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OTOH, Microsoft ...
... could be making a clever play to create huge pent-up demand for a nonsucking Windows operating system to boost Windows 7 revenues!
This is interesting. Who would have imagined, fifteen years ago, that Microsoft would come to this? I thought that with its money, it'd hire the people needed to actually execute, and eventually be able to win on genuine competition, from a position earned with misdeeds. The idea MSFT is just too culturally out of synch to deliver is really humbling: they have, after all, the resources to try anything that might work ....
Take care,
--Tex.
re cash
Apple's cash probably does not offer a meaningful barrier either to irrational panic pricing or to frightening volatility.
http://jadedconsumer.blogspot.com/2008/10/does-apple-have-safety-net.html
The one thing facts like cash can help with is identifying the point Apple's price reflects irrationally low panic sale offers, and isn't simply a rational reflection of dimmed expectations.
The other possibility investors might consider is that Apple does something clever with its cash while liquidity is tight, but since when has Apple demonstrated any skill in that? Only incidentally -- as in ARM Holdings and Akamai, where Apple was investing for strategic purposes and not principally for capital gains -- has Apple ended up with cheery capital gains from its deployment of liquid assets.
Maybe Apple will use cash to built costly plants, driving down short-term margins in the hope of obtaining future advantages in production:
http://apple20.blogs.fortune.cnn.com/2008/10/05/has-steve-jobs-built-a-secret-macbook-factory/
Take care,
--Tex.
re Q
I disagree that the major concern should be the Q. I think the major concern should be long term, and that means solving the underlying suit rather than the Q. Spending money buying off creditors is less useful than proving their claims meritless, which will also have the effect of removing the Q (by mooting the creditors' claims that led to the bankruptcy proceeding).
ETLT has long traded with a P/B below 1. If you don't think your reward -- the company earnings per share -- is adequate even buying at a discount to book value, then you should find a company whose management produces a return you prefer.
For example, I like ACAS, which also trades below net assets and has a great dividend, to boot:
http://jadedconsumer.blogspot.com/2008/09/acas-like-bank-but-different.html
Take care,
--Tex.
re PR
The broken English on the site is really hilarious. Having done business with the Chinese in this community, I understand it's not an indication they're dense, it's an indication you can get along just fine in most of the world without much English. Still, it's jarring to experience in a serious business communication. I think this may be why some people suspect the business can't be serious.
Take care,
--Tex.
re receiver during appeal
I am more than a little puzzled as to how a receiver could be appointed while the appeal remains outstanding. I suppose foreigners like me wont easily understand US laws in this regard.
I've actually collected judgments in Texas, so this one is up my alley.
Once a judgment has been entered, the party holding the judgment can enforce it. The only way to stay enforcement pending appeal is to post a bond in the amount of the judgment as surety against the risk the losing party will squander in litigation the money the trial court thought should be paid to the winner of the judgment.
Appeal bonds are not free; they cost money. Normally, a company operating in the U.S. doesn't want the disruption of a receiver seizing assets needed in the business, however, and posts bond. ETLT doesn't have any US operations, and doesn't have any US property, so ETLT has very little reason to fear collections efforts during the pendency of the appeal.
Since ETLT hasn't paid the judgment, and the judgment hasn't been stayed by an appeal bond, the judgment is payable immediately. Because ETLT has no US assets but has US debts, it easily meets the definition of insolvency under the Bankruptcy Code, so the bankruptcy proceeding is lawful. However, it's fruitless because there's nothing here to collect. Also, if the appeal of the judgment succeeds, the bankruptcy proceeding will become moot.
China hasn't got a treaty on cross-border recognition of judgments from the US, so collections in China isn't a risk, and impairment of operations isn't a risk. Suing ETLT in the US is frankly a fool's errand, unless ETLT has truly awful representation, because the US judgment is worthless in the jurisdiction containing all the assets against which one would want to collect.
Take care,
--Tex.
The last I heard, the underlying suit is still on appeal.
The only reason collections were undertaken is because no supersedeas bond was posted.
The reason no bond was posted is simple: why pay an insurance premium to prevent collections in the U.S., when the company's assets are all in China?
I think Western is digging a dry hole, hoping to gin up settlement interest by management by creating panic among investors about the shares.
If management isn't compensated on the basis of options, and isn't planning to cash out, it's unlikely to generate much leverage.
I'm interested in hearing the outcome of the appeal. My understanding is that the underlying suit was refiled repeatedly, which suggests someone was shopping for a friendly judge or the like. If the law doesn't back up the trial court's position, the judgment isn't safe on appeal.
Anyone have access to the pleadings, or can post info on exactly how this went down? It'd be nice to know more about the merits of the case, though there have been links posted on the history of Western and its principals to suggest they're scam artists suing on a contract for services they never performed.
Take care,
--Tex.
OT re paid for in taxes
I can't buy the "well I paid for it with taxes" line.
Not even Social Security was paid for with recipients' taxes: despite being billed as a government insurance program for retirees, there's nothing at all like insurance in it, and it's apparently well-accepted that present contributions are funding present benefits, rather than have present benefits paid from past accumulations plus investment returns.
The fact is that as offensive as tax rates may be, they don't pay for the things you think would make a good federal investment; the taxes you paid years ago were pissed away on things like millionaire congressmen getting a lifetime salary, $500 hammers, and expenses caused by regulatory capture by federal suppliers of their fattest, dumbest customer.
I honestly don't expect that when the FEMA folks look at my stated income that they will give me a red cent. I expect that if I want anything to tide me over, it'll be related to business halting and involve an SBA loan. I think getting the loan will take me more time than it's worth, and that I'd be better off working -- or helping clients get into a position to pay me again!
The threat of actually getting government aid -- which I didn't really entertain until I read Lango's screed against its receipt -- has made me wonder if we shouldn't look at Cinderella Man (the movie) for an example of how aid should be treated: like at most a depressed-interest loan. I've had those before in connection with school, though in that case there's a private lender in the mix, with a federal guarantee. To avoid having aid obliterate the chances of recipients getting their credit in order and re-establishing themselves, perhaps aid programs for people who are temporarily out of work should have a special class of low-priority claim to ensure lenders and landlords that the amounts sought won't be taken before new clams are paid. Eventually, if the aid works, recipients can -- like the Cinderella Man -- pay the money back.
As long as it comes off as a no-strings gift, and an entitlement, it'll be hard to get people to treat it like it has value. So long as federal money is treated like it's free, we'll have no end to its consumption. We need to make people consider its cost, and perhaps that means we need to stop treating it as a handout altogether.
In a related vein, I keep seeing signs that show the cost of road construction projects. Typically, they identify the officials in charge of the project, the cost in local dollars, the cost in federal dollars, and the total cost. The federal dollar line is probably there to make onlookers see the project as a clever lure to create local jobs with money obtained from D.C. I see it differently. Those are dollars my community would have to solve problems with the priority of my community but for the funds having been taxes away by a Congress that's been unable to get close to balancing a checkbook since before the Second World War. I'm frankly irritated that Congress is allowed to tax these sums away, only to offer them back with strings, in effect buying a police power denied to Congress by the Constitution.
There may be great things funded presently with money disbursed by the authority of Congress. However, I'm doubtful these are things Congress should be funding; I think in many cases they are projects properly funded by someone entirely different. The cost of the funding is alarming: everybody seems to trade pork-barrell projects as currency, which means they're selling their votes for a payoff made with my money, taxed from me at gunpoint.
I'm sure we can get into a long tirade on projects specifically funded with money earmarked by law for dubious purposes, but this is a symptom of bigger problems.
I'm about given up on fixing it, though. I heard the President announce money market funds will now be paying a tithe to the federal government in exchange for more 'insurance' without explaining how the insurance will be priced and how risks will be adjusted, if at all. I recall the premiums being inadequate during the S&L crisis, inadequate for the flood coverage that encourages people to build costly mansions in known flood plains, inadequate to cover the loan guarantees made by federally-chartered mortgage guarantors -- all because nobody figured out how to price the risk. I have a crazy, dangerous idea: if federal regulators knew the right price on these risks, they could run their insureds' businesses better than the insureds themselves, and should be making money on it. Just how likely is it that we'll see rational premium pricing in any of these federally-created so-called insurance programs?
It's a future bailout waiting to happen.
Offering a money market insurance program today is akin to offering flood insurance after a hurricane has formed in the Gulf, and I suspect the math is about as good.
On the other hand, confidence is a good thing. The question is how long the federal government can convince people its guarantee is worthwhile. I remember when Japanese corporations could issue debt cheaper than the US Gov't, and used proceeds to buy Treasury bills. How things change.
I never thought the US government would end up being taken seriously as a worldwide financial guarantor again. I thought its inability to balance its books had pretty much killed that goose. Maybe everyone else is in even worse shape ...?
Ahh, to be able to work again!
I expect to drive back to Houston tomorrow.
Take care,
--Tex.
the rescue's point
The point behind the rescue isn't to save FRE/FNM shareholders but to save those who expect FRE/FNM to make good on debt obligations, including loan guarantees.
Preventing FRE/FNM investor-shareholders from losing their at-risk investment isn't the kind of thing the bailout was designed to avoid, and would be a difficult political sell. Why not protect investors who bought Apple at 202? This isn't what the deal is about.
The bailout is designed to prevent a collapse in liquidity of mortgage instruments, which in turn would kill home loan availability, which would have severe effects on the economy. Loss of loan guarantors would mean unexpected financial risk appearing overnight in portfolios -- pension funds, insurers, banks -- the failure of which would definitely have big ripple effects.
The key here isn't keeping shareholders safe or rewarding speculators with a lottery win, but ensuring Congress' purpose in chartering FNM/FRE is continued: ensuring liquidity in home mortgages. The Treasury "fact sheet" is pretty clear that one of the reasons to bail out the companies is to eliminate the ambiguity regarding their relationship with the federal government, which was widely seen as tacitly backing the promises of FRE/FNM.
Now, the Treasury overtly backs the promises of FRE/FNM, and runs the business, and owns the assets. It's very clear, now, in a way it was not a year ago.
The idea of being able to set FRE/FNM free of conservatorship one day is certainly a dream of the folks running the project, and it would make them all look like heroes, but the immediate-term problem is staunching the panic in financials caused by the massive-scale frauds in the real estate lending business over the last however many years. This is, after all, the same problem that drove AIG to the Fed with its hat in its hand, and it, too, is looking at a 79.9% federal owner. Though it's not in conservatorship, and still has shareholder-selected management, AIG will have to reduce its size by selling off assets to increase its liquidity; the purpose of the AIG deal is to give AIG a couple of years to do this instead of forcing it to run a fire sale.
Take care,
--Tex.
re ACAS' management
Anyone interested in benefiting from ACAS' expertise in mortgage-backed securities can invest in ACAS-managed mortgage instruments directly:
http://jadedconsumer.blogspot.com/2008/09/making-money-old-fashioned-way-with.html
The good news is that as an AGNC holder, you are interested in the solidity of the loan guarantees by FRE and FNM, not the share price performance of FRE or FNM themselves, so you need not worry how long or whether and at what price these companies might end up under shareholder management again. AGNC is the kind of party the federal government intends to insure against default -- the kind of party that provides liquidity to the mortgage market by buying mortgage-backed instruments in the secondary market -- so it stands first in line to benefit from the FRE/FNM bailout.
I don't hold much AGNC myself, but I hold ACAS, which gets about $0.04/sh/q from AGNC (dividends and management fees). My share of that is more than my electricity bill, so I can't complain.
Er ... more than my electricity bill will be once I get power restored after Ike ....
Take care,
--Tex.
re fishing
Actually, I wouldn't consider a market-wide decline in sales as not Apple-specific, as it would affect Apple and its business and its prospects directly. Illiquid asset valuation suspicions in financial stocks would be an example of my idea my idea of not-Apple-specific news.
In prior quarters, we'd seen other computer makers struggle while Apple posted gains, and I was unaware that Apple's gains had taken bad news. The news that Apple's share of North American notebooks had increased dramatically seemed a good piece of news to me, though if the market as a whole is contracting that might not indicate the kind of robust sales growth one might hope.
I've discovered that I qualify for FEMA aid (!). Being without essential utilities for five consecutive days apparently puts you in an aid-worthy category, though it's possible I'll discover I have too much income or assets to really qualify. The application page didn't say. The fact I've been put out of business for a while may qualify me for SBA loans if nothing else. I have no idea how long this will last.
Given the general climate of economic panic, and my personal limits in making money while I remain evacuated pending restoration of power and internet to my home and office, I'm looking to raise cash. Last year was really not the best time to diversify into financials, was it? This will be a painful autumn. At least everybody I bought is actually solvent. Well, so far!
Take care,
--Tex.
re blood in the street
I got interested in ACAS when it was in the forties, so I won't ever see a basis like you have -- but I've enrolled in the company's DRIP and expect good dividends for years.
Take care,
--Tex.
re speed of payment
That was a big deal in the S&L implosion: folks who had deposits knew they were covered ... but couldn't get paid fast enough to avert personal disasters.
Take care,
--Tex.
naked shorts
Given that naked shorting has been illegal for a while now, I'm honestly surprised it's still able to be found. I mean, the SEC should have these guys in irons, right?
The fact that a company can appear for over a hundred days on a list of widely-failed-to-deliver certificates tells me the SEC just doesn't want to lock up people who sell short without bothering to borrow the shares. One example is ACAS:
http://jadedconsumer.blogspot.com/2008/07/acas-scary-short.html
The stock made a persistently naked shorted list over the summer, has a steadily increasing dividend, and seems not to have the liquidity problems hypothesized by some (including myself) who were worried about the company's ability to maintain regulatory limits on leverage.
http://jadedconsumer.blogspot.com/2008/08/on-risks-of-acas.html
Finding underpriced stocks involves homework. I suspect that there are quite a few financials which have been wrongly tarred with the subprime brush, or own illiquid portfolio companies that have been badly hammered by the FAS-157 brush (despite ongoing profits), or investment banks that have been tarred alongside Bear/MER/Lehmann but actually have their houses in order. The problem is that finding them requires knowing something about the companies -- homework.
I'm happy to trade stock ideas with people, but one man's investment is another man's cardiac arrest. Are you dying to invest in non-dollar markets? Petrified of China? Eager to own financials? Willing only to own companies with an obvious economic moat?
The market here is based on people freely trading securities at the prices set by market participants. Recently we've seen that those market-set prices can be volatile as can be -- sometimes catching up with the revealed truth, and sometimes racing ahead of the facts on the basis of fear.
What the "Gubment" wants it gets. So if they (Government) said the company's shares will trade freely and be based on what the market thinks the value is then that is what will happen.
Sure, but the fact the shares trade freely doesn't mean the company has any assets following the conservatorship order. The Treasury document on that point is crystal clear. Nobody seized the publicly-held shares, just the assets that used to be owned by the company. That does have a nontrivial impact on share values, I'd think. The upside is that the liquidation value isn't less than zero now, it's just exactly zero.
The objective of the government is to keep the people who bought guaranteed mortgages secure, keep bond holders secure, and keep the capital flow into the mortgage market safe. It may take a while before it looks like FRE or FNM can do this without the safety net. My guess is that it works, but honestly, FRE/FNM will have to exercise better control over underwriting quality if they are to know what to charge for loan guarantees. Someone needs to be awake in the wheelhouse.
I would like to see criminal investigations among fraudulent underwriters, frankly.
Take care,
--Tex.
re title, again
When you finance a car, the title is not held by you either if you'd like to use that scenario.
Sure you have title to your financed car. The title simply has a security interest recorded with it. It's called a lien. The lien holder can't control the car, he just has to be satisfied before you transfer sell title to someone else.
I'm gathering that you have no idea how any of this works. I'm sorry to have taken up your time.
Have fun, and good luck.
Take care,
--Tex.
re title
The conservatorship didn't get any title whatsoever.
from the link you deride...
http://jadedconsumer.blogspot.com/2008/09/why-fannie-and-freddie-cannot-be-safely.html
comes a different story::
Conservatorship seems to be misunderstood by some folks, so the government published a little Q&A sheet that spells it out:
Q: What happens upon appointment of a Conservator?
A: Once an “Order Appointing a Conservator” is signed by the Director of FHFA, the Conservator immediately succeeds to the (1) rights, titles, powers, and privileges of the Company, and any stockholder, officer, or director of the Company with respect to the Company and its assets, and (2) title to all books, records and assets of the Company held by any other custodian or third-party. The Conservator is then charged with the duty to operate the Company.
Federal Housing Finance Agency, "Questions and Answers on Conservatorship", p.2
This means that government conservator assumes all "rights ... with respect to the Company and its assets" -- divesting "any stockholder, officer, or director of the Company" of any rights previously held. The Conservator runs the Company as he sees fit, owning all its assets.
===
Just to spell it out further, the rights, titles, and powers of the company include title to the assets and the power to manage them exclusively. The Treasury document seems crystal clear.
Incidentally, what a house sitter gets isn't a power of attorney, but a bailment, which creates duties to the owner. Getting all the rights and titles of the company doesn't sound anything like a bailment. It sounds like the situation described by Buffett when he summed up the situation: game over. Except that it's now the conservator's game, not the shareholders'.
Take care,
--Tex.
stock's financial worth
(2) "Stockholders will continue to retain all rights in the stock's financial worth; as such worth is determined by the market."
http://www.ofheo.gov/media/PDF/FHFACONSERVQA.pdf (page 3, question 2)
Yeah, all rights to the stock's financial worth. Not the company's financial worth. Exactly what, do you imagine, is the financial worth of a share of stock in a company, the title to whose assets were just vested in a federal regulatory official?
That's why I think this thesis is right: the shares cannot be safely bought.
http://jadedconsumer.blogspot.com/2008/09/why-fannie-and-freddie-cannot-be-safely.html
Both your take and that one are based on the same documents, it seems -- it's just that you seem only to read parts of them, and to interpret them to mean funny things.
Take care,
--Tex.
title
Even this last post of yours is foolishly so badly inaccurate I'm not sure why I bother with you. No assets of any kind? ROFL!!! How many bowls did you smoke this morning?
When title passes, that's a change in ownership. What kind of ownership did you have in mind?
As for the blog post that there are some reasonable cases in which share price returns (though it's not clear to what price the author intends meaning when he says it "returns"), I can hypothesize some myself. I just don't consider wishful thinking and value investing to be the same thing.
Something being underpriced or discounted isn't the same as something being possibly less worthless in the future, if government officials decide they are done running the business and collecting a management fee.
I guess if I baby-sit your house for a month while you go on vacation you and that moron blogger would consider that me owning the house too, right, because I promised to "conserve" it while you're gone, returning it to you when you get back? lol
House sitters don't get title. If the government intended to become the trustee and not the owner, it need not have used language that ensured title passed to the conservator. The fact that it did use language conveying title says pretty clearly that the government didn't mean what you claim it meant. Moreover, it's plain as day that shareholders have no control at all -- zilch -- during conservatorship or, if receivership occurs, receivership. Government employees will be casting all the votes, and will be managing the assets in the interest of debt holders and its own interest as senior preferred holders. So far as I can tell, they don't even owe a fiduciary duty to common owners.
Take care,
--Tex.
PS AGNC v FRE, one year from Friday's high? Hello?
Stink bid ideas?
Anyone have thoughts where to bottom-fish?
In the absence of Apple-specific news, I'm inclined to think the current selloff is to raise funds to meet financials-generated margin calls.
Other ideas?
TIA!
Take care,
--Tex.
Apparently you didn't read the link.
If you actually read the links, you might understand the post framed around them.
Why don't you come back with some examples of the hideous mistakes in the linked posts so I can understand why I shouldn't accept the arguments in the links.
From you I mostly get claims that the future will rain money, without any substantive argument.
Since when does a stock with share price of .28/share need to pay a dividend before it makes massive returns to its buyers?
BRK.A certainly never paid a dividend. On the other hand, it has assets and profits. Given the lack of assets, it might be a nice reassurance for a stock like FRE to continue with dividends, as a reward for taking the risk on an asset-free stock.
I don't mean net-zero, I mean literally no assets of any kind, positive or negative, after conservatorship order was signed. I'm wondering if you read any of the links I gave. Well, no. I'm not wondering: I'm sure you haven't. You haven't even read the links YOU gave!
AGNC v FRE, one year, loser posts that he's a fool on this board. Done?
Take care,
--Tex.
See you in a year! em.
this is an interesting opportunity for the government to get rock-bottom debt. No wonder Lango thinks they're keen to enter the loansharking business!
Take care,
--Tex.
PS I got into a p*ss*ng match on the FRE board about the valuelessness of FRE. I would appreciate any sane heads' feedback on my position, as I am so far mostly getting angry rants. My argument is basically this:
http://jadedconsumer.blogspot.com/2008/09/why-fannie-and-freddie-cannot-be-safely.html
re iBox
If you read the contents of the documents linked in the iBox, you'd see the real deal. Try this:
http://jadedconsumer.blogspot.com/2008/09/why-fannie-and-freddie-cannot-be-safely.html
This spells out the story using direct quotes from the very documents that you claim prove your case.
Are you interested in a friendly bet? ACAS vs FRE with a timeline of one year?
ACAS has some discussion here:
http://jadedconsumer.blogspot.com/2008/07/acas-scary-short.html
With a dividend of zero, FRE isn't such a scary short. What do you care to bet? A public posting in which the loser debases himself as a fool?
Maybe AGNC is a better bet, since it's actually in the home mortgage finance business:
http://jadedconsumer.blogspot.com/2008/09/making-money-old-fashioned-way-with.html
Let's say we do AGNC v FRE, total return for one year, based on a hypothetical purchase at the daily high on Friday.
Deal?
Take care,
--Tex.
re the printing press
On the other hand, if the Chinese are keen to fund this kind of local charity, who are we to deny them the privilege?
Muhuhahaha!
We have to come up with some way to tap that sovereign wealth fund, no?
Take care,
--Tex.
government backed penny stock?
Just because debt holders have protection doesn't mean equity owners do. The shares are so devalued you can't even vote against them at Motley Fool CAPS any longer. The company doesn't need to liquidate to deprive common owners of equity. Hey, look: it's already gone!
I think the argument is fairly well summed up here:
http://jadedconsumer.blogspot.com/2008/09/why-fannie-and-freddie-cannot-be-safely.html
Take care,
--Tex.
re merger
The senior preferred stock purchase agreement bars merger without consent of the government. If Congress had intended FRE and FNM to be one corporation, it would not have established them in two separate acts. However, the federal government may have come to new thinking on the matter.
I just doubt it.
Why would the two merge? Is one of them actually solvent?
The big question is why shareholders should care, given that the conservatorship has divested shareholders of any rights in the companies. Buying these shares is a long-term bet that government regulators can provide a better return than private management. If so, this would be a new feature of federal government programs.
http://jadedconsumer.blogspot.com/2008/09/why-fannie-and-freddie-cannot-be-safely.html
--Tex.
OT re flexibility
One definitely has more choice of whether to pay a little principal or a lot with the 30y, but if one is budgeting for minimum payments (which I was when I last bought) and want to pay more equity and less interest, the shorter term is the only choice -- else you need to pay the whole interest payment on the 30y plus whatever principal you want -- a total that's likely to make monthly cash flow tighter.
I was on a serious budget as a full-time student then.
30y is definitely attractive for the ability to keep using low-cost leverage for decades, and if you don't overpay for your house the equity you get from appreciation isn't anything to sneeze at. I just don't think a one-size-fits-all regulatory environment is the answer.
Interest rates that float with major, non-gamable benchmarks also seems reasonable, provided everyone knows what they are getting into.
I think the solution is to prosecute fraud and drive bad actors into other professions (for example, we seem to have a chronic shortage of US-citizen fruit pickers ...)
Take care,
--Tex.
OT "fundamentals"
Remember when Clinton said that the answer to the question put to him while he was under oath depends what the meaning of the word 'is' is?
This may be a case of whether the fundamentals are strong depends what one considers the "fundamentals" -- is it debt levels, spending patterns, trends in the housing market, the solidity of financial institutions ... or is it things like ingenuity and spirit and willingness to vote for the right party come November?
There's bad news still seeping out, and it'll take time to absorb what's going on. The big debate is whether the bottom is nearby, or whether we're just pausing as we bounce further downhill. The answer -- how long it will take, and how bad it will get, how fast -- surely turns on how much more bad news, not previously located where one could readily find it, is going to blow up how quickly, and whether government policies tend to exacerbate it (e.g., in the 1930s) or tend to ameliorate materializing risks.
I'm trying to line up long-term bets, and keep from allowing bullishly levered positions from last year cause more havoc than I can tolerate.
As for Apple, it sucks that when it looks like Apple is really executing and has good competitive advantages, it should have such a negative and uncertainty-laden economic environment to dampen its performance.
Take care,
--Tex.
30y loans
When I've ran the numbers, I've found I preferred a 15y or 10y so I could actually build some equity in the house rather than pay interest seemingly forever without denting the principal. I have a friend for whom I house-sat while he went to India for over a month, who left a stack of signed blank checks for handling his affairs, and his instructions called for making extra principal payments on his home. I think many people prefer not to be saddled with 30y terms.
The point about the "right" interest rate for a 30y period is a good one: who's to say what the "right" rate is? In the last several decades I've teen Treasuries go from low-single-digit rates to double-digit rates well into the teens, and there's no reason to think things can't be as wacky in the next several, particularly as we keep electing politicians to run the country instead of people who own a calculator. The fact that adjustable rate mortgages have been used to create a shock for unwary buyers doesn't mean they're in principal a bad idea. The fundamental problem is that Joe Average has no concept about the time value of money and can't readily work out what is and is not a good deal; Joe Average can only wrap his head around the plausibility of a certain monthly payment. At least, given how I've been approached by car dealers, I assume the "monthly payment" metric is the one that tends to close deals. Me, it's all about time value of money.
Given the relative interest rates, I think having a ginormous 30y mortgage is actually a pretty good idea, but the downside is that the rate is always worse than it is for a 15y.
How to make a set of rules that will protect consumers from wanting to buy more than they can afford could be more problematic than it first appears. The best you can do may be to create rules that make it clear buyers had an adequate opportunity to learn what they were doing when they signed up. Current disclosure requirements are pretty good at that, at least to the extent that make it easy to tell whether required disclosures were or were not delivered. It's a step in the right direction.
Ancient laws against fraud are probably adequate to address conduct like lying to get oversized loans on speculative property purchases, encouraging such lies to get big commissions by making sure prospective buyers know no-one will be doing any fact-checking on any information provided in a loan application, playing games with friendly/bought appraisers to ensure loans go through trouble-free, and reselling known junk as solidly-underwritten loans with adequate security in the event of default. This is why we pay taxes to a government with a white-collar fraud prosecution team. This is why we have prisons. This is why people in the financial services industry need to have a felony-free record (most of the time, anyway).
I'm unclear what new regulatory proposals will actually make life better or more financially efficient. Perhaps, as with federal flood insurance, the problem with the loan guarantee system is that it doesn't involve adequate risk-adjustment, and there is a way to fix things on the back end. However, just as a jury can't be expected to make the right decision when the prosecutors, police, and judge all conspire to hide evidence of the truth, the guarantee folks and CDO packagers can't be expected to fix, somehow, on the back-end, transactions that have been poisoned with fraud at the outset. Perhaps by firewalling within incompetent lenders the loans that don't have adequately documented due diligence, it might be possible to ensure that banks eat their own dog food if they aren't willing to meet standards of prudent loan review. Who knows.
I'm willing to hear proposals, but "you may only loan for X duration or at Y rate" sounds like a prescription for highly-unavailable credit, which probably isn't to anyone's best interest.
Take care,
--Tex.
re uninsured deposits
I know a guy who sold a house and put the cash proceeds into CDs.
Yes, CDs.
He said he was afraid to do something riskier.
Beyond $100k, everything was at risk of complete loss, and of course CD interest rates at his local bank weren't enough to keep with inflation.
But he thought this was "low risk".
How'd the quote go? 1% think, 4% think they think, and 95% would rather die than think?
Take care,
--Tex.
OT flood insurance
The first time I really saw the impact of the federal involvement in flood insurance was in the 1990s, when several rivers in Texas flooded simultaneously due to prolonged, severe rain. At the time, the scandal story was that operators at a dam may have manipulated water flow to prevent flooding in relatively recently built multimillion-dollar waterfront homes, which caused large numbers of people in cheaper properties to be flooded. These properties hadn't previously been flooded, because historically there was no reason to operate dams against their favor.
It turns out that nobody had wanted to build in the lowest-lying riverfront properties, because they were well-known to be easily inundated. The only thing that made it economically attractive to build in these flood plains was the availability of federally-priced flood risk coverage, which was relatively free from the rationality that would be imposed were rates set by ordinary market forces.
In this case, federal subsidy allowed multimillionnaires to foist upon the general public the risk their idiotically placed mansions would be destroyed by expected weather. It was federal subsidy of the bad decisions of the most wealthy. It also created an economic and political incentive to cause damage to less-wealthy households, which were unsurprisingly less capable of tolerating financial losses.
I have an in-law, living in Florida within a stone's throw of the Gulf, who thinks that the federal flood insurance plan should push more flood risk onto people in, say Arkansas and Arizona, where people bought homes that don't have the benefit of being near salt water but also don't offer any risk of storm surge. For some reason he thinks he's got a right to a subsidy of the cost of the risk he accepted to enjoy the smell of salt air. Why should I bear the risk of the questionable decision to build a home on a fault line? Why should anyone have to pay for his decision to live close enough to the water to get sprayed when the wind kicks up? Shouldn't people who deliberately build on high ground far from the sea be entitled to some kind of break for not being an idiot? Isn't there any personal responsibility any more?
Crazy.
Between federal promotion of stupid home development siting through irrationally-priced insurance programs, and federal prevention of universal health coverage, I think we've seen enough of federal involvement in the insurance industry. There's a reason states generally implement model laws drafted by the National Association of Insurance Commissioners: it creates uniform national law in areas of law for which uniformity is desirable (and obviates the need for federal regulation on grounds of promoting uniformity, though this canard is still flown despite the facts), and it enables diverse views to be aired in an environment of insurance-specific regulatory expertise so that informed decisions can be made -- before the nation suffers from acting on ignorance -- on the difference between serious problems that genuinely exist and mere fluff alleged by lobbyists but not borne out by any observed data. The fact that the NAIC can't pass laws keeps it from being dangerous, and the fact that it's full of expertise from different parts of the insurance business -- consumer advocates, regulators, insurers, reinsurers, you name it -- means that when it does offer guidance through a model law it's a fairly well-considered piece of regulatory guidance. The cool thing is that the NAIC has only the authority of the quality of its output: no state need adopt a thing it suggests. NAIC regulations become uniform national law only to the extent that its ideas are GOOD.
Contrast this with the situation in D.C.
So yes, federal involvement in the flood insurance program is a boondoggle. I would go further: federal regulators do not understand insurance, do not understand why insurance is different from other regulation, and have no concept what they are doing. Federal judges all the way up to the United States Supreme Court regularly get insurance issues dead wrong, in ways that make it clear they haven't even passing familiarity with general insurance law. (There are some reasons this is the case, and that it's not altogether bad -- but now that the federalization of everything has dragged more and more insurance issues into federal court other than simply on grounds of diversity of citizenship where state law is applied, and now that federal law is getting applied to more things related t the insurance business, the situation is becoming really revoltingly bad.) The things that make insurance law different from ordinary contract law, and different from a taco stand or an auto dealer's manufacturer's warranty, and so on are just lost -- utterly lost -- on federal regulators. They sometimes talk the talk, but when the chips are down so are their pants.
Take care,
--Tex.
OT rights
There's certainly not a right to government-funded relief. There's not even a right to a timely police response to ordinary crime.
The argument about relief usually turns on whether a government agency, having sucked the wealth out of a community through taxation, should be allowed to go on with business as (incompetent) usual, or should be held to task in some way. Nobody ever to my knowledge said "those fools should be prosecuted for theft of local resources, or manslaughter, or fraud" -- at least, nobody who intended it literally.
Nobody can be lawfully foreclosed who made their promised payments.
Taking from lenders their security interest in real property is, without question in my mind, a taking of property. Seizure of property without just compensation is barred by law in the U.S. Funding it with taxation, on the other hand, would simply be a wealth transfer from the public at large to the lienholders whose security interests are vaporized by Congress. It's the kind of wealth transfer that I expect to suffer from the problems typically associated with regulatory capture.
Take care.
--Tex.
re legacy SEHO business
I think the fact that CAAH describes the old business as not having sales or R&D expenses suggests it may be getting closed down. I expect future revenue growth to come from Chinese subsidiaries. Profitability thus far is solely the result of AoHong, and I understand CAAH is reviewing CDS due diligence on other prospective acquisitions.
I expect profitability, and earnings growth, which as they materialize should lead share price in the right direction. At current trading volumes, I don't think I could even exit.
Take care,
--Tex.
OT Ike
Thanks. The surge wasn't nearly as bad in Galveston as feared, though emergency operators did receive a high volume of futile rescue request calls from the island. The fear was that the 14' sea wall would be swamped with 20-25' surge and the island would be largely wiped clean, but this didn't materialize: surge was closer to 10'.
Power out for 4.5 million near Houston, and nontrivial property damage, but not nearly the scenario that my family had in mind when we decided to evacuate: The projection Thursday morning was for the hurricane to hit as a category 4 and close to 5, which would have been radically worse. Hitting as a nearly-3 was really a stroke of good fortune.
I won't return to Houston until I have reason to think I have power. Currently, power exists downtown and the Texas Medical Center, which are areas in which power lines are all underground. I'm very close to the Medical Center, so power restoration is likely to be pretty swift once it begins in earnest Monday.
Take care,
--Tex.
OT re sunset provisions
I was thinking that with Congress having proved that bad laws can get passed en masse through cooperative vote-trading (in which instead of everyone's bad bill being defeated, everyone's bad bill is instead passed, because each of the few hundred voting legislators wants some favor on their own dumb bill and will trade a vote on others' dumb bills to get their own foolishness passed), perhaps we need a sunrise law.
My theory is that members of the general public won't be willing to make deals to allow their tax dollars to be squandered elsewhere just to get some little pet pork project funded, and so on -- that the deals that sell among legislators just wouldn't fly in the general public.
Under the sunrise provision, the laws passed by Congress would not come into effect without a ratifying referendum. I think a plausible exception might be made for certain kinds of natural disaster or invasion responses, but the wording of the exception would have to be carefully evaluated to prevent gaming. In Texas, the Constitutional requirement that a bill be read three times before it can be called to a vote is routinely suspended under the "emergency" provisions, making a joke of the emergency provisions and making non-existent the public benefit of making legislators give the public the notice they would enjoy if the legislature were prevented from voting on a bill until its final text had been public for at least three days. As-is, it's possible for interests with good access to enjoy superior opportunity to respond to developing legislation.
If federal laws required ratification by the public, I suspect lots of really dumbassed legislation and federal money-showers would be short-circuited. We might be able to enjoy a reduction in legislation down to the small subset for which there is actual widespread public support. Given the limited range of federal authority under the constitution, this isn't such a big problem.
Take care,
--Tex.
OT re Ike
I'm currently in flower Mound, Texas. Telephone reports have my home out of power, but not flooded. I think my wife left some ice cream containers in the freezer sideways, so they would fit better, and I think they'll mean we're in for a big fridge clean-up. I expect it'll be a fridge-emptying, actually, by the time power is restored.
http://JadedConsumer.blogspot.com
Take care,
--Tex.
OT re Nader votes
You Nader voters should throw a party with Buchanan.
Take care,
--Tex.
OT throwing away your vote
It's still tilting at windmills, but I get more out of my hollow action than I do out of the hollow action of voting either D/R.
I've heard people argue that voting for either corrupt and misguided party is throwing away your vote, and the only way to cast a vote that matters is to cast it for a candidate that actually cares about what the job means and how to do it faithfully.
Why vote with the herd?
The only good answer I ever heard for that was to avoid the worse of two proposed evils. Crazy: we cast our vote from fear things might be worse than the joker we elect?
We need to do something to make government more responsive, and in this age of rapid communications perhaps the answer is to vest less authority in government for certain types of decisions. Perhaps Congress should be allowed only to propose laws, which should be subject to ratification by referendum before they come into effect, except perhaps for a special list of types of laws that might actually need to change on a dime for the public good. Come to think of it, that's not much, is it?
Take care,
--Tex.
I Like Ike
... not.
The wife doesn't fancy being without power or water with two small children underfoot. We're headed to Flower Mound sometime this afternoon, to avoid the Friday crush. I hope!
Take care,
--Tex.
re news
The purpose of the bailout is to assure the world that the creditors are safe.
The bailout isn't designed to do favors for the common stock, whose owners have lost control of the company and will have their ownership reduced to 20.1% of what it had been, while the government agrees to bring the net worth of holdings up to zero per share repeatedly for a while. Government gets to loan the companies for as long as it wants funds at a 10-12% rate (depending whether the cash dividend is current every quarter).
Common owners have to watch while the companies shrink, in accordance with the bailout agreement, to having a specified, limited amount of their own capital tied up in retained loans, which means that the opportunity to profit in the future is not only diluted, but additionally capped. If common owners don't like the way the company is run, there's little to do as they will have to buy off the government's interest to shed its control -- even if eventually profitable again. If profitable, this buyout could be extremely expensive.
Indeed, there is no provision for buying out the double-digit debt owed to the federal government in connection with the bailout, so creating a more efficient capital structure able to leverage an adequate credit rating (without government backing; the current credit rating is based on the government's credit) will be impossible without government consent. And where else will the government be making 10%?
This could be a long haul to independence. This is a state-run factory for now. Has anyone ever heard of a state-run factory making a ton of money?
For my appetite for financials, I'll stick to ACAS and the companies it manages.
http://jadedconsumer.blogspot.com/search/label/Ticker%3AACAS
Take care,
--Tex.
falsehoods
I"m about done playing, as your post pretty much speaks for itself.
(2) A financial doesn't get "priced" different than a tech stock. Money doesn't know sectors. Earnings, growth, and the ratio of both to market cap is all that matters. Period. If FRE is profitable and the ratio of those profits is large compared to its price, it makes absolutely no difference whatsoever if their book value is $0.00 or $1.00. The stock will go up.
Profit of zero is worth zero. Assets of zero are worth zero.
Go look at financials and the relationship of their price to the shares' book, and you will see a clustering based on the expected return of those assets in the hands of existing management. P/B is simply not a useful measurement in a tech stock, because earnings are not related to book: they are related to the marketability of intangible assets that may not appear on the balance sheet.
Feel free to imagine anything you like.
Like I said, let's compare notes in a year. I'll take ACAS and AGNC as my comparison financials, and you can have FRE/FNM.
See you in a year!
Take care,
--Tex.