The Reports are in...

Earlier this morning it was announced that the preliminary Q1 GDP growth rate was a sluggish 0.6%. The main reason the number was positive for this quarter was the build in inventories which count towards GDP this quarter but will be subtracted next quarter. This will most certainly lead to a negative number for Q2 amid a consumer slowdown caused by deflated housing prices. Nigel Gault, an economist at Global Insight sums up the report nicely:

"The economy just kept its head above water in the first quarter. Don't break out the champagne, though."


The Fed cut rates a quarter percentage point today which now puts the Fed funds rate (rate at which banks loan and lend to each other) at 2%. They also lowered the primary credit rate (rate at which banks borrow from the Fed) to 2.25%. Although there were two dissenting votes on the committee, this was pretty much expected. The Fed also mentioned that this would probably be the last cycle of rate cuts as most economists are predicting pauses in the future. Many people including myself argue that these cuts are unnecessary because monetary policy doesn't immediately impact the economy, but instead lags the current markets. This cut may not take effect until late 2009 and by then conditions could already be corrected. Inflation is still a major concern because it will entail higher consumer prices which will lower GDP growth. The Fed surely understands that the decisions they make have numerous ripple effects on the markets and the economy but sometimes it is hard to determine how large the effects will have.

So what does this mean? Uncertainty for one! It is very unclear where the economy is headed in the near future and it looks more likely to favor the downside. Things will become clearer with time as we see how the previous Fed cuts affect the economy.

Source: WSJ

Tradable Money Markets

WisdomTree just announced a series of TRADABLE "money market equivalents", funds seeking to perform similarly to money market funds available in a number of different countries, such as China, India, Brazil and Japan. In the case of the US and Euro Funds, they seek to return 1-month LIBOR, denominated in their respective currencies. Cool idea, especially if it catchs on...I mean who isn't tired of .4-.6% cash sweep rates at most online brokerages? That being said, the commission needed to enter or exit the ETF does defeat a good bit of the purpose of the US fund, as anyone with enough money to invest in a fund like this (meaning they'll make enough on the investment to cover both sides of the commission plus enough to make worth the time and effort) is already getting at least LIBOR on their cash account, if not more (think non-federal money market). Those with currency exposures I can understand, but I'm willing to bet "USY" is not the next "SPY".

WisdomTree Currency ETFs

Market Movements

What's happening in Today's Markets? According to First Trust Advisors, LP, money is flowing into the following areas:


What does this mean? The market is acting to correct recent mispricings. For example, the continued flow of capital into municipal bonds should bring yields down below those of treasuries, a gross mispricing that has been present for more than a month. The huge flow into high-yield corporates should narrow the spread between those bonds and Treasuries, which is the widest it's been in more than five years, implying huge rates of defaults, which simply aren't there. It also appears that some investors are beginning to bottom fish domestic equities, with domestic equities seeing a strong reversal from massive outflows to fairly strong inflows. This all coincides with the huge draw down in money market assets, as cash seeks risker investments including not only the aforementioned equities and fixed-income products, but clearly commodities as well.

CNBC Milliondollar Challenge

Registration is open for anyone to join. They have weekly winners and the overall winner so there are many opportunities to win! This year currencies can be traded which will no doubt make it harder for the little guy to do well, but it will provide opportunity since the currency markets are volatile. Anybody interested in teaming up with me for the competition just post a comment!

What is a recession?

With this week's GDP number there has been a lot of commentary on the current state of the economy. A recession can mean different things to different people. Whether it is 2 consecutive quarters of negative GDP growth, or just 2 quarters of negative GDP growth, or maybe the conditions that the average American consumer is facing. The National Bureau of Economic Research has the final say. Most macro economic classes teach the first definition mentioned above but as you can see from the last recession in 2002 the quarters of negative growth were separated by one with positive growth. Since there is no concrete definition why should we be arguing about the current economic conditions. Bottom line things are bad and whether it is a recession or slow growth it really doesn't matter because the Fed is taking action it feels is necessary to correct the housing/credit crisis.

This is a big week for the markets with the GDP number, a Fed meeting, Jobs reports and continued corporate earnings. Look for more analysis to come!

Congress: BUSTED!!

What's taking you so long!? On May 16, 2007, Rep. Brian Baird [D-WA] introduced a bill known as "H.R. 2341: Stop Trading on Congressional Knowledge Act". This act had been created to "To prohibit securities and commodities trading based on nonpublic information relating to Congress, and to require additional reporting by Members and employees of Congress of securities transaction, and for other purposes." ARE YOU SERIOUS!? YOU ARE OUR NATION'S DECISION MAKERS AND YOU'RE EVEN THINKING ABOUT LYING/CHEATING/STEALING? Why is this even an issue? While I recognize that lobbying presents an obvious conflict of interest, what Congress-person would be unintelligent/dishonorable enough to use Government information to trade their own account? Below is the document, via GovTrack:

H.R. 2341: Stop Trading on Congressional Knowledge Act

Rapper's Delight

And we thought they were just wasting their money...

Congratulations to each and every rapper/thug/gangster/etc who was enlightened enough to plan for a period of inflation, and act swiftly to protect him/herself against it. By purchasing precious metal "Grillz", these individuals effectively hedged themselves against a weakening dollar and have made their prosthetic wonders yield a double-digit return. Is it a mere coincidence that these "new money" superstars predicted the onset of inflation? I doubt it. I think they realized that with dozens of people making six-figures (or more) creating jingles that include such notable lyrics as

"Hey ma, what's up, lets slide, all right, all right
And we get it on tonight
You smoke, I smoke, I drink, me too, well good
Cause we gon get high tonight
Got drops, got Coups, got Trucks, got jeeps, all right
Cause we gon take a ride tonight"

our money supply is truly misplaced, with, simply put, too much money available.

So, to all those who were ahead of the curve, "Stay fly"



Thank you to K. Shah of Oliver Wyman for pointing out such a profound reality.

Wanted: Your Riskiest Assets

In response to the Bank of England's recently announced actions to improve liquidity, TraderDaily provides great incite:

"Fresh from preliminary lab testing, the Bank of England has unleashed a powerful new anti-subprime tool, the Special Liquidity Scheme. Here’s how it works: you bring in your mortgage-backed securities (or, as we understand it, any toxic anything you can find lying around), the bank puts them through a giant meat-grinder, and out comes a pile of shiny-new government bonds. This is for a limited time only, so hurry to your local BOE window with whatever you’ve got. Act now and they’ll also accept old shoes, oil drums, Russian nuclear waste, day-old bagels and the gum you scraped off the bottom of your shoe this morning. Bond supplies are capped at $100 billion, so, just like happy-meal toys, they won’t last."

And you thought Bear Stearns was a bailout?

Capital Gains Tax

Interesting graph from the Wall Street Journal showing capital gains realizations with different tax levels. This obviously shows that lower tax rates leads to greater revenue for the government which is the point of taxing in the first place. This is the "long term" capital gains tax which applies to any realization on an asset over a one year period. Any gain realized in under a year is taxed at rate you pay on the rest of your income.

It is almost a certainty that tax rates will increase with the Bush tax cuts about to expire in 2010, and it's really a shame, but if we get a candidate who is willing to be prudent with government spending then the tax rates may not have to go up as much. Although the capital gains tax has an impact on economic growth, the tax that really could stimulate the economy is the corporate income tax. John McCain advocates lowering it from 35% to 25% but this could just be pre-electoral talk.

Natural Gas Prices

U.S. natural gas prices has risen 93% since last August and there is some concern that prices might retreat over the summer. The interesting thing is that comparing U.S. prices with the rest of the world they are undervalued. Many analysts believe that this will drive prices higher in the future. However, Chesapeake's chief executive believes that production levels will also increase which will keep prices in the range they currently trade. I find this intriguing because they would definitely benefit from higher prices, yet he sounds pretty confident that his assumption of stable prices will hold.

LNG (liquefied natural gas) has made transportation of this energy source easier which could potentially lead to higher level of natural gas use as an energy source. Natural gas emits the least amount of carbon dioxide out of all hydrocarbons and many green initiatives will include increases in natural gas over crude oil and coal.

Source: WSJ

Euro-Dollar Position

Enough said.
Via: The Big Picture

Recession Odds

Its funny how easily opinions are changed about recessions. GOOG, IBM, CAT report good numbers and you see recession odds go from 70% to now 20.5%. This chart is from intrade and in now way this is an exact indicator but the media and people who comment about the markets need to start having more concrete convictions before they speak.

We're going to be alright. The US economy is strong. Emerging and developing countries are experiencing growth we've never seen before. I've been buying for the last few months, I think you should be doing the same.

Chart via mjperry.blogspot.com

Alternative Investments [MS-AIP]

The following is for educational purposes only, and is by no means an offering of securities of ANY kind.


This is definitely a conservative fund-of-funds. As you can see, the fund is entirely large managers such as Perry, DE Shaw, Cerberus, Citadel and Och-Ziff. Why would someone invest in a FoF like this? Take a look at the drawdown...that's VERY small..also, the larger funds are more effectively able to handle huge institutional inflows. Finally, most of these firms have established track records, which makes the FoF easier to pitch to clients.

What's REALLY Going On At Citi?

Today was Citigroup's closely listened to conference call. I'll admit, I was the first person to say Vikram Pandit was the wrong guy for the job. I'll now admit, however, that he's doing a much better job than I ever thought he would. Below is the handout from today's call.

Analyst Supplement

Your Backdoor to China/India

New Chinese/Indian Currency ETNs

Yes, that's right...the most undervalued currencies in the world can now be bought in an exchange-traded form, courtesy of Morgan Stanely.

VanEck Vector ETN (Chinese)

VanEck Vector ETN (Indian)

The (oil)DOWN side of ETFs

Claymore Securities, the creator of arguably the most exotic ETFs, includes "MacroShares" as one of their offerings. Take a look at the Discount/Premium to NAV that the "Oil Down" fund (designed to go UP in price when oil goes DOWN) is trading...


No, that is NOT a mistake...

Thanks to NakedShorts for pointing this out...

Why I Work For Bloomberg LP

Our biggest competitor:



Impressive.

Puerto Rico

Munis are a great place to invest right now. Imagine yielding more than 10 percent on AAA rated securities backed by the government. The first of these bonds that Bloomberg mentions are the Puerto Rico Tax Free AAA rated GOs. When I was working in Puerto Rico in 2006 they were in the midst of creating these securities. I was completely against the issuance of these bonds as the interest payments come from a sales tax that the government imposed. I am not a fan of taxes, much less a fan of taxes that will likely be in place until 2024 which is when the last of the bonds expire. The PR government has many problems and I won't go into much detail but for investors, these bonds are GREAT . There is an upcoming election in the island. If the candiate I want to win does (which will most likely will) it will mean even better things for Puerto Rico's economy.


Bloomberg

With the collapse of the $330 billion auction-rate debt market, a disaster for issuers and stranded bondholders, has made it possible for investors to earn 10 percent or more on top-rated securities.

Puerto Rico's tax-free AAA 2024 general obligation bonds are paying 12 percent, equivalent to an 18.5 percent yield on taxable issues. That compares with rates of 4.3 percent for 10-year U.S. Treasuries and 10.5 percent for corporate high- yield, high-risk debt, according to indexes compiled by Merrill Lynch & Co.

Federal Reserve Balance Sheet & How This All Ends.

In a stroke of ingenuity, banks are packaging anything they can find to get cash from the Fed. Admittedly this is a broad statement, but Lehman for one recently pooled $2.8B of its unsold buyout debt into the Freedom CLO, which it in turn punted to the Fed for loans (though it was required to keep 25% on its own balance sheet). This raises questions as to whether there is any hope of preserving the Fed’s balance sheet. As it takes on more collateral of questionable worth, some are starting to worry that the Fed will run out of T-bills. What options does the Fed have in the unlikely even that it does run out? Yves Smith has a good compilation of options from various sources. All of them are quite unconventional, but the Fed has shown itself to be fairly comfortable with innovative policy. Some of the more interesting options (of questionable legality) include the Fed issuing short-term paper, paying interest on bank reserves, or reversing the TSLF by providing Fed guaranteed MBS to banks.

Federal Reserve options aside, I’ve been wondering, how does this all end? Housing prices show no sign of slowing their decline, MBS and similarly backed junk seems destined to keep declining in value (though such “sure bets” are admittedly a dangerous assertion). It seems that this credit crisis will proceed well through 2008 and possibly into 2009. That is unless drastic action is taken in the form of outright purchases of MBS by a branch of the federal government or some incredibly creative stop on housing prices, though I am not advocating either.

I’m interested in hearing people’s thoughts on both the issue of Fed options in the event it runs out of T-Bills (if it even can) as well as the notion of “how this all ends”.

(Graphic from Alea).

How They Stack Up

Interested in Private Equity? See how some of the top firms in the World have been performing.

CalSTRS PE Returns

World Housing Bubble!

Arguably, the root cause of all the troubles the US and now the world financial markets are having is the US housing bubble and its subsequent bursting, which has yet to end. In last weeks Economist there was a short article with the accompanying graphic seen on the right. The chart shows housing prices as percentage gaps over what can be justified by their respective market fundamentals. Though the US has already suffered a 20-30% decline in housing prices, there appears to be more room to go. More frighteningly, virtually all of Europe is only beginning to feel the impact of housing price declines and is still sitting a top a glaring bubble. The slight caveat to this is that some areas may not be quite as quick to deflate. Europe’s greater population mobility and lesser landmass in relation to the US played a role in helping prop up this housing froth and will likely play a hand in its decline. Besides the obvious economic impact on wealth that this decline has, it appears as though other financial markets may be spared the slaughter that New York felt. After all, with the exception of The City, I doubt many European financial centers have the arcane structured finance vehicles that NYC did.

The inherent next question is: how does one profit from this bubble? The UK housing decline has witnessed a declining pound, however currency speculation is quite an ineffective as well as indirect way of profiting from the bubble. Anyone have any ideas on possible equity plays or creative fixed-income outlooks on the European housing bubble?

Yahoo-Microsoft Deal Just Got Much More Complicated

In some ways the proposed Microsoft/Yahoo deal has not left the news since it was announced in February, but now there are some new players in the saga. Yahoo and AOL are in talks on a deal that will be worth more than the Microsoft offer, but the question Yahoo shareholders have to ask is what deal is better for us. In my opinion I see this move from Yahoo as a slap in the face to Microsoft, but they are just returning the favor when Microsoft low balled their price/share offer. But don't count Microsoft out yet because they are talking to News Corp concerning a joint deal for Yahoo. This will obviously increase the offer because News Corp will add some equity to deal. If this doesn't work for Microsoft than they might take it to the shareholders because in all actuality this is probably the best deal for them. You can't tell me that the combined power and services of those three is comparable to AOL and Yahoo.

Commodities For The Rest of Us

For those of us who are not able to take advantage of opportunities in commodities via the futures markets, VBAM has unveiled yet another product enabling us to access these markets.

Commodities Funds

Who's Next?

We've been seeing listed funds associated with hedge funds and PE firms get decimated, some more than others. Why has Ares held up so much?

The following is a list of funds associated with PE or hedge fund firms who have seen their value decline:

Carlyle Capital (CCC) - The Carlyle Group
Axon Financial - TPG-Axon Capital Management (affiliated with TPG Capital)
Ares Capital Corp. (ARCC) - Apollo Management
KKR Financial Corp. (KFN) - KKR & Co. LP

Any more to add?

Apollo Follow-UP

VERY IMPORTANT:

Something many people HAVE NOT picked up on:

"This prospectus relates solely to the resale of up to an aggregate of 29,824,540 Class A shares, representing Class A limited liability company interests of Apollo Global Management, LLC, by the selling shareholders identified in this prospectus (which term as used in this prospectus includes pledgees, donees, transferees or other successors-in-interest). The selling shareholders acquired the Class A shares in an exempt offering, which closed on August 8, 2007 and which we refer to as the “Rule 144A Offering.” We are registering the offer and sale of the Class A shares to satisfy registration rights we have granted to the selling shareholders. "*

The people selling shares on the NYSE are the ones who have gotten killed on the private Goldman Sachs market, and are looking to offload their shares to the public. This brings up a VERY important point:

If the brilliant people running CalPERS, the Abu Dahbi Investment Authority, and Apollo are selling, do you really want to be buying?

*via the SEC

Third Time's A Charm?

Once again, a firm that operates almost exclusively in private, opaque markets is coming into the public eye. Apollo Global Management, LLC, the fund run by Michael Milken apprentice Leon Black, has filed for a public offering on the NYSE. Until now, the Firm's stock has been trading on the GSTRuE market, a market for institutions only. The stock, which debuted around $40, now trades at $14. After the huge drops in share price for competitors Blackstone (BX) and Fortress (FIG), one wonders why Black has continued with the listing process (and why he hasn't pulled the listing from GSTRuE, as he must move from GSTRuE to the public markets within 240 days.) While it may sound far-fetched, why doesn't Apollo buy back its own stock?

Below is the prospectus filed with the SEC:

Apollo Global Management, LLC

Greenspan's Legacy

There have been numerous attacks on the former Fed chairman criticizing his loose monetary policy from 2000-2004.  Low interests rates made mortgages very affordable and people began taking on debt they couldn't realistically pay back. All of this lead to a bubble in housing prices and gave banks and other financial institutions a lot of bad debt on their books. The ongoing credit crisis is a product of many events and although some may have been triggered by monetary policy at the Fed I think it is unfair to blame Greenspan. Instead of looking back let's look forward and find a solution to the problem. Regardless of who's fault it is, the current Fed and regulators are the ones that will be responsible for correcting the crisis. 

The WSJ has a great article (click title) on the matter.  

Facebook

Ever wonder what facebook founder and CEO Marck Zuckergberg wrote on his Harvard admissions essay? Here they are. Follow the link below and you can see his essays, application and a diary he kept while witting the codes for facebook.com

LINK

If it's a credit crunch out there...

... then why is bank credit at the highest level its been since 1979? Take a look at the chart above which is taken from U of M Professor Mark Perry's Carpe Diem blog. Something about what we are hearing from CNBC and Bloomberg isn't matching up with the data.

Also, with another better than expected piece of economic data today (Macroeconomic Advisors' job data for March), CNBC economist Steve Liesman remarked, "We did 0.6% (growth in Q4) and with the data out recently its looking like we'll do 0.8-1% in Q1." If 0.8-1% is becoming the consensus number for Q1 then the recession fears will have proved to be way overdone and the market will have to continue its rally. Sometime things don't need to be perfect, they just need to be better than most in the markets thought.

MII Members - $250 Redemption

Due to MII's massive short position in Bear Stearns this quarter, we will be issuing $250 to all members who have a signed contract on record with us.

Click here to register on our website for your redemption.

Doug Kass' Grades

In January, Douggy Kass of Sea Breeze Capital Partners gave us his surprises to look for in 2008. Yesterday he graded himself for accuracy through Q1. While he deserves an A+ for some (Bear stearns getting "taken-under"), he's being pretty genenous with the grading policy for most.

Benefitting From Bear

While laboring over the 250+ page SEC filing by Citadel Investment Group, I found the following information regarding their options positions in Bear Stearns. That's right, they own $115 and $125 PUTS. Not too shabby...



via the SEC

Lehman and UBS

Today's rally is mostly fueled by the the write-downs UBS and Lehman just took.

Investors were pleased to hear that Swiss bank UBS AG said it will issue up to $15 billion in new stock and that its chairman, Marcel Ospel, had quit. Investors chose to look past the bank's announcement that it will take a fresh $19 billion write-down due to additional declines in the value of its mortgage assets and other credit instruments, following an $18 billion write-down last year.

Raising capital through stock issuance, a $19 billion write-down and this stock is up 10%??? I think this is a sign that many investors believe that with these writedowns the worse from the credit crunch is behind us. Finally.

I Hope I've Been Punk'd

Young media icon Ashton Kutcher "is joining the William Morris Agency Inc.'s blank-check firm Performance Acquisition Co., a SPAC seeking $500 million through an IPO on the American Stock Exchange."

Ashton's SPAC

That's when you know.

via TheDeal

JP Morgan Takes #1

In the last 7 months investment banks have performed poorly, however some of the banks are just better at limiting their loses. JP Morgan took over as the #1 underwriter on Wall Street according to numbers compiled by Thomson Financial. Here are the details:

According to Thomson, underwriting volume fell to $1.27 trillion from $2.3 trillion a year earlier. JPMorgan arranged $129.4 billion of offerings, winning a 10.2 percent share.
Citigroup followed with $94.7 billion of offerings and a 7.5 percent share. Deutsche Bank AG was third, with $91.8 billion of offerings and a 7.2 percent share.

JP Morgan has not released any statement on the matter, however many of you will be seeing this table when they come to recruit on campus next year. Citigroup had this to say:

Citigroup in a statement said it manages its business "for productivity and profitability rather than league table position."

Sounds like a loser's mentality to me.