Lemonjello's intermittent skullduggery

[lemonjello]

Anyone else find this slightly hilarious?

reviewjournal.com

Pablo Picasso's "dream" painting has turned into a $139 million nightmare for Steve Wynn.

In an accident witnessed by a group that included Barbara Walters and screenwriters Nora Ephron and Nicholas Pileggi, Wynn accidentally poked a hole in Picasso's 74-year-old painting, "Le Reve," French for "The Dream."

A day earlier, Wynn had finalized a record $139 million deal for the painting of Picasso's mistress, Wynn told The New Yorker magazine

The accident occurred as a gesturing Wynn, who suffers from retinitis pigmentosa, an eye disease that affects peripheral vision, struck the painting with his right elbow, leaving a hole the size of a silver dollar in the left forearm of Marie-Theresa Walter, Picasso's 21-year-old mistress.

"Oh shit, look what I've done," Wynn said, according to Ephron, who gave her account in a blog published on Monday.

Wynn paid $48.4 million for the Picasso in 1997 and had agreed to sell it to art collector Steven Cohen. The $139 million would have been $4 million higher than the previous high for a work of art, according to The New Yorker.

Cosmetics magnate Ronald Lauder paid $135 million in July for Gustav Klimt's 1907 portrait "Adele Bloch-Bauer I."

Wynn plans to restore "Le Reve" and keep it.

[lemonjello]

Shouldn't have eaten that last burrito

Something is seriously wrong with Mexico -

----------------------------------------------
POSTED: 7:38 am PDT October 10, 2006
UPDATED: 2:28 pm PDT October 10, 2006
SAN DIEGO -- Rescue crews freed five people trapped in a concrete storm drain that runs beneath the U.S.-Mexico border, NBC 7/39 reported.

Images: People Rescued From Cross-Border Tunnel

Crews from the San Diego Fire Department worked for about 90 minutes Tuesday morning to enlarge the exit to the drain and pulled four men and three women to safety at about 8:45 a.m.

Emergency crews received a call from Border Patrol officers at about 7:15 a.m. Tuesday, fire department spokesman Maurice Luque said. The officers reported that the people were trapped in a concrete storm drain that surfaces behind an industrial building in the 10000 block of Via de la Amistad in the Otay Mesa area. The officers said the drain appeared to run across the border, which is about a quarter of a mile to the south. The opening of the drain was about 2 feet by 2 feet.

A Border Patrol officer who was watching the exit of the drain with remote surveillance equipment saw two people come out at about 7 a.m., Luque said. Officers went to arrest the young man and woman, both in their 20s, and discovered that another man had become jammed in the drain opening, trapping the people behind him, Luque said.

Rescue crews enlarged the concrete exit hole with jackhammers. Five people were pulled from the drain, Luque said. At one point, 14 people had been inside the drain, but seven backed their way out to the Mexican side before rescuers had enlarged the exit, he said

The seven people who came out of the tunnel on the U.S. side were taken into custody by Border Patrol officers, Luque said.

Officials closed the Otay Mesa cargo port at the border shortly before 9 a.m. for safety and security reasons, U.S. border officials said. It was reopened shortly before noon.

[lemonjello]

conspiracy theory or neocon reality?

Not to mention rumors making the rounds about Goldman running up a few of the Dow stocks.


------------------------------
By Steven Mufson
Washington Post Staff Writer
Friday, October 6, 2006; D01

In mid-May with gasoline prices at $2.95 a gallon and rising, 15 percent of Americans listed high fuel prices as their top concern, outstripping terrorism. And much of the public seemed ready to vent its wrath on President Bush and the Republican-led Congress.

By early September, though, with the nationwide average at $2.73 a gallon and falling, only 5 percent of those polled said that the price of gas was the single most important issue, according to a Washington Post-ABC News poll. Since then, the price of gasoline has fallen even further, now down about 70 cents a gallon from its peak in August -- with only a month before the elections.

Coincidence?

A lot of Americans don't think so. "This has been huge fodder for talk radio," said Tyson Slocum, director of energy programs at Public Citizen, who says he has appeared on about 15 radio shows focusing on whether the Bush administration is manipulating oil prices before the congressional elections. "I don't think the influence is as explicit as some people out there are alleging. But all markets are susceptible to politics, and oil is no exception."

Generally, oil experts, executives and traders cite other explanations for the recent steep fall in prices, including the easing of anxieties about possible armed conflict with Iran, the flight of financial speculators, ample oil inventories and softening U.S. demand. Prices, they say, are the results of decisions made by people ranging from pension fund managers and oil executives to traders and ministers from the Organization of the Petroleum Exporting Countries.

But the roller coaster in oil prices this year without any supply disruption has fueled conspiracy theories about why gasoline prices went up and why they are coming down now. After seeing a Washington Post report about oil traders closely scrutinizing supply and demand, one reader responded online: "LOL!!!! They're looking at the approach of November elections!!!!! Care to wager how soon after the elections a 'catastrophic' event will occur to re-inflate the prices at the pump?????"

CNN anchor Miles O'Brien dismissed the conspiracy talk in a Sept. 25 gabfest. "Some bloggers are putting those two things together and, you know, this is the grassy knoll group," he said. More-sober analysts are also skeptical. "Paranoia is as American as apple pie," says Chas W. Freeman, former U.S. ambassador to Saudi Arabia. "This is all Michael Moore on steroids."

But politics have always flowed with oil. Here are some of the leading theories, and some possible explanations, for what is happening in the volatile oil markets.
A Favor to Bush?

According to this theory, the Saudi government is doing Bush a favor by trying to bring down prices before the election. The evidence? Some say the Saudi government has a long-standing relationship with the Bush family. They also cite the 2004 book by author and Washington Post assistant managing editor Bob Woodward, "Plan of Attack," which said that then-Saudi ambassador to the United States, Prince Bandar bin Sultan, promised to keep oil production high enough to moderate fuel prices and bolster the U.S. economy during the presidential election year.

Now, with crude oil prices tumbling and OPEC members calling for production cuts, Saudi officials -- at least publicly -- are saying they will wait until the next meeting of OPEC oil ministers, which happens to be scheduled for December. "OPEC will be meeting I think within a month or two to review these factors, and we will discuss these things with countries like Venezuela and Nigeria," the Saudi ambassador to the United States, Prince Turki al-Faisal, told reporters after giving a speech in Washington on Wednesday.

But oil traders are worried that Saudi Arabia won't wait. Yesterday, oil prices closed slightly higher on reports that OPEC, including Saudi Arabia, has decided to cut output. A well-placed trader in Europe said the kingdom has quietly trimmed its output to 9.15 million barrels a day, from 9.3 million barrels a day, and that it has been talking about shaving a bit more if other OPEC members also cut back to stop the rapid slide in oil prices.

Most oil experts say Saudi Arabia generally tries to avoid conflict with the U.S. government, whether it is run by a Bush, another Republican or a Democrat. And Saudi oil policy opposes sharp upward or downward price changes so that consumers don't switch to non-petroleum fuels.

"Saudi production levels are keyed to moderating price increases, that's true," said Freeman, who was in Saudi Arabia during President George H.W. Bush's administration. At that time, Saudi Arabia opened its spigots to dampen prices as the United States prepared to free Kuwait. "But they don't really control them anymore," Freeman added. "[Saudi oil minister] Ali Naimi can't fine-tune prices for the purposes of influencing elections even if he wanted to." Freeman said that based on his conversations with Saudi leaders in 2004, "they would have been perfectly prepared to work with someone else if George Bush had been defeated."
The Goldman Touch

According to this theory, Treasury Secretary Henry M. Paulson Jr. has asked his former partners at Goldman Sachs to dump gasoline futures to drive down pump prices and boost GOP prospects in November.

Goldman runs the most important commodity index, which serves as the basis for about $60 billion in investment funds. And the firm has been selling gasoline holdings. "Goldman has been liquidating its gasoline position, and that's put a lot of pressure on prices," said Citigroup Inc. oil analyst Doug Leggate. "It's a very large part of why gasoline has fallen."

Whether the sales are part of a conspiracy is another question. Paulson has said he severed all ties to Goldman when he became Treasury secretary -- and there are Democrats at Goldman, too.

Goldman has issued three press releases about its sales. In June, it said that because of U.S. government regulations it would replace unleaded gasoline futures, which will be terminated, to futures in reformulated gasoline used in blending with ethanol. But then on Aug. 9, Goldman said it would reduce the gasoline portion of its index, sparking a steep one-day plunge in prices on the New York Mercantile Exchange. Goldman sources said yesterday that the proportion of gasoline in the index has been reduced by two-thirds.
Tapping the Reserve

Some Americans think the Bush administration is secretly selling stocks from the Strategic Petroleum Reserve, the 687.7 million barrel emergency stockpile stored in Louisiana salt caverns.

Normally, the federal government is slowly building the reserve. But in April, Bush said he would take the unusual step of suspending additions to the reserve in the face of soaring gasoline prices. From May to September, according to an Energy Department Web site, there was no net addition to -- or subtraction from -- the reserve.
The Big-Oil Theory

Are the big oil companies lowering prices to help the Republicans? "Politicians will fulminate about things, but it's the market that sets the price," said John Felmy, chief economist of the American Petroleum Institute.

But Public Citizen's Slocum argues that an indictment of BP PLC traders for allegedly trying to corner the propane market shows that oil giants can sway prices. Furthermore, he noted, big oil companies have political preferences. He said that 81 percent of the $63 million in political contributions made by major U.S. oil companies since 2001 have gone to Republicans.

But Slocum thinks the recent price drop isn't the result of a plot by big oil companies. Instead, he points to the flight of money invested by financial "speculators" in oil markets. "Do I think Karl Rove or George Bush is whispering in the ears of the oil companies? No. That's silly," Slocum said. "But some folks in the government sent strong signals to the speculators. Was that related to the elections? I don't know."

[lemonjello]

McMansion builder McBroke

DOW JONES NEWSWIRES
October 6, 2006 10:32 a.m.

WILMINGTON, Del. -- New Jersey real-estate developer Kara Homes Inc. filed for Chapter 11 bankruptcy protection, reporting debts of nearly $297 million.

A series of building-materials suppliers top the list of unsecured creditors in Kara Homes' bankruptcy, led by A-1 Bracket of Morrisville, Pa., and Strober Building Supply of Haddonfield, N.J.

Kara Homes' assets were listed as $350 million in the petition the East Brunswick, N.J., company filed Thursday in a New Jersey bankruptcy court.

Founder and president Zudi Karagjozi signed the bankruptcy filings for the company and is listed as a co-debtor, liable for Kara Homes' debts.

In 2002, Kara Homes was named the fastest-growing home builder in the U.S. by Builder Magazine, an industry publication.

Marketing materials available online say Kara Homes is a quality builder of luxury homes, single-family homes, town homes and adult communities throughout New Jersey. Prices for some Kara Homes topped $1 million.

[lemonjello]

Flaps down, flared for that downy soft landing...

Tony Crescenzi, bond guy -

"The yield spread between the three-month T-bill and 10-year T-notes is now at 36 basis points, with the 10-year's yield at its most inverted to bills than at any time since January 2001, two months prior to the start of the 2001 economic recession. The current spread yields a recession probability of close to 35%, according a Fed study."

[IIC]

All the comparisons of home sales with 2005 numbers are so bogus. Everyone knows that 2005 was the top and represents unsustainable activity. So, why don't the "experts" (including the Nat'l Assoc. of Realtors, who have the biggest dog in this fight) give us moving average figures, instead of dumb ole year-over-year numbers.

You could chart it yourself Park...IIC

All the comparisons of home sales with 2005 numbers are so bogus. Everyone knows that 2005 was the top and represents unsustainable activity. So, why don't the "experts" (including the Nat'l Assoc. of Realtors, who have the biggest dog in this fight) give us moving average figures, instead of dumb ole year-over-year numbers.

[lemonjello]

Woodward on Rumsfeld

Washingtonpost.com

Secret Reports Dispute White House Optimism

By Bob Woodward
Washington Post Staff Writer
Sunday, October 1, 2006; A01

On May 22, 2006, President Bush spoke in Chicago and gave a characteristically upbeat forecast: "Years from now, people will look back on the formation of a unity government in Iraq as a decisive moment in the story of liberty, a moment when freedom gained a firm foothold in the Middle East and the forces of terror began their long retreat."

Two days later, the intelligence division of the Joint Chiefs of Staff circulated a secret intelligence assessment to the White House that contradicted the president's forecast.

Instead of a "long retreat," the report forecast a more violent 2007: "Insurgents and terrorists retain the resources and capabilities to sustain and even increase current level of violence through the next year."

A graph included in the assessment measured attacks from May 2003 to May 2006. It showed some significant dips, but the current number of attacks against U.S.-led coalition forces and Iraqi authorities was as high as it had ever been -- exceeding 3,500 a month. [In July the number would be over 4,500.] The assessment also included a pessimistic report on crude oil production, the delivery of electricity and political progress.

On May 26, the Pentagon released an unclassified report to Congress, required by law, that contradicted the Joint Chiefs' secret assessment. The public report sent to Congress said the "appeal and motivation for continued violent action will begin to wane in early 2007."

There was a vast difference between what the White House and Pentagon knew about the situation in Iraq and what they were saying publicly. But the discrepancy was not surprising. In memos, reports and internal debates, high-level officials of the Bush administration have voiced their concern about the United States' ability to bring peace and stability to Iraq since early in the occupation.

[The release last week of portions of a National Intelligence Estimate concluding that the war in Iraq has become a primary recruitment vehicle for terrorists -- following a series of upbeat speeches by the president -- presented a similar contrast.]

On June 18, 2003, Jay Garner went to see Defense Secretary Donald H. Rumsfeld to report on his brief tenure in Iraq as head of the postwar planning office. Throughout the invasion and the early days of the war, Garner, a retired Army lieutenant general, had struggled just to get his team into Iraq. Two days after he arrived, Rumsfeld called to tell him that L. Paul "Jerry" Bremer, a 61-year-old terrorism expert and protege of Henry A. Kissinger, would be coming over as the presidential envoy, effectively replacing Garner.

"We've made three tragic decisions," Garner told Rumsfeld.

"Really?" Rumsfeld asked.

"Three terrible mistakes," Garner said.

He cited the first two orders Bremer signed when he arrived, the first one banning as many as 50,000 members of Saddam Hussein's Baath Party from government jobs and the second disbanding the Iraqi military. Now there were hundreds of thousands of disorganized, unemployed, armed Iraqis running around.

Third, Garner said, Bremer had summarily dismissed an interim Iraqi leadership group that had been eager to help the United States administer the country in the short term. "Jerry Bremer can't be the face of the government to the Iraqi people. You've got to have an Iraqi face for the Iraqi people."

Garner made his final point: "There's still time to rectify this. There's still time to turn it around."

Rumsfeld looked at Garner for a moment with his take-no-prisoners gaze. "Well," he said, "I don't think there is anything we can do, because we are where we are."

He thinks I've lost it, Garner thought. He thinks I'm absolutely wrong. Garner didn't want it to sound like sour grapes, but facts were facts. "They're all reversible," Garner said again.

"We're not going to go back," Rumsfeld said emphatically.
...

[lemonjello]

Ho hum

If you want an inside take of what's really happening in Iraq, I recommend taking a look at Fred's latest column. (see link at bottom of post)

-------------------------
Barrons.com

Florida's Housing Hurricane
By MIKE MORGAN

HURRICANE SEASON COMES EVERY YEAR in Florida, but a really damaging storm comes along maybe once a decade.

So it is with Florida real estate: After years of good weather, the Florida housing market is due for a Category 5 hurricane. Sample recent headlines from the real-estate page: August existing home sales in Florida drop 34%, condo sales off 41%.

Pay attention, Northerners and left-coasters: Although much of the country is safe from hurricanes and skyrocketing homeowner's insurance, the real-estate hurricane knows no boundaries.

Just as a hurricane needs warm water to feed its power, the housing industry's hurricane was fed by reckless investors feeding money into a real-estate bubble during the last few years. And not just Florida's: Investors have fueled all of the hot housing markets, including Arizona, California, Northern Virginia, Nevada and many of the Eastern Seaboard markets.

In Florida, the most extreme example of the investor frenzy may be the Miami condo market, followed closely by Naples, Orlando and the Panhandle. Right now, Miami alone has more than 50,000 condos under development, with thousands more in the planning stages. But from 1995 through 2005, the absorption rate in Miami averaged 2,500 units per year.

When most people think of Miami, they think beaches. Unfortunately, many investors are not getting the Miami they have pictured in their mind. Most of Miami's new condos are not being built along the world-famous beach. Many so-called luxury condos are going up in some of Miami's most blighted areas. But the investors who scooped up these condos from as far away as Europe and Australia saw slick Websites and magnificent marketing materials.

Orlando and Tampa have more single-family developments, but the same problems: Investors didn't care if the home was built somewhere they wouldn't consider living, and they didn't care if the kitchen had Formica instead of granite and they didn't care if builders cut corners in construction to enhance margins. It didn't matter where or what the builders offered, as investors were only concerned with one buzzword: "Preconstruction."

Dozens of people called or e-mailed every day, pleading with me to find them a preconstruction "deal." By early 2006, however, we could find only two developments that made any sense, even though we had reviewed more than 200 statewide.

Of course, builders had no problem selling investors as much as they would buy, at ever-increasing prices, despite an absence of demand from people actually wanting to live in these places, and their undesirable locations.

Lotteries and limited releases for preconstruction homes fueled the investor frenzy. No one wanted to be left out, just as in the closing year of the dot.com frenzy. And, just as many of the dot.coms did not have the business fundamentals to survive, many of the developments that investors in Florida real estate scooped up at premium prices aren't what prospective occupants actually want. Result: The thousands upon thousands of homes that have been built on spec cannot command the original prices investors paid.

The housing bubble is much more dangerous than the dot.com bubble. For the most part, dot.com speculators were only risking their original investment. Some housing speculators are risking loss of their primary residence because they borrowed against it to finance their spec homes. Yes, homes, plural: Many speculators bought several spec homes with low down-payments.

With prices on spec homes purchased a year ago going down as much as 40%, speculators' losses will far exceed their 3% to 20% deposits. Not only are prices down, but closing costs may have added another 5% to the cost of the purchase. Add the investors' commissions and carrying costs to the ledger of sunk costs. Even if they can sell, speculators will incur another 10% in selling expenses.

With so many economists calling for a soft landing, speculators have been hesitant to sell properties at a loss. But they are incurring monthly expenses for association fees, maintenance, utilities, taxes and mortgage payments worth 1% to 2% of the price they paid. They are suffering an additional loss as the home drops in price each month, by 1% to 3%.

New clients come to me with listings, insisting they need a specific price so they can break even. However, we no longer take mispriced listings.

Meanwhile, home builders have been forced to go to war with the speculators. The only way for publicly traded home builders to attempt to meet Wall Street's expectations is to offer massive discounts and incentives that will move unsold inventory. For example, a top-five public builder recently sold a home to a second-tier investor for $315,000 -- the previous investor's contract was at $490,000 until the deal fell through.

Like the now-legendary Perfect Storm, Florida real estate has three groups interacting to feed the market with inventory: Builders, speculators and traditional sellers. The speculators initially undercut the builders, but now the builders are leap-frogging the speculators to unload inventory.

With prices crashing, speculators who can do it are walking away from substantial deposits. The recent round of cancellation reports from builders will continue to grow, and some builders will soon report negative sales, as they experience more cancellations than sales. So the perfect storm ramps up, as builder inventory grows and the main force of buying in recent years, the investor, has dried up. What's the role of the traditional sellers? Their ship is the one that capsizes, with all hands lost.

Some builders even are continuing to build spec homes, anticipating a turn-on-the-dime market, or just trying to get some value out of their inventories of land. With the investors gone and historical levels of inventory, there are no dimes to turn on.

The Florida real-estate hurricane is also flooding out the people who work in the housing industry. The loss of jobs created during the housing boom will touch all aspects of our economy, including contractors, sales agents, suppliers, mortgage brokers, insurance agents, title-insurance companies, home inspectors and attorneys.

The housing industry was one of the largest components of job growth during the past few years, and so it will be one of the largest sources of job losses in the coming months. Interest rates won't help: With an 18.5% rise in 30-year rates from July 2005, the mortgage payment that bought a $500,000 home then buys a $421,598 home now.

The hurricane is upon us -- and it is too late to put up hurricane shutters or get out of the way.

MIKE MORGAN is a real-estate broker in Stuart, Fla., and owner of Morgan Florida, which offers residential, commercial and investment real-estate services and research.

[lemonjello]

But hey, the market is still up. Right?

WSJ.com

U.S. Foreign Debt
Shows Its Teeth
As Rates Climb
Net Payments Remain Small
But Pose Long-Term Threat
To Nation's Living Standards
By MARK WHITEHOUSE
September 25, 2006; Page A1

Over the past several years, Americans and their government enjoyed one of the best deals in international finance: They borrowed trillions of dollars from abroad to buy flat-panel TVs, build homes and fight wars, but as those borrowings mounted, the nation's payments on its net foreign debt barely budged.

Now, however, the easy money is coming to an end. As interest rates rise, America's debt payments are starting to climb -- so much so that for the first time in at least 90 years, the U.S. is paying noticeably more to its foreign creditors than it receives from its investments abroad. The gap reached $2.5 billion in the second quarter of 2006. In effect, the U.S. made a quarterly debt payment of about $22 for each American household, a turnaround from the $31 in net investment income per household it received a year earlier.
[Payback Time]

The gap is still small within the context of the $13 trillion American economy. And the trend could reverse if U.S. interest rates decline. But economists say America's emergence as a net payer illustrates an important point: In years to come, a growing share of whatever prosperity the nation achieves probably will be sent abroad in the form of debt-service payments. That means Americans will have to work harder to maintain the same living standards -- or cut back sharply to pay down the debt.

"Our net international obligations are coming home to roost," says Catherine Mann, a senior fellow at the Institute for International Economics. "It's as if on our personal MasterCards we have run up large obligations and never had to make payments. You can't believe that's going to last forever."

If the trend persists, it could also raise concerns about the nation's creditworthiness, putting pressure on the U.S. currency. "It's an additional challenge for the dollar," says Jim O'Neill, chief economist at Goldman Sachs in London. "Economists have been warning about this for so long that people have gotten bored, but now we're starting to see the deterioration."

Since the end of 2001, when the current economic expansion began, the nation's consumption, investment and other outlays have exceeded income by a cumulative $2.9 trillion -- the largest gap on record. That current-account deficit contributes directly to the nation's total foreign debt, the value of all the U.S. stocks, bonds, real estate, businesses and other assets owned by non-U.S. residents. As of the end of 2005, total U.S. foreign debt stood at $13.6 trillion -- or about $119,000 per household. Net foreign debt, which excluded the $11.1 trillion value of U.S.-owned foreign assets, was $2.5 trillion.
...

[lemonjello]

Whew, glad that's over.

Sept. 25 (Bloomberg) -- Sales of previously owned homes in the U.S. fell in August to the lowest since early 2004, and prices fell from year-ago levels for the first time since 1995.

Purchases declined 0.5 percent last month to an annual rate of 6.3 million, from 6.33 million in July, the National Association of Realtors said today in Washington. Sales fell 12.6 percent compared with a year earlier.

The median sales price fell 1.7 percent to $225,000 from a year earlier, the first drop since April 1995, David Lereah, chief economist for the Realtors, said at a briefing. Federal Reserve policy makers, who last week held interest rates steady for a second month, expect housing will cool gradually to slow the economy and help curb inflation.

``We've been anticipating a price correction and now it's here,'' Lereah said. ``The price drop has stopped the bleeding for housing sales. We think the housing market has now hit bottom.''

Resales were expected to drop to an annual rate of 6.2 million, the median estimate of 58 economists in a Bloomberg News survey, from July's originally reported 6.33 million. Economists' forecasts ranged from 5.97 million to 6.42 million.

Home resales have fallen every month since March, when they were unchanged. They averaged 7.06 million last year. Existing home sales account for about 85 percent of the housing market and are recorded when a contract is closed, while new home sales are counted when a contract is signed.

Unsold Homes

The supply of homes for sale increased to 3.918 million, a 7.5 months supply that was the highest since April 1993, up from 7.3 months at the end of July. Resales of single-family homes were unchanged at an annual rate of 5.51 million, the report said. Sales of condos and co-ops fell 3.5 percent to a 793,000 rate.
...

[lemonjello]

Relax. The people in charge know what they're doing.

economist.com
...

Dark matter

Back in the days of claret-filled city lunches, life was so simple. Company pension funds and mutual funds put money into the securities of states and listed firms and hoped that they did well. Things are a great deal more complicated now. Even as the private world has eclipsed public markets, finance has been convulsed by a computer-enhanced frenzy of creativity. In today's caffeine-fuelled dealing rooms, a barely regulated private-equity group could very well borrow money from syndicates of private lenders, including hedge funds, to spend on taking public companies private. At each stage, risks can be converted into securities, sliced up, repackaged, sold on and sliced up again. The endless opportunities to write contracts on underlying debt instruments explains why the outstanding value of credit-derivatives contracts has rocketed to $26 trillion—$9 trillion more than six months ago, and seven times as much as in 2003.

In many ways, these complex derivatives are good for economies. Because they allow investors to lay off the risk of borrowers' defaults, they free lenders to lend more. Because risk is dispersed to those who have an appetite for it, the system should be more robust. Because derivatives are traded in liquid markets, they rapidly transmit information about the creditworthiness of borrowers. The benefits of this hyperactive shuffling of money spread well beyond financial markets. If companies are borrowing more cheaply and sensibly to make acquisitions, pay dividends and buy back their own shares, businesses everywhere should run more efficiently.

That is the theory, at least. And so far, it has broadly been borne out. The markets struggled to cope with financial crises in Asia and Russia in the late 1990s and with the implosion of Long-Term Capital Management, a hedge fund, in 1998. By contrast, there were never serious fears that the dotcom bubble burst, September 11th 2001, or, more recently, the collapse of General Motors' bonds and investors' flight from risky investments, would lead the system to collapse.

Regulators understand very well how much the world stands to gain from this revolution in finance, but they are nevertheless nervous. Because of the lack of transparency, they cannot see whether these volatile new debt instruments are in safe hands or how they will behave in a crisis when everyone is heading for the exits. As Donald Rumsfeld might have put it, they have left a world of known unknowns for a twilight landscape of unknown unknowns.

Last week Timothy Geithner, the Federal Reserve's man on Wall Street, gave warning that all this might make financial crises less common, but more severe. Britain's Financial Services Authority complained this week that investment banks and hedge funds were sloppy and prone to conflicts of interest. In a panic, incomplete paperwork could cause the whole system to collapse amid disputes about who owns which liabilities. Worryingly, firms had wildly different estimates for the risks of similar portfolios of investments. Someone somewhere is investing on flawed assumptions.
...

[lemonjello]

Any football fans out there?

Book excerpt from the Liar's Poker guy -


The Ballad of Big Mike
By MICHAEL LEWIS

I. Looking for the Next Anti-Lawrence Taylor

http://www.nytimes.com/2006/09/24/magazine/24football.html?_r=1&oref=slogin&pagewanted=print

[lemonjello]

Whoop, der it is

More rhymes from Barrons.com

Why Risk Is Rising for LBOs
By TOM BURNETT

LEVERAGED-BUYOUT ACTIVITY IS RUNNING at a fever pitch. Bolstered by recent strong returns, the LBO funds that lead these acquisitions are expected to raise more than $100 billion in 2006, a record total that has helped drive overall merger volumes to heights last seen during the Internet bubble of 1999 and 2000. However, investors in LBO funds and shareholders of public companies getting a bid from one of these funds need to be aware of the increasing risks in this marketplace.

Among other challenges, these funds must cope with the fact that the Federal Reserve has raised short-term rates 17 times in the past two years, which means that vehicles like cash and short-term notes will become more attractive investment alternatives to LBOs. That could raise the pressure on managers to commit funds quickly to snag deals. Otherwise, investors may start clamoring for some of their money back, thus slashing the funds' management fees. Higher rates also usually raise a company's interest costs and cut its profit margins, making acquired companies harder to turn around.

That so much money is in the hands of so many eager deal makers competing for the same basic opportunities is also cause for worry. According to a private-equity trade group, the National Venture Capital Association, 88 LBO firms raised $25 billion in 2002; by 2005, 175 funds had raised $95 billion. In the first half of this year, $55 billion was raised by 73 groups, making it likely the $100 billion mark will be breached.

This intense bidding for deals increases the possibility that funds will overpay to take public companies private in a trickier environment. Higher prices also narrow the margin for error.

Debt-laden companies, especially if bought at high valuations, will have a harder time making meaningful progress against a tide of rising interest rates.

Already there are signs of strain. A review of regulatory filings by several pricey recent LBOs -- two retail chains and a tech company -- offers a peek at their deteriorating financial condition and lessons for investors.

One of these leveraged buyouts is Toys "R" Us, which was purchased by a group composed of buyout specialists who regularly raise LBO funds, Bain Capital and KKR, plus Vornado Realty Trust (ticker: VNO). At its July 22, 2005, close, the deal had an estimated value of $7.5 billion, equal to 29 times earnings. Like its rivals, Toys has been hit by problems, including lower consumer spending and higher gas prices. Wal-Mart's expansion (WMT) into toys has only deepened these troubles.

While Toys owned most of the real estate supporting its outlets, this cushion isn't big enough to allow the retailer to refinance its balance-sheet obligations, which have kept its operations under severe financial duress. On July 13, 2006, Fitch Ratings assigned a speculative rating of CCC+/RR5 to Toys' $1 billion senior secured credit facility, and later issued a "negative" outlook.

Toys' revenues in the fiscal quarter ended in April actually rose 12% from 2005 levels, and gross margin increased from $732 million to $833 million. However, interest expense of $130 million pushed it to a pretax loss of $132 million, up from a $67 million shortfall in the April 2005 quarter, when it was still publicly traded.

The losses continued in the July quarter, as interest expense of $129 million drove operating income of $11 million with a pretax loss of $113 million. The pretax loss for the six months ended July 29, 2006, was $245 million, compared to a loss of $83 million (excluding special charges) in the first half of fiscal 2005.

Goodwill 'N Things: A year after its LBO, textile retailer Linens 'N Things has less cash and equity and more debt and goodwill.

The negative impact of the LBO on the balance sheet is readily apparent. Cash assets declined from $1.85 billion on April 30, 2005 (pre-deal) to $664 million by July 29, 2006. In that same period, total debt increased from $2.43 billion to $7.05 billion. And Toys' equity disappeared, dropping from a positive $4.36 billion to a negative $888 million.
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[lemonjello]

The New Opium

barrons.com

MONDAY, SEPTEMBER 18, 2006


Investing in a Shaky World
Interview With Rudolph-Riad Younes,
Co-manager, Julius Baer International Equity Fund
By SANDRA WARD

TALK ABOUT WINNING WAYS. Since we started seeking his investment views in 2002, this head of international equity investing at Julius Baer has seen his stock picks in these pages appreciate 41.75% a year, on average, through the end of August, handily beating the benchmark MSCI EAFE index during the same period. Only five of his 31 stock picks underperformed, and their lackluster showing was more than offset by the commanding returns of the rest. And the portfolios that Younes manages along with his colleague Richard Pell haven't done too badly, either. Their flagship, Julius Baer International Equity Fund, has gained 17.5% annually, on average, the past five years and is up 21.9%, on average, in the past year, also easily beating the benchmark. No wonder, then, that the assets they manage have ballooned to $43 billion.

Barron's: Give us the Big Picture.

Younes: My favorite subject. Today's version of the opium trade continues.

And China is the new Britain?

China is providing the West and the rest of the world with very low credit and very low interest rates, which is creating addiction in the form of borrowing and spending and leading to hallucinations in the form of asset prices.

It seems to us this opium trade is going to last for a very long time, and it has implications on where we invest our money. The reason it is going to last so long is that U.S. corporations have a lot of leverage on politicians and on government decisions. They finance both political parties, and they're not strictly U.S. companies anymore, but global companies, and people tend to forget that. U.S. companies care about what is good for the global economy, not necessarily what is good for the U.S. economy.

The short electoral cycles in the U.S., in which every two years you have the full House up for re-election and one-third of the Senate being elected, exacerbates the problem. Everybody knows that monetary and fiscal policy takes about 12 to 18 months to have any affect on the economy and, while the opportunities are great for tactical decisions, they are terrible for strategic decisions.

So give an example of how multinational companies, by embracing a more global outlook, have not served America well?

Look at profits as a percent of GDP [gross domestic product]. Historically, it averaged about 5.4%, but today it has almost doubled to about 10.2%, way above its previous peak at 7%. That's exhibit A. That's happened as U.S. corporations have moved jobs offshore and Congress has let certain policies go on longer and longer than maybe they should.

Yes, but what about the argument that companies are more efficient and more productive?

We are so efficient that we don't do anything anymore, that's how efficient we are. We are so efficient we beg the Chinese to buy something from us. We are so efficient that debt to GDP is above 200%. We are so efficient that we have a trade deficit that is 7% of GDP. Even Turkey would be ashamed of that.


OK, so what are the implications of this on how you invest?

At the end of the day, money management is a combination of dogmatism and pragmatism. While we wait for our thesis to be proved, we are also trying to protect our investors and trying to find places where we can make money without dramatically being affected by the global picture. The big questions for us when we look at the market involve inflation and the direction of equities, bond yields and currencies.

Inflation is something there should be no debate about and somehow there is. As the Bank of England observed recently, our core inflation number should include energy because energy is affected by demand from China. The same way China is exporting deflation to us by manufacturing goods more cheaply, it is importing inflation through its demand for commodities and energy. Core inflation should also include house prices and other asset prices, rather than just rental equivalents, as is done now. Again that would change the inflation picture dramatically. If you consider headline inflation and include asset prices instead of rental equivalents, the true inflation number would be between 7% and 10%. The question is: If real inflation is 7% to 10%, why don't we see it in wages?

That's been a big mystery. What's your answer?

The reason we don't see wage inflation is not just because of China, but more importantly, because people used their houses as ATM machines, basically refinancing their houses and withdrawing equity. If your wages are not enough to support your spending, your house bills or your education, but you manage to get an additional loan against your house and use that loan to refurbish your house or pay for your children's education, then you are not going to complain and you are not going to go on strike and you are not going to be militant because you are not being paid enough money. Wages, plus equity withdrawal from your house, was enough to support your living standard. Once that sort of financing dries up for the consumer, we will see significant wage pressure.

Yet, I've been hearing concerns about deflation.

Deflation is not going to happen for a very simple reason: Deflation is a tax on the poor. If you look at the typical balance sheet of a U.S. consumer, he or she is long houses and has big loans. Deflation will bring their house prices lower, and it will make it much more difficult to pay their debts. So they will get killed on both ends. It ain't going to happen. On the other hand, if inflationary policies are pursued, house prices will go up, at least nominally, and making money on your house and paying your debt will become easier because you have inflated debt. So far, the bond market has not reacted to this reality.

But you expect it will?

Bond yields are very, very low. They are ridiculously priced, and the reason they are ridiculously priced is because the investors who decide the price are not driven by absolute returns. The biggest investors are the central bankers. Then there are the pension funds who need to match their liabilities. The funny part about these investors is that the lower they drive interest rates, the more bonds they need to invest in to cover their future liabilities. People should not be buying bonds.

People have been wrong on bonds for two years now.

How many got Nasdaq wrong? Again, if something is expensive or cheap it doesn't mean it is going to correct automatically. Could the long bond go from 4½% to 3%, yes, and there is nothing I can do about it. But we are talking about where value is, and bonds don't represent very good value.

And currencies?

You are not getting paid to own any of the major fiat currencies. Today's rates are very low. If you look at the five-year swap rates, the market is expecting short-term rates to be not much above today's level five years from now. The only thing consistently beating the dollar, year after year after year, has been the commodity index. That's a real battle.

And equities?

On the surface, the multiples are not a problem. Fifteen to 16 times forward earnings is not something to make anyone panic, although that's at the high end of the historical average. The problem today in the equity market is the level of profit margins. Margins are almost 100% above the historical average. If you think we are going back to the historical average, then you are talking about 30 times earnings. Add to that the global imbalances around the world, and equities are not a very safe place to be.

In the global equity market, two bubbles have not yet fully deflated: Nasdaq and Japan. Despite the rallies that occur in those sectors, in the long term, they are in a downward trend because they are still overvalued. Japan is at least 50% overvalued. If Korea were considered part of the developed world, as it should be, we would be replacing many of our Japanese names with Korean names because valuations in Korea are one-half to one-third their Japanese counterparts.
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