June 2007

There are two very good articles worth reading on the current issues at Bear Stearns, and the funny money action at a few hedge funds.

Side Pockets @ The Big Picture

Toxic Waste @ Bullion Vault (by Paul Tustain)

The whole thing is starting to sound like a Ponzi Scheme to me…? and if the impact is large enough, we could see buyouts start to struggle (already happening) and eventually share buybacks start to slow down.

Bulls and bears trade places on the margin, so if the sub-prime issues are not “well contained” but have even a slight impact on the overall market/economy, we could well see the tide shift.? It doesn’t look like it yet, but these are the things to keep our eyes on for further indications of change.

One of my holdings, Rosetta Resources (ROSE) took a bit of a tumble yesterday…? the shares closed near their lows of the day down 8.4%.

The interesting thing is that this happened on ?no news?.? About a month ago the price spiked upward on a Cramer recommendation when he called the stock ?criminally underpriced?.? Yet this wasn?t a Cramer-ism, the dip wasn’t because of something he said.? Rosetta is a natural gas producer, maybe it?s falling because of the short-term breakdown in the natural gas price?? Not really… all the gas producers, including Rosetta, were weak over the last few weeks and it doesn?t really explain the one day plunge.

The real story?? Calpine is suing Rosetta for $400 million.? For perspective, Rosetta?s market cap is $1.2 billion, so we?re talking about almost 33% of the market cap of the company.? Rosetta was originally spun off from Calpine, and now the parent company thinks they weren?t paid enough for that privilege (there are many sordid details, including the fact that Calpine is currently in bankruptcy and only realized the underpayment now that third parties are seeking to cover their debts).

While the soap opera will likely continue for a while (it?s a money grab, after all) the interesting point is that this news didn?t show up (and still hasn’t) on Yahoo Finance?s news for the company, nor in Google Finance nor Google News.? I only found the story when I logged into my Schwab account and reviewed the news listings that Schwab had for the company.

The lesson to take away from all of this is to make sure you have several places to go for your news…? especially if you expect to act based on news for a company or stock.? Also, Yahoo Finance and similar free services are great, except when they aren?t.?

Yet another CPI report was released on Friday, and quite a few people are reading the same report with different conclusions…

CPI “proper” indicated a 2.7% rate of price increases… While the Core CPI rate indicated a 0.1% rate of price increases. Those that look at CPI think that inflation is ramping up, and those that look at the core rate think that inflation is under control.

Sidebar: one important point is that prices do not inflation make — inflation is a monetary phenomenon (a change in the money supply), and price changes are a visible side-effect (with a lag) of the monetary inflation. We’re playing a guessing game looking at prices and thinking that prices “are” inflation.

The inflationist camp will argue that the 0.1% core rate was rounded down from 0.149%, which is a true and convenient talking point, but they’re missing a much bigger problem.

What is the Core CPI? According to Briefing.com:

CPI can be greatly influenced in any given month by a movement in volatile food and energy prices. Therefore, it is important to look at CPI excluding food and energy, commonly called the “core rate” of inflation.


I got interested in Oaktree Capital Management after reading a little blurb about them raising close to a billion on private markets. I like Oaktree’s focus on inefficient and alternative markets, and I looked into what it would take to get some exposure to their expertise. I went to their website to cruise around and check them out. (more…)

The NY Times has a new Freakonomics article about cash-back financing from real estate transactions. The gist is that, even though illegal, real estate buyers have been frequently using cash-back financing to come up with the down payment for their new homes.

So, not only are the weak hands in the real estate market going with adjustable rate loans during a period of historically low interest rates, but they’re also levering up additionally just to get the down payment…

Here’s a good chart (from Mish) that shows how many of those adjustable rate loans are about to reset…

Mortgage Rate Resets

Even though some areas continue to be stable, I think we can expect continued weakness in those areas that used to be ultra-hot…

A quick check of the mortgage-lender implode-o-meter shows over 80 mortgage companies have run into trouble…

After yesterday’s post on the CNBC Contest Controversy, I thought I would share my experience in participating in the contest. Instead of trying to game the contest, I simply had one account and one entry in the contest.

My highest ranking was on two different dates… if you count my highest placement versus my highest percentage rank within the pool of participants.

  • April 2 ? 19,000th place, which is the top 3% – return at that point was 20%
  • May 9 ? 31,203rd place, which was top 2% – return at that point was 25.87%

My general strategy was fairly simple: (more…)

There are interesting allegations that contestants in the CNBC Million Dollar portfolio contest may have been cheating…? taking advantage of a security hole in the contest website to place after hours trades.? The amusing thing is that the cheaters have basically done the same thing Wall Street did back during the mutual fund late trading scandal…

More amusing to me is the description of the guy who found that the leaders were cheating…

…the 42-year-old was spending 12 hours a day on the contest, using three computers in his Greenwich Village apartment to trade 1,600 different portfolios, all in an effort to win the $1 million grand prize. He even dropped his studies for the chartered financial analyst (CFA) exam, given once a year, so he could have more time for the financial news channel’s game.

He was taking advantage of a “feature” of the contest that you could have as many trading portfolios (and entries in the contest) as you wanted to…

Of course those of us with programming experience thought about gaming the system with an automated program, but sometimes life is too short to chase a contest like this…

They say that real estate is a local market, and the moderate strength in the Durham MSA as per the latest (1Q 2007) numbers from the OFHEO certainly proves the point.

Durham’s growth rate is up 7.07% in Q1 (the rate is annualized), which is pretty good.

Take a look at Durham vs. Raleigh: (more…)