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Where's Andy? Questions on Credit and Airlines

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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

Dude you started a hedge fund, you are one of the reasons we are in this mess. I think I will listen to warren buffet and hope this bill will pass.
 
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.

Satpak, I haven't bothered becoming an RIA. I formed my hedge fund in FL, and there's no requirement to be an RIA if you manage less than $15M (after which you have to register with the SEC and will need to be an RIA) in a hedge fund. I started with $600K of seed capital and the fund is now worth ~$925K. As for the Series 65 exam, I plan on taking the test this winter.

For short rules, I had concentrated in the financial sector prior to the ban, so it hurt considerably. However, if anyone took the time to look under the hood, it was pretty obvious that they were dead meat. I started with the weakest and was working my way through the phone book. I wouldn't have shorted GS, but when the Fed kicked the chair out from under LEH, it became open season on all leveraged financials. They've all got terrible balance sheets.

A crash is extremely healthy; there’s been excessive risk taken by market participants relative to reward and it continues to this this day. The markets are in bubble territory, just as the housing markets remain in bubble territory.
 
Dude you started a hedge fund, you are one of the reasons we are in this mess. I think I will listen to warren buffet and hope this bill will pass.

Yes. I started a hedge fund in Aug 2008 with $600K of seed capital, so I'm the problem. Let's ignore the real causes of where we're at and blame it on hedge funds. You don't have the slightest clue what a hedge fund is and how they work.
Warren Buffett? You have NO IDEA how much trouble Warren's in. Any idiot can make money in a bull market. It requires brains to adjust to a bear market and make money. Before we get out the other side of this mess, I expect 'ol Warren to have sold off most of his assets. Warren is NOT making those statements because he wants the country to do well; he's doing it to save his own skin. Just like Bill Gross of PIMCO. Next time you listen to an 'authority,' you'd better ask yourself what's in it for them.

If you're going to jump into a thread, at least have a basic understanding of the subject matter.
 
Cramer actually wants this thing to pass. this andy dude hope the 700b investment fails. I hope to god it will pass.

Then you're hoping that this country will default on our debt. And from reading your posts here, it's quite obvious that you have no idea of what the implications of a default will be. I'd try to explain it to you, but it sounds like you've already made up your mind. ... ignore the 200 leading US economists that have stated that this bailout is a bad idea.
 
Andy:

I have to agree with others in commenting that your actions contributed to the problem, at least inasmuch as you contributed to AIG's collapse.

AIG was an easy short call. Those who took these massive, leveraged, short positions shot that sucka dead like a drive by shooting on a little old lady. The shorts were wrong on the fundamentals and still it crashed to zero just because every smartest guy in the room-Johnny come lately piled on with not a care for the outcome of their actions.

Just about anyone can make money in a bear market also, but credit goes to those who create, not those who destroy. Buffet's "problem," if you want to call it that, is his morality. If the World has truly changed and terrorists now control the floor, then yes, your analysis is spot on.

Meanwhile, AIG's thousands of subsidiaries still go about their work, making money facilitating the operation of schools' risk management programs, enabling the launching of satellites that relay our text messages, leasing the airplanes we fly and settling claims with their adequate reserves built up and saved over nearly a century of operations. Many of the contracts written to sell American products across the World are underwritten by AIG policies….If you can destroy the underwriter and the leasing company, who’s next, GE, BA, ROK? Of course! More easy short calls as long as the mood is dismal and like minded individuals play along.

Ethically, I do have a problem with naked shorts. (I'm not accusing you in that practice) Maybe you can explain to one of us quiet guys in the corner why allowing traders to sell something they don’t hold (and have no intention of holding) is a good idea. Just seems like a tool to manipulate the market, destroying the concept of “trade.”

By the way, what is our nation to do with all these baby boomers who's retirements are getting wiped out?

Nothing personal, you just were willing to stand up and discuss the issues. You write a very interesting post. I sure hope you are wrong, but like you, I moved half out of the market and paid everything off a year and a half ago. I sold some AIG the minute I heard about Mr. Greenburg's departure, but I did think it was right to go short on it.

Companies do best when everyone is scared out of their wits and focused on winning. My long view is that the government will do everything in its power to effect a controlled devaluation of the dollar to increase housing prices (not value) and Companies will adapt, adjust and as you point out those who provide essentials are probably long term value plays which will offset inflation. Selling into short term deflation while long term inflation lies right around the corner could be a rash move. Selling into a panic like folks are doing today? I'm going to turn off the computer, trim the bushes around the house, and enjoy a good glass of wine tonight. Looking at property in Asia next month.

Enjoyed your post.

~~~^~~~
 
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Not sure the hedge funds are the problem, certainly not the entire problem, the underlying fundamentals of the companies are. You could short stocks all day long, but if the companies are strong, then you will not make much of profit, nor really cause any harm.

Bigger problem was the fact that many of the failed and failing companies had very little disclosure, and every day, they released just a little more bad news.
Kind of like the bandaid analogy, which is better to get ift off, one sharp pull or ten little tugs? In this case, the tugs brought the stocks lower and lower , untill it became worthless.

Not to worry though, there will be plenty of money made in this market, just not for the average joe.
 
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Andy has been wrong on many of his predictions in the past. I honestly think of him as like many of the "barracks lawyers". They talk a good game but in reality they don't know what they are talking about at all.
 

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