The Market Ticker - Company Specific

Verizon ETF Warning

nospam@example.com (Karl Denninger) — Thu, 05 Nov 2009 13:22:00 -0500

If you have an "advanced device" on Verizon (or want one) be aware that there are rumblings of SERIOUS increases in ETFs should you be unhappy (or just run out of money and need to cancel.)

It appears that Verizon (from a little birdie that just tweeted in my ear) is increasing their ETF on these devices some time in the next two weeks to $350 (from $175) with a $10/month decline (from a $5/month decline) for "advanced devices" (e.g. Blackberries, Netbooks, etc) for all new contract signers or re-signers.

This is a rather curious change given that T-Mobile has effectively gotten rid of subsidies with their "Even More+" plan, and even better, has quantified the subsidy value to the customer ($10/month difference between subsidized and non-subsidized.)

This wasn't quite the reaction I expected from T-Mobile's announcement...... we'll see whether arrogance is an appropriate business model in this economic environment, and whether AT&T attempts to follow Verizon's lead.

Best guess as to intent: This is an attempt to prevent people from arbitrage'ing the ETF and some devices (e.g. the Blackberry Storm.)

I wish you luck Verizon.

Disclosure: No position.

Berkshire's Big Bet

nospam@example.com (Karl Denninger) — Tue, 03 Nov 2009 08:07:00 -0500

The amusing part of Berkshire buying BNI (Burlington Northern) isn't that he's doing it at what looks to be a ridiculous premium to the current stock price (although below the historic high) - it is that he's splitting Berkshire's "B" shares in doing it.

Remember, this is the guy who has maintained forever that stock splits are inherently wrong, in that they're nothing other than a game.

Well, yes. But under the cover of the claim that he wants BNI shareholders to "enjoy" a tax-free exchange, suddenly Berkshire "gets religion" and splits the "B" shares 50:1?

Uh, Warren. This is a stock and cash deal, right? What prevented you from issuing a "C" share? Nothing, other than dilution, which you could handle with an immediate buyback of the outstanding amount necessary to balance it.

Here's my view, for what it's worth - BNI at yesterday's closing price was reasonably valued at a P/E of 14. At the deal price it's about 20. That's too high, unless you believe that manufacturing is coming home in massive numbers, and that "indefinite growth" is coming back.

I think Warren's wrong on valuation. I also think he should have bought BNI back in March, when the stock price was under $51, and paid $70, which would have been an even bigger premium in percentage terms and been a better deal for Berkshire shareholders:

Here's Berkshire's "B" share chart (the "A" is the same, just bigger numbers):

If you're a BNI shareholder, I'd be taking the money - this morning. You're no longer the owner of a big industrial mover; you're now the owner of stock in what amounts to a financial conglomerate trading with a P/E of 52 (as of this morning), where you had a P/E of 14 last night. Worse, Berkshire's market cap is being "invaded" tremendously by this acquisition, turning Berkshire from a financial company (in the main; banking and insurance) into a multi-line conglomerate with a HUGE transportation component.

Mean reversion is going to suck WHEN it occurs, and this much is certain - you didn't own BNI expecting it to have a P/E of 52, but suddenly it does, and anyone who believes that a conglomerate with 25% of it's total market cap comprised of "railroad" should trade at anywhere near a P/E of 52 has rocks in their head.

Buffett's comment: "This is a bet on the future of the country, 5, 10, 20 years from now."

That's Berkshire's and Buffett's mantra, and in addition this is a bet that rails will be the big winner over time in terms of moving products in a world that is increasingly hamstrung by both energy constraints and (in my view insane) "global warming" nonsense.

I think Warren is right on who wins in the transportation matrix in the future, but he doesn't care about multiples.

I, as an investor, do.

If I owned either of these firms (I don't) I'd be a seller this morning into the ramp job, especially if I held BNI. Nobody in their right mind trades a P/E of 14 for a P/E of 52.

Disclosure: No position.

CIT BOOM BOOM!

nospam@example.com (Karl Denninger) — Sun, 01 Nov 2009 16:30:00 -0500

Hope you didn't buy any CIT on the hope of a bailout!

Nov. 1 (Bloomberg) -- CIT Group Inc., a 101-year-old commercial lender, filed for bankruptcy with financing from investor Carl Icahn after the credit crunch dried up its funding and a U.S. bailout failed.

The practical impact of this is likely to be:

Their factoring business is unlikely to be significantly impacted. This is a very profitable line of work, and while I have often (and still do) argue that any business using it is certifiably insane, it should continue.
Their "general" lending, however, is almost certain to be severely curtailed. I have seen estimates that it could fall by as much as 90%, and that seems reasonable to me.

For many small businesses the latter could be particularly acute. I would also expect the margins on their factoring business to be adjusted (better for them, worse for retailers) which could put a further squeeze on their small and mid-sized business clientele.

This will leave a mark - we'll have to see how bad it gets for retailers in the coming weeks and months, but being right in front of the holidays it cannot be a welcome development.

Citi-Citi-BANG-BANG! (C)

nospam@example.com (Karl Denninger) — Sun, 01 Nov 2009 16:05:00 -0500

Oh boy, it appears that I may have hit the mark here....

Of the company’s $1.2 trillion in credit commitments outstanding in the second quarter, $873 billion were credit card lines.

And the charge-off rate on those things is over 10%!

Here's what I wrote:

Both of these "results" have a high probability of decimating Citibank's card business and the latter behavior could literally blow them up. That the firm is willing to risk this outcome - an outcome that, to me at least, appears to have a very high probability - means that Citibank has to be crazily-desperate and willing to place an "all-in" bet that they will be able to either (1) book unpaid "interest" as "earnings" and "assets" (much as banks did with negative amortization loans) prior to final disposition via bankruptcy for those consumers or (2) there are enough people who both can't pay off or transfer the balance AND can continue to pay to make this strategy worthwhile even given the intensely negative public opinion reaction this move is guaranteed to generate.

In short, this looks to me like a "Hail Mary" pass. So long as this remains a Citibank-only story my interpretation is that Citibank is in a lot worse financial shape than is being let on - perhaps poor enough that they're at risk of imploding anyway, "too big to fail" or not.

Good luck Citibank; I'll keep my telescope trained in your direction from beyond "minimum safe distance" looking for this....

Disclosure: No position; I don't short stocks under $10. IMHO this issue has a high probability of being a zero.

Hisssss (Citibank Overpressure Warning?)

nospam@example.com (Karl Denninger) — Fri, 23 Oct 2009 09:39:00 -0400

Back to the letter from yesterday that I posted.... (click for an easier-to-read copy):

To recap what this says (this is the second page of the letter that was posted in The Ticker yesterday:)

Standard "purchase" interest rate is going to 29.99%.
The "default rate" is also now 29.99%.
The cash advance fee rate is now 5% (most were 2% previously, but I do not have the previous value for this account or for Citibank in general.)

Citibank's average yield year-to-date (consumer and plastic) was about 12%. But they're suffering 10% defaults, making their true margin about 2%. That's still a positive number.... if it's accurate.

This spread, of course, has a lot to do with previously-issued fixed-rate 12.99% cards (they and everyone else had a lot) that were handed out like candy to everyone and their brother, frequently with $10,000, $20,000 or even $50,000 credit lines.

Huge numbers of small business owners - especially sole proprietors - use these cards as a means of financing operations. They relied on that 10 or 12% interest rate, and most of them have huge balances outstanding.

I have since confirmed that this letter is not just going to people who have had credit "challenges". Indeed, this appears to be a blanket change on the part of Citibank. I now have multiple copies from people who assert that they have 750+ FICOs and have never missed a payment on this or any other obligation - the "paragon" of so-called "responsible" credit use. All of the letters are identical.

The problem should be obvious - for someone with one of the 12.99% cards that is now 30%, this is a radical change that more than doubles monthly interest expense. Of those who have sent me copies of this letter and disclosed their previous rate, none were over 20%, meaning that these changes represent 50% or greater interest rate increases. If you're anywhere near the edge of being unable to pay, this will shove you off the bridge and into the deep, shark-infested water of bankruptcy.

But more important, I believe, is what this says about what's really going on in these banks. Many simply put this out there as a "response" to the pending credit-card legislation, and note with irony that the bank that is most-owned by taxpayers (Citibank) is the one doing the worst screwing of the consumer.

But is it that simple? After all, given the extraordinary support that the taxpayer has put into Citibank (they would be literally out of business several times over but for our support) would not Treasury stomp on this sort of abuse? Remember, Barack Obama is supposedly "for the people" and "change in Washington and on Wall Street", right?

Perhaps there something more dangerous - and hidden thus far - going on here? Perhaps what we're really seeing is a business reacting to hidden deterioration of asset bases that are not known by investors and the public due to the legitimation of bogus accounting that happened this last March, but which is known by company executives!

Why do I believe this is a plausible, even likely explanation for this behavior by Citibank? That's simple: This sort of "terms change", which is an effective declaration of default even against those who haven't defaulted (see above; the same 30% rate is being applied to defaulted and non-defaulted accounts!), will drive two consumer behaviors that could ultimately destroy Citibank's credit card business and perhaps the bank as a whole:

Those who can transfer balances out somewhere else and/or pay them off will immediately do so. Nobody is going to pay a 30% interest rate and an imposition of default rates on non-defaulted balances willingly and on purpose unless they have no other choice.
A significant number of people, on receipt of this notice and understanding what it means (a declaration that non-defaulted accounts are being charged the same penalty rate as a defaulted account!) will immediately go out and charge up the entire unused balance on their card and then intentionally default.

While the latter is technically illegal there's not much that can be done about it, especially if you're unemployed (and 20% of America's workforce is!) You can't get blood from a stone, no matter how hard you squeeze. Indeed, while I do not and will not advocate unlawful behavior there comes a time when one must recognize and understand it, even if one can't condone it. This would be one of those times.

Both of these "results" have a high probability of decimating Citibank's card business and the latter behavior could literally blow them up. That the firm is willing to risk this outcome - an outcome that, to me at least, appears to have a very high probability - means that Citibank has to be crazily-desperate and willing to place an "all-in" bet that they will be able to either (1) book unpaid "interest" as "earnings" and "assets" (much as banks did with negative amortization loans) prior to final disposition via bankruptcy for those consumers or (2) there are enough people who both can't pay off or transfer the balance AND can continue to pay to make this strategy worthwhile even given the intensely negative public opinion reaction this move is guaranteed to generate.

In short, this looks to me like a "Hail Mary" pass. So long as this remains a Citibank-only story my interpretation is that Citibank is in a lot worse financial shape than is being let on - perhaps poor enough that they're at risk of imploding anyway, "too big to fail" or not.

Needless to say such an event would be extraordinarily ugly for the economy and markets.

If readers get these sorts of notices from other banks, and a pattern is established, that would be even more ominous. If you, as a reader, get one of these from other institutions I would love to have a copy, as a correlated pattern with other institutions would, quite possibly, point to imminent systemic trouble.

Disclosure: No position.

Capital One: Shred Your Wallet (COF)

nospam@example.com (Karl Denninger) — Wed, 21 Oct 2009 10:12:00 -0400

Time to call out the outrageous actions this "bank" has taken.

Let's first start with the fact that Capital One, along with most of the other "big banks", took TARP money. Why did they need/take TARP money? Simple: They were incompetent in their risk underwriting and thus got in trouble. That's a fact.

Now let's add the other sin, to which the other big banks are also subscribed: These same firms have all front-run the legislation passed by Congress to bar certain practices, such as universal default and two-cycle billing, by raising rates and fees in front of the changes.

But these things are not news.

No, what might be news, however, is what I discovered today.

This morning my phone rang. It was Capital One's Fraud Department, calling to ask me if I had placed some charges on the card. Now to be fair, this card hasn't seen much use since I found PenFed (http://penfed.org), a very nice credit union that has an auto-crediting reward card and is a credit union besides.

They went through their spiel about how I wasn't liable because of their "superior" guarantee (rank BS; there is no liability, ever, for fraudulent charges as a matter of Federal Law) and similar.

But I noticed something. I was having trouble understanding the woman on the phone. I also couldn't stop her from script-reading; I asked for access to be restored to the online system so I could look at what, if anything, had gotten through their screen, and was refused - then script resumed.

I asked for a supervisor. My first question: "Where are you?"

Answer (no, I'm not making this up!): "A caribbean island"

WHAT?

No, she wouldn't tell me which one.

It appears that Capital One's FRAUD DEPARTMENT is in some offshore Caribbean tax haven (which incidentally is where a whole lot of ridiculously fraudulent and outrageous schemes tend to originate, no?)

Needless to say I wasn't very nice to said "supervisor"; she hung up on me.

I called back to "customer service" and my first question was "where are you?"

Answer: INDIA!

My reply? CANCEL THIS ACCOUNT - NOW.

That got me transferred to a different office, this time in Texas. Oh, a US Citizen being paid US Wages to work on a US Account with US law and US controls? Finally, but only when I ask to cancel the account?

So let's see if I get this right:

Capital One has their fraud "investigation" and "call center" in some nameless Caribbean Island. This means your financial information is also present on that Caribbean Island, where you have no United States legal protections whatsoever. Their staff have access to not only your purchase history (obviously) but also your social security and account number(s).

Capital One has their "customer service" call center in India. Same issues apply - your financial information is present over in India, where United States Legal protections do not apply, and your personal banking information is being handled by non-United States Citizens.

The outrage doesn't begin and end with the fact that your personal financial information and history, including your Social Security number, the key item for identity thieves, is present offshore and accessible to people who cannot be prosecuted under United States Law.

Indeed, one must wonder - are these "card compromises" really happening at merchants, as the card companies continually assert? How do we know they're not lying? What's to stop a few crooks in these "offshore call centers" from accessing your information there, then passing it on (for what I'm sure is much more than they make answering the phone in India or some Caribbean Island) to some part of the criminal element? I'll tell you what is not there to stop them: United States Law, since they're beyond US jurisdiction!

No, the real outrage is that while Americans are increasingly out of work, with the so-called "official" unemployment figures approaching 10% and any real count (including "discouraged" workers) approaching one in five, or 20%, these firms have taken these decent-paying jobs and sent them offshore, thereby spending the money you give these latter-day robber barons not on employing UNITED STATES CITIZENS but rather finding places where there is NO United States wage and hour law, nor any benefits, nor any United States legal protections on the information they have access to and could abuse.

BOYCOTT CAPITAL ONE!

JP Morgan Earnings: Mirage?

nospam@example.com (Karl Denninger) — Tue, 20 Oct 2009 08:35:00 -0400

Hmmmmm....... I offer for comment the following, which was forwarded to me and upon which Zerohedge has also opined:

JPM Miracle or Mirage

There are a lot of questions raised by the decrease in uncommitted cash, but I'd like to put forward a potential reason for it as a discussion point, since nothing in the firm's results was put forward as an explanation.

Remember that JP Morgan/Chase has a significant servicing business in all areas of finance. Servicing is thought of as a cash cow, and during ordinary market conditions it is - you get to skim off a few basis points for what looks like doing nothing more than taking someone's check, cashing it, and forwarding the proceeds as allocated in some structured finance transaction.

Risk-free money, right?

Uh, not quite.

The problem comes along when conditions are not normal (like now); a servicer is obligated to advance payments whether or not they come in! While the servicer is also entitled to charge and collect fees (e.g. late fees, etc) in order to make money doing this you have to be able to collect those fees, otherwise this supposed "revenue stream" is more akin to the negative amortization BS games that were played with Option ARM capitalized interest during the boom years of the housing bubble.

Does this account for the JP Morgan/Chase cash "disappearing act"? I have no idea, but it's a plausible explanation. Without color on that obligation and the "value" embedded in those servicing arrangements (negative or not) one has to be concerned about a potentially-huge problem brewing for these institutions - and one being ignored by both the financial media and investors.

(Ps: Anyone care to bet on whether The FDIC and OCC will ignore the Tier Capital deterioration? "Prompt Corrective Action" sounds like such a nice law - and if it was paid any attention whatsoever it would be!)

Disclosure: No position.

Alcoa Kicks It Off (AA)

nospam@example.com (Karl Denninger) — Wed, 07 Oct 2009 18:11:00 -0400

An interesting, mostly-positive earnings report - with a few unexplained quirks.....

Let's dig in a bit and see what we got (the aftermarket loved it!)

Strong points include the fact that the bottom line was a beat; top-line questionable - everyone is claiming "beat" but I had the same number on my screen as they reported, so take your pick - if it's a beat, it's not a big one (and might not be one at all.)

Cost-cutting and improved prices for aluminum products are the story here. Here's the top-line reality: Revenues were $4.6 billion .vs. $4.2, up 9.52% sequentially. Good, right?

Weeeeeellll... aluminum prices went from $1,667 per ton to $1,972, an 18.3% increase.

Now we got a wee problem. This rather strongly implies that the actual shipped volume was down sequentially. Does it prove this? No, as we don't have product mix shifts in the report, but this sure as hell suggests a decrease in shipped tonnage sequentially, not just year/over/year, and is a big fat flashing yellow light that I bet you don't see talked about.

What makes no sense here is this statement in the release:

Due to low inventories at distributors and rising shipments, regional premiums are improving and global aluminum consumption is expected to increase 11 percent in the second half of 2009.

I don't believe it, to be blunt. You don't have a 9% increase in gross sales on an 18% increase in prices and tell me that shipments are rising, unless you're somehow magically making product appear at customers for which you're not being paid. The internals of the report and the breakdown don't help me come up with a reconciliation either.

Something doesn't add up.

Oh wait! Here it is! Right at the bottom of the report (missed it first pass; thanks to the guy who emailed me!): 1,230,000 metric tons shipped this quarter, 1,288,000 metric tons last quarter.

BINGO!

SHIPMENTS WERE IN FACT DOWN SEQUENTIALLY!

The conference call says they're looking for a 4% rise in demand in China and 6% worldwide, but a 15-20% decline in automotive sales for the full year 2009 and 30-35% decrease in heavy trucks (indeed, there was a report out this afternoon on Class 8 truck sales - horrifyingly bad doesn't even begin to describe it.) But wait! The release also says:

global aluminum consumption is expected to increase 11 percent in the second half of 2009.

Uh.... those numbers don't add up either. What am I missing here guys and dolls?

The rest of the report seems to make sense - the only other area of trouble I see is in engineered products, which is Alcoa's highest-margin business and is in serious trouble, down 15% sequentially. That's mostly aerospace - read "airplanes." Not exactly a growth industry at present......

I'm disturbed, however, by the apparent discrepancy in claimed numbers in two different places and the consolidated result statement saying that in fact shipments didn't increase, they fell.

That is hardly the picture of "improving demand" claimed to be experienced in the reported quarter and forecast - especially when that forecast is for an increase that would simply reverse the 3rd quarter tonnage decline implied by pricing and revenues (that is, take us back to second quarter tonnage-shipped levels.)

Finally, there's the matter of P/E. Assuming we could get to a normalized 12 month leading expectation of 70 cents in fully-diluted earnings by the middle of 2010 (and I believe that's damn aggressive) you're paying 21x on those earnings 12 months out - too darn rich for me for an industrial concern on any reasonable set of forward expectations.

I liked AA in the $5s in March, but I wouldn't go anywhere near it at $15 today.

Sorry, no $ale.

Disclosure: No position; I sold out of my spring long at what was obviously early, but if I still had it, I'd be selling into this strength.

CITing The Bowl

nospam@example.com (Karl Denninger) — Wed, 30 Sep 2009 08:13:00 -0400

Here we go again.....

Sept. 30 (Bloomberg) -- CIT Group Inc., the commercial lender that has said it may be forced to file for bankruptcy, is considering an offer of financing from Citigroup Inc. and Barclays Capital, people familiar with the situation said.

The 101-year-old company’s bondholders are also seeking to provide about $2 billion in loans as a restructuring deadline approaches tomorrow, said the people, who declined to be identified because the negotiations are private. New York-based CIT may choose other options, the people said.

This would be the third time they've gone to the well this year - the previous being a $3 billion "rescue" back in July.

For those who are math-challenged this means they're running at a roughly $1 billion a month "burn rate" (to use a phrase from the old Internet Bubble); isn't "capitalism" grand?

The problem with this firm is that it shouldn't be in trouble. "Factoring", which is the primary business CIT is engaged in, is usually an insanely-profitable enterprise. So what went wrong?

Simple: They started eating the rest of the financial industry's cooking - the belief that they could branch out into various other forms of lending and ignore credit quality. This put them squarely in the same box as the rest of the banks (except that unlike BAC, C and others, they haven't been allowed to cook the books and steal from the taxpayer!)

The result was technical insolvency.

Now they're trying to stave off a full-on default and bankruptcy filing.

It is unlikely to work.

Even if they strike a deal this week there's a nasty $2.1 billion line from Citibank and Bank of America (yes, really, two banks that themselves are insolvent on a mark-to-market basis!) that has to be paid in April of next year. Where's that going to come from?

The irony of one insolvent entity borrowing from two more effectively-insolvent entities isn't lost on me. This is really no different than finding that you can't make the credit card payment so you find someone who will "roll over" your credit card balance into a new card, and "whew!" - you don't have to make a payment on the "new" line for 30 more days.

This sort of shell game is really nothing different than playing "hot potato"; legal under the rules of accounting, but a clear sign of desperation by everyone involved. The continued claims of economic improvement by the media and Washington have to be squared against the fact that debt defaults are not abating and ability to pay is not improving; indeed, we continue to see a pattern where people are simply "kicking the can" for another month or two, piling up yet more debt that they can't cover.

The back story that is not being talked about with CIT is that there's a major problem with many small and mid-sized businesses - they have fallen into the trap of "pulling forward" their financial condition.

Credit, when used to buy plant and equipment for productive purposes, can be a net positive for an enterprise. When used to finance inventory in a heavily-inventory-laden business it is more dangerous, in that the failure to meet gross margins due to a bad guess on product mix and quantity can sink you.

Factoring is more dangerous still, in that one is giving up a percentage of the gross billed ticket in exchange for "money now." When a business is driven to this sort of gimmickry it calls into question the viability of one's customers; if you have to pass the risk of slow (or no) pay customers to someone else, how viable is your company and its customer base? Remember, the reason you "factor" is that you believe that the discount on that paper is less than you'd spend on a traditional credit line - or you can't qualify for that traditional line with your bank!

How long this goes on before someone finally throws up their hands and says "no more!" is difficult to determine - but the outcome is not.

All we're arguing over is the timing.

CALL FOR A NATIONAL BANK BOYCOTT (BOA)

nospam@example.com (Karl Denninger) — Wed, 23 Sep 2009 11:50:00 -0400

Yes, The Ticker is formally calling for a national bank boycott on Bank of America.

I'm serious.

And this has nothing to do with the fact that I believe they're hiding losses, that they're under investigation 7 ways from Sunday regarding the Merrill merger, or that BofA likes to bang you in the backside with usurious "overdraft fees", even though any of those standing alone is more than enough reason to run this bank into the ground.

Nope.

It is about this:

A South Carolina Bank of America branch is drawing criticism Thursday after an employee reportedly ordered the removal of American flags placed to honor a fallen Marine over fears that people would be offended.

The Palmetto Scoop received one eyewitness email claiming that the branch manager at Bank of America’s Gaffney branch at 1602 West Floyd Baker Blvd. “told a citizen who was preparing the route for a U.S. Marine killed in action in Afghanistan by placing small American flags along the roadway that the flags might upset some of her customers.”

Said the outraged tipster, “[The branch manager] took them down and made the citizen go in to get them if she didn’t want them thrown away.”

The flags were part of the funeral procession of Lance Corporal Christopher Fowlkes, 20, who died last week after an explosion in Afghanistan’s Helmand province.

Bank of America said:

“We want to ensure the community knows how deeply proud we are of the men and women who have sacrificed so much in service to our country,” the statement said. “The bank does fly the American Flag at our locations throughout the country and flags were displayed in front of our banking center in Gaffney the evening prior to our dedicated Marine returning home.”

A miscommunication in policy? And flags were permitted to fly in front of the location the evening prior - when the bank was closed and no customers would see them - but not when it was open?

Who would be "offended" by American Flags being flown on a funeral parade route route for an American soldier who was killed in action?

I am DEEPLY offended by this action taken by Bank of America, and their "corporate communication" on this makes clear that this was not a "simple misunderstanding." Bank of America has made clear that they "welcome" as customers ILLEGAL IMMIGRANTS, who are the only people who I can see being "offended" by the display of American Flags on a funerary parade route for a fallen American soldier!

If you are an AMERICAN, if you are in any way associated with our military or any of our fine fighting men and women in the military I call upon YOU to boycott this bank right here and now.

Withdraw your money.

All of it.

Move your business somewhere else.

All of it.

Kill these evil bastards the old-fashioned (and perfectly legal) way:

WITHDRAW YOUR FUNDS AND TAKE YOUR BUSINESS ELSEWHERE SO THEY HAVE A NICE EMPTY PARKING LOT ALL DAY LONG and an EMPTY vault to go with their REFUSAL to allow American flags to be displayed in tribute to FALLEN AMERICAN SOLDIERS.

Again: MOVE YOUR FUNDS AND BUSINESS TO A LOCAL CREDIT UNION. IF YOU DON'T HAVE ONE, PENTAGON FEDERAL CREDIT UNION (http://www.penfed.org) is HAPPY to have you as a customer and unlike Bank of America SUPPORTS OUR FIGHTING MEN AND WOMEN IN THE MILITARY.

Oh, and PenFed also won't bend you over the table with outrageous fees, including but not limited to playing games with overdrafts.

WaMu Part II? (Wells Fargo)

nospam@example.com (Karl Denninger) — Thu, 17 Sep 2009 15:03:00 -0400

The Market Ticker began publication when I noticed a nasty little thing that Washington Mutual was doing - paying dividends from "capitalized interest" - that is, "funny money" promised to be paid in the future by homeowners who had negative-amortization loans.

In California.

With price-to-income ratios for homes that frequently were running 10x, or more than three times the maximum safe value.

I screamed about this at the time, predicting that WaMu would ultimately blow sky high, and nobody in the regulatory apparatus did a damn thing about it.

WaMu did in fact blow up and was "forcibly" folded into JP Morgan.

Is it happening again, but in a different venue, this time with Wells (and perhaps elsewhere)?

According to sources currently working out these loans at Wells Fargo and confirmed by Dan Alpert of Westwood Capital, when selling tranches of commercial mortgage-backed securities below the super senior tranche, Wachovia promised to pay the buyer’s risk premium by writing credit default swap contracts against these subordinate bonds. Should the junior tranches eventually default, then the bank is on the hook.

Uh huh. Ain't that nice? We'll write a CDS and make money twice! Better yet, we called that a "true sale" of the original securitization.

Like hell.

One senior member of Wells Fargo’s commercial loan group who deals directly with the quandary, who spoke on the condition of anonymity, said, “One third of this commercial portfolio we took on from Wachovia is impaired and needs to be completely rewritten. I’ve just hired five more guys and we can’t keep up with the volume of defaults. Southeast Florida and Tampa are serious trouble spots.”

One third eh? Florida? SE Florida? Like Miami. where not long ago I looked up at the skyline to see multiple completed "condo developments" that had a half-dozen lights on (not including the doorman) at 10:00 PM - in a 40 story tower?

Eek.

There was $230 billion in that portfolio when Wells "acquired" Wachovia last year. Was it written down adequately?

Good question.

Was the risk disclosed properly to shareholders at the time of the acquisition?

An even better question.

But the real topper is how Commercial Real Estate loans are frequently done, including a big part of these loans - they're usually interest-only on a reasonably-short time frame (e.g. five years) with the balloon (principal) due on maturity.

This isn't a uniquely "bubble" thing, it in fact has been how commercial real estate (significant projects anyway) have been done for decades. The premise is that the rent and fees will cover the interest and the bank will roll the note at maturity. Interest cost may change but that's no big deal since rents adjust up and down, right?

After all, the actual base value of real estate never goes down, leaving you with a principal balance greater than the net-net value of the property, right?

Where have I heard that tall tale before?

Of course Wells could try to sell the loans off in the market. Or can they? How much is the underlying property worth? Nobody in their right mind is going to give them more than the current value of the property less the discounted cash-flow remaining on the note. What sort of damage would that do to Wells' balance sheet? Can they absorb it even if they wanted to (which from the lack of sales reported in the market they clearly don't!)

Oh yeah, and under the wonderful "accounting rules" banks don't have to disclose the CDS they wrote against those tranches on their balance sheet nor provide maximum exposure - until and unless they blow up in their face, when suddenly that liability "magically re-appears."

This sort of crap is exactly the kind of accounting game that I have been hollering about for more than two years. The fact that these numbers remain undisclosed and are not being volunteered tells me that the banks are likely hiding huge - possibly critical - contingent losses which they have every reason to believe will become realized.

And by the way, this problem is almost certainly not specific to Wachovia/Wells.

But due to the fact that our government allows institutions to hold "off balance sheet" exposures at all, a practice that after ENRON should result in instantaneous indictments and prison terms, we simply do not know how deep this rabbit hole goes - at Wells or anywhere else.

Is the recovery in the stock price of financial stocks (and the market generally) due to actual stronger performance (and a brighter future) or just due to more crafty lies?

And what, pray tell, happens to both if it turns out that in fact there isn't enough capital in these institutions to cover the CDS payments when (not if) the loans (or the complex securities based on them) blow sky high?

What might trigger that? Oh, I don't know..... maybe something like this?

Standard & Poor's Ratings Services recalibrated its ratings criteria for collateralized debt obligations, resulting in the ratings firm's putting about 4,790 CDO tranches totaling $578 billion on watch for downgrade.

Declaration Of Accounting Games (WFC)

nospam@example.com (Karl Denninger) — Wed, 16 Sep 2009 09:00:10 -0400

Gee, isn't this enough for everyone (including in Congress)?

12:29 *WELLS FARGO CITES 'ECONOMICS OF LIQUIDATING ASSETS'
12:29 *WELLS FARGO PREFERS TO HOLD NONPERFORMERS RATHER THAN SELL
12:26 Wells Fargo Says Non-Performing Assets Expected to Increase

Yeah.

The "economics" are that you have to take the market price if your liquidate assets.

But the government will allow you to make something up if you "hold it", even if the value continues to deteriorate and even if the "value" when you made the loan originally was hyperinflated on a bunch of hot air and willfully-blind lending "standards" that amounted to outright fraud in the underwriting process, thereby fueling a speculative asset bubble.

This, of course doesn't change whether a "non-performing asset" is generating cash flow.

It is not.

This "strategy" is in fact nothing more than intentional, willful blindness and that our "regulators" allow it is an outrage.

For the reason they're allowing it you can look right here:

That's what has to happen "going forward" for those "assets" to recover their "value."

Good luck Wells.

But CAT Said Things Were Improving?

nospam@example.com (Karl Denninger) — Thu, 20 Aug 2009 09:59:00 -0400

Or so I thought their conference call and earnings release said....

"There is still a great deal of economic uncertainty in the world, but we are seeing signs of stabilization that we hope will set the foundation for an eventual recovery.

Oh they did say that. Remember that this was part and parcel of the ramp job in the stock market - in fact, here's the chart for you:

Ah, yes, I remember that ramp job from around the 21st of July.

But what has actually happened among Caterpillar dealers since that date? Here's the results:

Caterpillar Inc Releases Dealer Statistics for 3 months (May-July);

July Retail Machines sales -48% -filing
- July total retail machine sales -48% y/y (June -47% y/y, May -43% y/y
- July total sales of reciprocating and turbine engines -33% y/y (June -32% y/y, May -21% y/y)

Heh wait a second! I thought that the company's business was stabilizing and improving?

Uh, nope. July's actual results show deterioration over June when the quarter closed.

Not a lot of deterioration, but deterioration nonetheless, and that's after a cliff-dive between May and June.

Funny how the facts get in the way of the pumping, and what's even more amusing is how Tout TV has completely ignored this story.

Not that I'm surprised - their job, you see, is to make sure you, the retail bagholder, buy stock before the truth becomes widely known so you're the one left holding the bag when the house of cards collapses.

Oh, by the way, CAT made that statement on July 21st - after nearly the entire month had already passed. Care to argue that they didn't know July's numbers were going to suck when they said that? I thought we had laws relating to making statements that you know (or have reason to know) are false in the context of securities and public companies?

Good luck Sheeple.

But I Thought Retail and CapEx Were Ok?

nospam@example.com (Karl Denninger) — Thu, 20 Aug 2009 08:18:00 -0400

One has to wonder where the levitation act is coming from in the market these days. Certainly not from the big retailer Sears....

That's due to a surprise loss - 79 cents/share, when the market expected a profit. Two weeks of pumping and gains - gone premarket.

Then there's Network Appliance. While not the "Grand-daddy" that CISCO is, NTAP is nonetheless a bellweather for corporate storage demand, and corporate storage is, of course, a solid indicator of not only business CapEx on its face but also of expected business growth.

The more you grow your business the more "stuff" (electronically) you need to store. But last night, while reporting a profit, Network Appliance withdrew all forward guidance, saying that they had "no visibility" in forward order flow. The result?

Yesteday's "miraculous recovery" in the market's indices was led by and nearly exclusively consisted of the futures market. Just as happened about a week ago over in Japan (when the Nikkei suddenly had a futures-led pump) we had the same thing happen over here in America - there were two monstrous "pumps" that were not people buying individual stocks, not mutual funds buying the indices (e.g. SPY, XLF, etc) but rather someone placing directional bets in the futures market, and once again, as happened in Japan, it was highly-correlated with the dollar, which took a dirtnap and drove oil prices to the moon.

This sort of game-playing is not illegal, of course. If you think the market is going to rise, you're free to buy futures contracts.

But anyone in the media who equates a futures-led pump with "money on the sidelines" rushing into mutual funds - that is, actual investors (as opposed to "hot money flows") coming in to buy "nicely-priced equities" has rocks in their head.

In the end the underlying economic facts always win, and what is clear is that the economy continues to contract, retail sales are moribund at best (yesterday's reports from Hot Topic, Gymboree and others all disclosed that the firms expected declining same-store sales for the forward quarter) and business CapEx is weak at best - if not on life support.

This is not the material from which economic turnarounds are formed.

More Inside Trading? (AIG)

nospam@example.com (Karl Denninger) — Fri, 07 Aug 2009 11:25:00 -0400

Gee, was this just a "simple" short squeeze, or was AIG's surprise profit announcement this morning leaked?

Hmmmm.....

Not that it would be anything new, of course. We know from past experience that only rumors (or leaked facts!) that make stocks go down are ever investigated by the SEC, and then only when the persons doing the leaking (or rumoring) are not big broker/dealers and their crony hedge funds.

This sort of nonsense is nothing new; it is in fact as old as the stock market. But the blatant level of inside baseball during this crisis (and now the rally) has gotten entirely out of hand.

AIG was widely expected to report another huge loss, and yet they rallied to an insane degree on nutty volume for two days prior to their earnings release -which (surprise!) showed a big profit.

Most-telling the rally today has not eclipsed the high of yesterday, meaning that the price move that happened in fact priced in an event that allegedly was not known to anyone outside, nor was it allegedly traded on before it was released.

In other words the market "predicted", in this specific instance and on enormous volume, something that was not known to anyone who was actually trading.

If you believe that then I'm sure you also believe that Santa Claus is the guy who fills up your stocking with candy on Christmas Eve.

PS: If AIG made all this money, does that mean they will be providing the entirety of this profit to the United States Government in repayment of the credit extended in order to keep the company alive, not to mention the pass-throughs to Goldman Sachs and others? Somehow I doubt it.