop in housing prices to date is minimal compared to what's ahead.
Take a look at all of your assets. Consider selling whatever assets that are not needed. It is time to downsize; any delay will only result in selling those assets for lower prices at a later date. Get rid of all bills. Gotta get as much out of debt as is possible. Make a few financial sacrifices today; any delays lead to greater sacrifices in the future.
We are going to go through a deflationary period very soon. Cash won't be king; it will be Absolute Ruler of the world. Having extra cash is going to be very important. Longer term, I'm debating whether we'll be looking at hyperinflation; it'll depend on how big our national debt gets. You don't want hyperinflation; it's extremely destructive. Deflation is the lesser pain.
These are tense economic times. But they've just begun; mentally prepare to run a marathon - we've only started the race.

The Wall Street bailout is likely dead at this time. That's a good thing. The economy and stock market are going to crash whether or not the bailout was to occur. The bailout would only have delayed the crash by a month or so, allowing the people that caused the problems to escape intact. That $700 Billion will be needed in the future for the govt to spend on govt programs to get the economy going again.
Take a look at any stocks you own. If the companies don't make essentials - soap, shampoo, food - sell them. The markets are getting very close to crashing. Very close. If anyone needs help on this, call me. I'm not going to pester anyone anymore. I know everyone's busy, but the stock market's going to go down significantly. You want to stand out of the way in cash. My cell's xxx-xxx-xxxx. I know everyone's busy, but if you can't take an hour to sell all of your stocks, you must be making a buttload of money each hour.
What I saw in the markets today: The stock market moved up today on the false hope that the bailout would pass. That's looking pretty dead now. The credit markets are seizing - this is very, VERY, VERY bad. As in the economy's crashing bad. Most people don't watch the credit markets - I follow many different markets, not just the stock market. The credit/bond markets are your canary in the coalmine that warns before the stock market crashes. And then WaMu got taken over by the FDIC this evening. That takeover is going to wipe out the FDIC's balance sheet and they'll need to go to Congress for more money - now I hope everyone understands why I was so adament about having no more than $100,000 in any single bank. If you've got $200,000 in the bank, make sure it's in two DIFFERENT banks, not just two different accounts. I haven't crunched the numbers on how much it's going to cost the FDIC to take over WaMu, but I'm thinking that it'll use up a LARGE chunk of that $700 Billion they wanted to use to bail out Wall Street.

Claire, how close are we to selling mom's house? This is why I pushed so hard to have it sold by now. If you don't have it under contract before the end of Sep, it'll be time to lower the price again.
I'll be transferring some money out of mom's IRA late this week or early next week. I want to split it between mom's joint checking accounts. I'll need to get from Claire and Charlie the ABA and account numbers for Highlands and BBT so that I can wire the money from mom's TDAmeritrade account. I'll wire money from mom's Scottrade account into the TDAmeritrade account - I can wire money for free from mom's TDAmeritrade cash account, so it will happen fairly quickly. Spreading it out among BBT, Highlands, Wachovia, and TDAmeritrade. I'm not sure how long I'll keep the Wachovia account open; they're also in trouble. I will make sure that I don't leave much money there.

As far as mom's money goes, I've got a lot of it sitting in cash, but I did start scaling into short positions. And in case anyone's wondering, yes, everything's legal. There are a lot of half truths about this being told in the media and it pisses me off. Mom remains mostly cash, but I plan on building most of her portfolio in short positions before the weekend. It may be a bit early and the markets could potentiall pop higher next week, but the stock market is very close to falling off a cliff.

If anyone wants to talk about the markets or strategy to prepare for the future, call me. I'll be happy to talk about it.

Andy
 
I forgot to answer you on the airline picture. I don't know. I haven't looked at airlines in a few months; there's no money to be made in that sector on the long or short side relative to risk.
I had been concentrating on the financials - and yes, I shorted Lehman and AIG into the ground. I also had short positions on Morgan Stanley and Goldman Sachs - I closed those positions when I heard on CNBC that the Brits banned short selling on financials; I expected the US to do the same. Those 'free market' regulators never seem to disappoint my low opinion of them. I didn't get off completely unscathed; the big rally at the end of last week cost me more than a few coins.
Now that financials are off the table, I've been starting to short high PE momentum stocks with low short interest. I expect them to tumble in any market selloff.
With adversity comes opportunity.
 
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Andy-
what's your advice for 401k's?
 
Waveflyer, late last fall, I parked my wife and my 401k, TSP, and IRA into the safest choices that I could find. I was more concerned about return of capital rather than return on capital.

For TSP, we're in the G fund. I didn't go with the F fund because it contains some mortgage backed securities.

For my United B/C fund, I'm in the Money Market fund.

Most 401ks have lousy choices as far as safe investments, so you've got to go with what you consider the safest.
When I looked, I wanted short term US government treasuries. Most of them had mortgage backed securities in them; if given a choice, I'd stay away from any conservative fund with mortgage backed securities.

There will be opportunities in the future to invest your money for high returns; I look at this environment as a time where I just want to preserve my capital and wait to fight another day.
Hope that helps.


As for the current status of the bailout, it looks like Congress may be crazy enough to pass it in spite of public sentiment. If they do, I will be spending every free moment on getting any elected official who voted for/abstained on this bill thrown out of office in Nov. Not one taxpayer penny toward a Wall Street bailout.
 
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Here's a draft of the bill: http://banking.senate.gov/public/_f...osalfortheTreasuryBailoutplanAYO08B68_xml.pdf

Note section 127:


SEC. 127. ACCELERATION OF EFFECTIVE DATE.
Section 203 of the Financial Services Regulatory Relief Act of 2006 (12 U.S.C. 461 note) is amended by striking ‘‘October 1, 2011’’ and inserting ‘‘October 1, 2008’’.



This is BAD. In Chapter 3, subsection 12 of the Financial Services Regulatory Act, it allows banks to go to zero percent reserve requirements in 2011. That's now accelerated to 1 Oct 2008.
What that's done is allow banks to use infinite leverage. The original bill was very bad & Congress was asleep at the switch. But accelerating this will cause a total collapse of our banking system. This has the potential to temporarily reinflate the housing bubble, only to explode in an even larger kaboom. It's like taking a MOP (Massive Ordnance Penetrator - largest convential bomb in the inventory) and swapping it with a 100 Megaton thermonewkular deevice (said with a best George W accent). Kablooey; kiss your posterior goodbye.
If this bill passes, that $700 Billion thrown down the rat hole won't matter much. We'll have much bigger problems.


Sometimes it's better to do nothing and let things run their natural course, no matter how painful. This is one of those times.

 
Andy are you an RIA? I am studying for that exam. Did you really start a hedge fund? How is the new short selling ban affecting things. PM me if you wish.

I agree 100% with your sentiments (sp?). Cash or Treasury funds are the place to be.

Actually, I think a crash is healthy, and will reset the game clock for a future bull market.
 
Heyas,

I also saw this coming, but from a different perspective.

South Florida real estate is a canary for the economy in general. When it started falling off a cliff about 18 months ago, I was poo pooed for saying we were heading for a real crunch, because everyone else was still seeing their artificially inflated bubbles.

Well, 18 months later, here we are.

I moved everything I had into cash with a fair position in gold. Zero debt and I own my house outright. I do have some excess real estate (just land), but it's family property, and has been so for some time. I wasn't looking for any return on it.

My take on the industry is that those that operate on constant influxes of paper backed cash are going to be sh!t out of luck and will fold first. Any new equipment is going to be near impossible to fund. When the worst of this hits, lesure travel is going to drop to near zero (think post 9/11^10)

Those airlines that happen to own some of their assets will be OK in the short term, but will retrench massively.

I hope everyone has a 2nd skill set.

Nu
 
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Andy,

Thanks for taking the time to reply. Lots of important decisions to make now.
Anyone who isn't thinking about how this stuff will affect them personally is foolish.
 

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