Geldpress

Bloomberg Press just released a new book on credit default swaps, entitled CDS Delivery Options.  Here are a few chapter titles that sparked my interest and may warrant a purchase of what could be an informative and entertaining book:

• The Music Stops in Home Prices, Lending, Wall Street
• Fed in a Box
• The End Game for the Government Sponsored Enterprises
• A Review of Treasury Futures Mechanics
• Distorted Economics

There are two chapters devoted to moving the economy forward – “Designing an Angency Credit Derivatives Futures Contract” and “Bringing the Index to an Exchange”.  These chapters lead me to believe the book’s main audience is the crooks on Wall Street who created this mess.  It also leads me to believe that the crooks would have EVENTUALLY stepped in to clean up their own mess, had the government not handed them blank taxpayer funded rescue checks.

The last chapter is a bear market case study on “The ABX Meltdown”.   It’s possible that this chapter could discuss Barrick Gold’s 2006 buyout offer for Nova Gold…  Additional update after the book arrives…

CDS Delivery Option: Better Pricing of Credit Default Swaps by David Boberski

The Geldpress team attended the first Seattle Condo Tour last year, where desperate high rise condo developers showcase their unsold properties for lavish prices.  From my perspective, it was just a futile attempt to lure in the last batch of rich Seattle morons.  And for the morons that didn’t have the $800,000+ for those tiny studio and 1 bedroom condos (still under construction), there was no problem.  The developers would happily etch another notch in the “Sold” list for just a tiny deposit or even a signature.  But those “Sold” condominiums often come right back on the market as cancelled sales when the “buyers” don’t get approved financing, or back out due to massive price declines ahead of completion.

If you don’t believe that developers would list properties as “Sold” without a down payment, take a look at MGM’s project – Las Vegas City Center.

According to this Forbes article:

In a note to clients, Daswani said MGM has sold 55 percent of the condo units to date, but has received only 20 percent of the deposits. The analyst cautioned that if the units’ prices fall about 15 percent to 20 percent from current levels that the project will turn out to be a loss for MGM.

Geldpress comment: Consider it done!  15-20% price declines are absolutely going to happen at a MINIMUM.  For a gambling metropolis that thrives on minimum wage incomes, it’s impossible to justify the insane pricing at City Center.  Also note that they reported selling 55 percent of the condos, and 80% of those reported “sales” were based on nothing more than a signature and a handshake!

The article also notes:

MGM Mirage may see a default rate of 20 percent to 30 percent on its CityCenter condominium units and faces the possibility of some asset sales, an analyst said Tuesday as he started the casino operator with a “Sell” rating.

Geldpress comment: MGM is toast in the likes of “Countrywide toast”, “Bear Sterns Toast”, “Lehman Brothers Toast”, and “Rye Toast”.  And despite future desperate pleas from the mayor of Las Vegas and governor of Nevada, MGM will NOT be declared “To big to fail”.  As for trading MGM, it’s to late.  The easy money was shorting MGM when it dipped below $40 last summer, and then dipped below $30 last Fall.  At these levels ($6.12 at last glance), there are no shares to borrow for shorting, and the options premium on the PUT side is to exorbitant to even bother.  Good Bye MGM.  Thanks for the memories!

Disclosure: No current position on MGM.

The Dow Jones Industrial Average was created in 1882 by Charles Dow.  Contrary to popular belief, the original focus was on 11 growth stocks, and not industrial stocks.  The index originally included 9 railroad stocks, a steamship line and a communications company. In 1896, transportation and industrials were split into 2 averages, one of which was what we now know as the Dow Jones Industrial Average.

To calculate theoriginal index, it was as simple as adding up the prices of the 11 components, and dividing by 11.  But much has changed over the last 127 years since the average was first created.  Component companies have disappeared, new companies have been added, and numerous stock splits have occured.  One thing has not changed, and that is the use of the simple price weighted average.  Only the multiplier has changed to factor in all the component changes.

The Dow Jones today consists of 30 companies.  The multiplication factor used to calculate the average is 7.964782.  For each component, regardless of market cap, the last price is multiplied by 7.964782.  The sum of all these factors is the new average.  There is also an unwritten rule of thumb that states that stocks in the average must be over $10 per share, or risk being removed from the average.  As of this writing, there 4 stocks below $10 (Alcoa, Citibank, General Motors, Bank of America), but they remain in the reported average – for now.

Based on the above information, here are a few interesting calculations:

• If Citibank, General Motors, Bank of America and Alcoa all go to zero, the Dow only drops to 7906.
• If everything on the left side (Citbank through Merck) go to zero, the Dow only drops to 6146.
• If everything on the left side loses 20%, the Dow only drops to 7691.
• If everything on the right side loses 10%, the Dow only drops to 7462
• If everything on the right side loses 20%, the Dow only drops to 6848.

If you are a bear, keep these figures in mind as you weigh your decisions to bet to heavily against the Dow.

Other interesting reading:

• Balanced and hedged portfolio using proshares
• Portfolio protection – hedging todays roller coaster market ride

According to the Yahoo earnings calendar, McDonalds is scheduled to release earnings on Monday.  Options traders are taking a bullish view on McDonalds, as seen from the February option chain below.  There are just under four weeks remaining before February options expiration.  The 60 strike calls traded 10,870 contracts on Friday, more than the entire open interest (9,426) of contracts.  Compare that level to the February Puts, which traded only a fraction of the volume, and it becomes obvious that somebody out there is taking a bullish stance ahead of McDonalds earnings.

Is following the herd the way to make money in McDonalds?  In the words of Bruno, “Ich don’t think so”!  Don’t forget it was also the herds that valued Goldman Sachs over $200, Citibank over $50, and Bear Sterns, Lehman Brothers and Indymac as solvent institutions!  I won’t risk shorting McDonalds ahead of the insanity on Monday, but I will look into taking a new short position if the lunatics bid their shares up AFTER earnings.

Disclosure:  No current position on McDonalds.

Disclaimer:  Trade at your own risk!

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You’ve heard of Moody’s Corporation.  They are the geniuses that rated nearly every mortgage in the country held by unemployed home “buyers” as “AAA”.  For the life of me, I still can’t figure out why Warren Buffett insists on buying this company as part of his Berkshire Hathaway holding company.

Not everything that passes by Moody’s desk is AAA rated.  Occasionally Moody’s does downgrade companies and their debt, but it is almost always AFTER THE DAMGE IS DONE.  Take a look at the 1 month chart of Royal Bank of Scotland:

At last check, RBS was trading at only $3.38 per share.  It was down over 70% in Europe during Monday’s closed U.S. session.  And it’s down another 70% today.  It took two consecutive 70% daily declines for Moody’s to wake up and downgrade their debt to Aa3!

Moody’s Corporation wins my vote for the most useless financial rating company on the planet!  Congratulations, Moody’s!

As for the fans of Warren Buffett, you may want to rethink your strategy of investing in his Berkshire Hathaway fund, which owns shares in Moody’s, Goldman Sachs, US Bank and other near insolvent financial institutions.

Here is the dateline interview with Warren Buffett where Warren refers to the current climate as an “economic Pearl Harbor”.

Here are a few more people who actually UNDERSTAND what is going on, unlike CEO’s and members of congress. And contrary to popular myths, they provided repeated warnings that were ignored by regulators and congress.

For months, everyone has been wondering what on earth Goldman Sachs (symbol:  GS) would be doing to earn money in the future.  They, like every other financial institution, have proven themselves widely incompetent and incapable of earning an honest buck.  But now the mystery is solved.  Goldman Sachs is looking to become a theme park operator!

From Highbeam research:

USJ Co., operator of the Universal Studios Japan theme park in Osaka, is considering issuing preferred shares worth 25 billion yen, mainly for allotment to Goldman Sachs Group Inc., making the U.S. investment bank the largest shareholder of the biggest theme park in western Japan, sources close to the plan said Wednesday.

A year ago airline CEO’s were routinely invited to appear on CNBC’s Fast Money and Mad Money shows.  The one question they were always asked was their level of fuel hedging.  CNBC commentators praised Southwest Airlines for its decision to hedge fuel by locking in at such a low cost.  But CNBC commentators never discussed the possibility of those hedges going wrong.  And in most cases, they are.

From Marketwatch, China Eastern just reported fuel hedging losses of $906 million.  Hedges are very common in multi-national companies, but when it comes down to it, they are a gamble.  And those gambles can work against you too!

China Eastern Airlines said Sunday it suffered a fair value loss of 6.2 billion yuan ($906 million) on fuel hedges last year and that operations have been affected by deteriorating business conditions since the second half, warning it would report a “significant loss” for 2008. The Shanghai-based airline said losses were accumulated under an “industry-wide crisis.” It said its aviation-fuel hedges ballooned into losses after crude oil prices fell sharply.

It’s pretty clear from the latest Bloomberg article who Hank Paulson is really working for, and it’s not the taxpayers!

Henry Paulson may be the most powerful manager of money in the world and he still couldn’t do for taxpayers with the $700 billion bailout of American banks what Warren Buffett did for his shareholders in investing in Goldman Sachs Group Inc.

Rather than “couldn’t”, I find it more fitting to use “WOULDN’T”.  And why would he?  Let’s not forget that those beggars at Goldman Sachs are his former colleagues.  Paulson and the current Goldman boys are in this taxpayer heist together.

The Treasury secretary has made 174 purchases of banks’ preferred shares that include certificates to buy stock at a later date. He invested $10 billion in Goldman Sachs in October, twice as much as Buffett did the month before, yet gained warrants worth ONE-FOURTH as much as the billionaire. The Goldman Sachs terms were repeated in most of the other bank bailouts…

The government has received warrants valued at $13.8 billion in the 25 biggest capital injections from TARP, according to Bloomberg data. Under the terms Buffett negotiated for his $5 billion stake in Goldman Sachs, the TARP certificates would have been worth $130.8 billion.

Warren Buffet is driving hard bargains that it would be hard for any government to match exactly.  But these terms are absolutely PATHETIC, and as long as Paulson is in charge, you can expect more of the same.  Paulson is paying 1000% more than Warren Buffet is for the exact same financial warrants!

Further…

The government will forgo almost $48 billion over the next five years in preferred stock dividend payments from the 25 biggest TARP infusions, as compared with Buffett, according to the terms of the deals

Way to go Paulson!  You get my vote for the most corrupt “public servant” of the century.