Did Bill Gross really say that?

I have a lot of respect for "Bond King" Bill Gross. Every month he puts together a nice commentary laced with mild humor, puns, and so on. I highly recommend reading his comments and acting accordingly. Of course, he is the bond king and a bond king does love a net lowering of interest rates and the associated flight to safety.

Enjoy, if you can.

Investor Outlook, December 2007
Bill Gross

The woven tangled web of subprimes has claimed more than its share of victims in recent months. Homeowners by the hundreds of thousands, to be sure, but also those that created, packaged, insured, distributed, and ultimately bought what should have been labeled "junk mortgages," but which by a masterstroke of marketing genius were given a more respectable imprimatur. "Skim milk masquerades as cream," warned Gilbert & Sullivan a century ago and sure enough, modern day subprimes packaged into financial conduits with noms de plume such as "SIVs" and "CDOs" pretended to be AAA rated cubes of butter. Financial institutions fell for the charade hook, line, and sinker and now we all suffer the consequences. Defaults are rising, the dollar’s sinking, and good Lord—even Google’s stock price is going down. Something must really be wrong here........continue reading by clicking the article title.

The Shadow Knows

or if you wish to just sit back and listen, click here The Shadow Knows audio

Here comes the govt to the rescue

I have to vent for a minute. The proposed government bailout of US subprime borrowers is just the latest example of the disregard of risk in the system. Now, I truly feel sorry for those new homeowners who were encouraged to enter into mortgages they could not afford. I will refrain from really sharing my viewpoint on the entire chain of people and entities involved in this credit mess. Suffice it to say that the reason I did not buy a house at these favorable rates a few years ago was due to the fact that I was not in the position to afford the mortgage if rates were to reset higher, which I was pretty sure they would. Also, the valuations were too high. The point is that I took the responsible approach and did not buy that which I could not afford. Fast forward to a day ago when the government introduced a plan to freeze these adjustable rates for the next five years. Are you kidding me. I cannot believe I was so naive as to think our government would let us get what we deserve.

This proposed bail out is an insurance policy I didn't know I had. If I had know the government would be there to bail me out of a mortgage I could not afford, you bet I would be living in a house well above my means. Welcome back moral hazard (taking above normal risks because I now have insurance). We saw the markets rally and carry trades put back on (rally in AUS$ and selling in JPY Yen). This is evidence of a moral hazard with regards to risk. I can now take on extra monetary risk because if we begin to experience stress on the system, the government will dive in and bail us out. This can work for a while. Once the government's bail out efforts don't work, watch out, it will get real ugly real fast.

The Wall Street Journal reports:

Battle Lines Form
Over Mortgage Plan

By MICHAEL M. PHILLIPS, SERENA NG and JOHN D. MCKINNON
December 7, 2007; Page A1

WASHINGTON -- In unveiling a plan to help more than one million struggling homeowners, the Bush administration and the mortgage industry have embarked on a controversial project: picking winners and losers from the rubble of the subprime-mortgage meltdown.

Under the deal, formally released yesterday, the industry would voluntarily help as many as 1.2 million homeowners who are heading for trouble paying their subprime mortgages but aren't yet lost causes. For some homeowners, loan-servicing companies will agree to freeze mortgages at their low introductory rates. In other cases, credit counselors or loan servicers will walk mortgage holders through refinancing processes.

The deal won't provide relief to many subprime-mortgage holders: These include borrowers who are now in foreclosure, have already refinanced their homes or are more than 60 days delinquent on more than one payment over the past year. In some cases, people with good credit scores will be excluded. Also left out are those deemed able to afford the higher interest rates scheduled to replace their introductory rates over the next two years.

The initiative could help stabilize falling home prices and rising foreclosure rates, buoy the mortgage market and provide a modicum of comfort to investors watching the housing crisis bleed into the broader economy.

But it also sets what promises to become a battle line as the subprime crisis plays out over the coming election year. Some critics, especially Democrats, say the plan doesn't go far enough to protect vulnerable homeowners against foreclosure. Others, including some homeowners, as well as those who have watched from the sidelines as home prices have soared in recent years, charge that the plan amounts to a bailout for financially reckless borrowers.

I pity the fool

I have always had a positive bias for some gold in a portfolio, especially as a hedge against inflation. Minyanville has developed a unique "indicator" to suggest where gold is headed. This is hilarious, this is a must watch.

Mr. T and the price of gold

Winners and Losers

To the major financial institutions it is a simple as, did we win or did we lose; Bottomline. At the end of the day, given all the risk, profits, explosive toxic financial paper, marked to theory debt instruments it is very simple. After the S%*t hit the fan, did we come out ahead. Unfortunately, for the smaller investor and the once new home owner the actual financial and emotional fallout is much more damaging. This post on Bloomberg gives us the first signal who "won" and who "lost".



Citi's Losses `Greatly Exceeded' Profits for Subprime (Update1)

By Gonzalo Vina and Sebastian Boyd

Dec. 4 (Bloomberg) -- Citigroup Inc., the biggest U.S. bank by assets, lost more money than it made from financial instruments based on U.S. subprime mortgages, a senior company executive said in a meeting at the British Parliament.

William Mills, chief executive officer of Citigroup's markets and banking division in Europe, said his bank had suffered ``reputational damage'' from the fallout even though the New York-based company had made ``adequate disclosures'' to customers who were trading subprime-related securities including collateralized debt obligations.

``Our losses greatly exceeded the profits we made in this field over several years,'' Mills said at a hearing of the Treasury Committee today.

Citigroup has been without a CEO since Charles O. ``Chuck'' Prince III quit last month after the bank announced $8 billion to $11 billion of writedowns on mortgage investments. That may cut fourth-quarter profit by up to $7 billion, the bank said. The company is searching for a new CEO and the candidates include Vikram Pandit, head of Citigroup's subprime division.

``The end buyers of these instruments were sophisticated institutions that were given the opportunity to review the documents associated with them,'' Mills said. ``We've taken our fair share of losses on this.''

Jeremy Palmer, who runs UBS AG's investment banking unit in Europe, the Middle East and Africa, told the committee Switzerland's biggest bank probably also lost more than it made.

`We Made Money'

Gerald Corrigan, the managing director in charge of risk management at Goldman Sachs Group Inc., said that his bank had fared better than Citi.

``On balance, we probably made money,'' Corrigan told lawmakers. ``We have had a measure of success in hedging some of our exposure.''

Corrigan said that disruptions akin to the subprime crisis could happen again even if bankers devote ``relentless energy'' towards preventing them.

``It is the nature of things, sad but true, that these periodic disruptions will occur,'' he said. ``We have to be honest enough to recognize that as hard as we work at this, sometime in the future another surprise will occur.''

``Mistakes were made, there is no question about that,'' said Corrigan.

Deutsche Bank probably made more money from marketing CDOs than it lost, said Charles Aldington, chairman of its London unit.

The committee has also called Hector Sants, CEO of the Financial Services Authority, Chancellor of the Exchequer Alistair Darling, banking industry lobbying groups and Bank of England Governor Mervyn King.

The Bernanke Put

Greenspan had a theoretical put, so why can't Bernanke? Well, he does. This theoretical Greenspan Put is a belief that, given a "market crisis", the Federal Reserve chief would step in and lower key rates to avoid a systematic crisis. We have seen this several times with Bernanke since he took over the reigns. Even the rumors of Fed action is enough to create the most dramatic of market rallies (as witnessed on November 28th , 2007 as the DJ-30 gained 330 points). If you are short, you will feel the pain. These types of events are what make shorting more risky than being long.

Nouriel Roubini does a fantastic job looking into the recent market rout and subsequent Fed inspired rally. Spend some time with the full article, it will help shed some light on the recent developments in our economy and just might save your financial future.

The Bernanke Put and the Last Legs of the Stock Market Sucker's Rally

How sharply will the US stock market fall if the US experiences a recession? Given the recent flow of very negative macro news, the likelihood of a US hard landing has sharply increased; thus, it is important to assess the implication of such growth slowdown, hard landing or outright recession on the stock market.

It is true that in the last two days the US stock market has recovered sharply after a significant 10% downward correction in the period from early October until Monday. But the most sensible interpretation of the upward move on Tuesday and Wednesday this week (in spite of an onslaught of lousy macro news: consumer confidence, existing home sales, Beige Book, fall in durable goods orders, regional Fed manufacturing reports, initial claims for unemployment benefits, expectations that Q4 growth will be closer to 0% after the revised 4.9% in Q3, sharply rising credit losses, falling home prices and a worsening housing recession, etc.) is that this is the last leg of a sucker's rally (or dead cat's bounce) driven by wishful hopes that the Fed easing will prevent a recession.

Certainly yesterday Wednesday equities rally was totally driven by Fed governor Kohn signaling the obvious, i.e. that given that the liquidity and credit crunch is now worse than at its August peak the Fed will cut rates in December, January and for as long as needed. In this game of chicken between the Fed and the bond market (with the latter signaling already for a while that the Fed will keep on cutting) the Fed was obviously the one to blink: this was no surprise to anyone who had noticed the meltdown in financial markets (a ugly liquidity and credit crunch) in the last few weeks. But for some reason the stock market on Wednesday discovered what analysts, the bond market and credit markets knew all along, i.e. that the Fed will have to keep on cutting rates as we are headed towards an ugly recession that is now inevitable regardless of how much the Fed cuts rates.......

Hello winter part two

Hello winter part I was a look at exercising during the tough times and staying true to personal goals and commitment to those goals. In part II of Hello winter, I want to relate that same outlook on commitment to personal finances. These two endeavors go hand in hand from a mental aspect. It makes complete sense to me to mix the two, thus the reason I am keeping a blog in the first place. Staying fit in the winter mentally is exactly like pushing through the tough times in your investing. You have made the plan, then some bad weather comes along and does its best to steer you off course and create doubt in your strategy. The mental pain can be severe but the reward is worth the suffering. Danger seems to be at every corner, your decisons are tested to the point where you think you will break. These are the times you must stay true to your system. Your system, that is the key. This is your training plan, it has been thought out with a clear mind, it has been time tested for soundness. If you are to make it to the "summer" or easier times you must remain true to your system and follow it regardless of the external environment.

Now lets back up one step further. To develop a plan and stick through it most, if not all, great athletes need a coach, a coach who has seen it all, and has consistently put his athletes in positions to become great. Don't discount the athletes personal determination to his goals, but they need someone to guide them and encourage them when the times are tough. This is no different in investing. To be successful, the individual investor needs guidance. I am no different. While I have the mental capacity, drive, discipline, and dedication to be successful I have not had a "coach". Without a coach, I can't live up to my potential. This realization has forced me to rethink my role as an Investment Advisor. Being a value to my clients as an Investment Advisor has been on of the most difficult experiences of my life. I will be a success in the future but now I am forced to look in the mirror and ask myself a very difficult question. Can I honestly do the best job for my clients when I know that I am not doing the job I expect of myself? The answer is no. Therefore, I have decided to merge my current client base into a firm with many years of experience and success. In order for me to be successful in the long run, and to be a real value to my clients I must find someone who can help me realize my one true goal, To be the best that I am capable to being.

Hello Winter part one

It finally happened. After a very mild start to the winter, we finally were hit. Now I know winter has not yet officially begun, however, my calender flips over once we have finally had some real cold weather. This was the first trail run I went on the was better served with crampons and ice skates. This usually means my real runs and bike rides are now isolated to the flats; endless loops around the Boulder Reservoir or Eagle Trail, rides out to see the Interstate, or even worse the treadmill and trainer. I begin asking myself why do we subject ourselves to this every year. Is there a benefit to going through these tough winters? While I was slip sliding away this morning, the answer came to me. We go through the tough times to make us stronger. When the going is tough we are forced to dig deep inside and push through. I thought back to my best season as a triathlete, 2004. I had just come off of Ironman Wisconsin, in September 2003 with a good result but not great. I had always been a good swimmer and cyclist, but my running had a lot of holes in it. If I wanted to see my potential as a triathlete I had to become a better runner. In order to become a better runner for the 2004 season I had to begin now, in late 2003 and train through the winter.

The first step was commitment to the end goal, qualify for Ironman World Championships in 2004, about a year out. Second was to run through the winter. I was determined to become a runner. This takes time, lots of miles, and lots of determination. Through that winter I did become a much better marathon runner. In fact, I did several marathons late that winter and spring, including the Boston Marathon (which by the way is an incredible event). The training was extremely tough. Winter brings with it short days, bitter cold mornings, and unstable weather. Dedication kept me going, nothing was going to stop me from becoming a runner. The body is amazing what it can become. The mind is even more amazing in what it can make the human machine become. I attribute part of my success during the warm summer season to the determination to train and stay motivated through the winter months. You must to have a goal, a commitment to that goal, and that determination must be tested for a real sense of accomplishment.

So as I was out running this morning, asking myself why am I doing this, I realized I am out here because I need to be tough. I don't have a goal to stay motivated yet. I talk about Xterra next season but I have not committed to it yet. Without commitment, a goal is not real it is only a dream.

Honestly, I do have to admit that winter training is not always that bad. Some of my best most memorable runs have been on the snow, in cold temperatures. The solitude and beauty of running through the forest in a fresh blanket of snow is something special.