This looks like an absolute no brainer.
We are at the top of the stimulus, 70% of the money will have been spent by September. Stimulus programs are fading out all over the world (except maybe China).
On the other hand, Spain, Portugal, and Greece have all been downgraded and face further market pressures on their debt this year. According to NakedCapitalism, Greece is going to face the most stringent economic constraints ever placed on a sovereign nation to receive their IMF alottment. That will just delay the problem for six months to a year. Once they blow through the first set of conditions, the market will be bigger questions to address.
I don't care if the IMF (a.k.a. US) and it's european friends bailout all of these PIIGS. They won't do it until it is the final option. That guarantees volatility before we get there.
Long VXX at 20.06.
Deleveraging is in effect and it is ugly.
Wednesday, April 28, 2010
Monday, April 26, 2010
First Marblehead recovers from a bump
Investing in FMD takes pure guts! (Or just faith in the vampire squid)
FMD has $422m cash ($380m market cap) and a $15m quarterly burn rate. Yet it has no real income because it was forced to stop all banking transactions because of it's capitalization levels and loan guarantees. It continues to take shrinking losses on that previous portfolio. The government lifted the cease and desist order on their bank subsidiary after they sold off their complete student loan portfolio at a sizable loss. So now they can get back into the business in a much better market climate than before.
For me, it is impossible to believe that the private student loan securitization market is permanently impaired. There is plenty of supply of private student loans to be made out there. There is plenty of demand for it from investors due to the strict recovery provisions. FMD servicing capibilities have proven to decrease default rates and increase recovery rates, crucial for student loan securitization investment returns.
A first peek of sunlight is a recent agreement with Sun Trust to perform $200m worth of loan processing, production support, program support and portfolio management, and program administration services. There is no timeframe yet in regards when they will execute this program.
So I think there is a market for them, it just has not reemerged yet. Others have made this bet before, but have yet to realize a return. But with the recent SunTrust deal, real revenues are on the horizon.
Finally, I can say all of these wonderful things, strike them, and still say the fact that Goldman invested $1B in private equity and has a vested interest in seeing a return on that investment is a good enough reason to dabble in FMD. Does anyone have a doubt about Goldman's ability to find a profit, ethical or not? I did not think so.
The author is long at $3.57.
FMD has $422m cash ($380m market cap) and a $15m quarterly burn rate. Yet it has no real income because it was forced to stop all banking transactions because of it's capitalization levels and loan guarantees. It continues to take shrinking losses on that previous portfolio. The government lifted the cease and desist order on their bank subsidiary after they sold off their complete student loan portfolio at a sizable loss. So now they can get back into the business in a much better market climate than before.
For me, it is impossible to believe that the private student loan securitization market is permanently impaired. There is plenty of supply of private student loans to be made out there. There is plenty of demand for it from investors due to the strict recovery provisions. FMD servicing capibilities have proven to decrease default rates and increase recovery rates, crucial for student loan securitization investment returns.
A first peek of sunlight is a recent agreement with Sun Trust to perform $200m worth of loan processing, production support, program support and portfolio management, and program administration services. There is no timeframe yet in regards when they will execute this program.
So I think there is a market for them, it just has not reemerged yet. Others have made this bet before, but have yet to realize a return. But with the recent SunTrust deal, real revenues are on the horizon.
Finally, I can say all of these wonderful things, strike them, and still say the fact that Goldman invested $1B in private equity and has a vested interest in seeing a return on that investment is a good enough reason to dabble in FMD. Does anyone have a doubt about Goldman's ability to find a profit, ethical or not? I did not think so.
The author is long at $3.57.
Thursday, April 22, 2010
Oil subsides but is still potent for upside
Oil continues to strength against massive supplies in the US.
"Oil inventories at Cushing reached 34.1 million barrels in the week ended April 16, less than one million barrels shy of a record, the U.S. Energy Information Administration said Wednesday. The extra oil has few outlets, with stockpiles across the Midwest at their highest in at least 20 years and refiners already producing enough fuel to further inflate gasoline and distillate inventories."
Supplies at the highest level in 20 years and oil is still above $80/barrell. Wow.
'"Oil prices have managed to remain above $80 a barrel largely due to strong demand out of China, which has exceeded expectations for economic growth over the last 18 months, even as U.S. oil demand has underperformed.
"The shift in the epicenter for demand continues to shift east of the Suez," wrote analysts with Barclays Capital.'
Yet this may not be the end of it. If the Chinese yuan increases, then oil could go even higher if their stimulus is maintained while the currency appreciates and thus the buying power of China increases.
"Oil inventories at Cushing reached 34.1 million barrels in the week ended April 16, less than one million barrels shy of a record, the U.S. Energy Information Administration said Wednesday. The extra oil has few outlets, with stockpiles across the Midwest at their highest in at least 20 years and refiners already producing enough fuel to further inflate gasoline and distillate inventories."
Supplies at the highest level in 20 years and oil is still above $80/barrell. Wow.
'"Oil prices have managed to remain above $80 a barrel largely due to strong demand out of China, which has exceeded expectations for economic growth over the last 18 months, even as U.S. oil demand has underperformed.
"The shift in the epicenter for demand continues to shift east of the Suez," wrote analysts with Barclays Capital.'
Yet this may not be the end of it. If the Chinese yuan increases, then oil could go even higher if their stimulus is maintained while the currency appreciates and thus the buying power of China increases.
Short the runt PIIGS
This will be a drawn out process. But we can be sure that Greece will default in some form or fashion (i.e. restructuring). In the meantime, let's enjoy the instability and make some money shorting the national champions of the most at risk PIIGS.
A few of the facts:
*There is a run on the banks going on in Greece already, official or unofficial. Over 25% of deposits have already left the domestic banks.
* Only six people in Greece claimed income higher than 1m euros in 2008 (pervasive tax evasion)
* Greece has spent over 50 of the last 200 years in default (subprime, always)
* Greece has not had fiscal discipline in the last 10 years, why will that change in a major recession?
As for the short of Portugal Telecom and the national electric company (EDFPY.PK), the performance of the telecom and energy industries are tied to the economic health of the country.
Short NBG at $3.10 entered on 4/22
Short PT at 11.00 (limit order)
Short EDFPY.PK at $37 entered on 4/22
A few of the facts:
*There is a run on the banks going on in Greece already, official or unofficial. Over 25% of deposits have already left the domestic banks.
* Only six people in Greece claimed income higher than 1m euros in 2008 (pervasive tax evasion)
* Greece has spent over 50 of the last 200 years in default (subprime, always)
* Greece has not had fiscal discipline in the last 10 years, why will that change in a major recession?
As for the short of Portugal Telecom and the national electric company (EDFPY.PK), the performance of the telecom and energy industries are tied to the economic health of the country.
Short NBG at $3.10 entered on 4/22
Short PT at 11.00 (limit order)
Short EDFPY.PK at $37 entered on 4/22
Thursday, April 15, 2010
Going to school with Sallie Mae
Moral hazard is alive and well, why not make some money off of it? A great candidate is Sallie Mae.
Recent policy changes by the Federal government banned the private origination of Federal student loans, Sallie Mae's most profitable activity.
As a result, Sallie Mae has contended that it will need to layoff 2000 workers as it retools to be one of the four designated Federal student loan servicers.
This rebalance in revenue streams pales in comparison to the current liquidity issues facing Sallie Mae. In 2010 and 2011 Sallie Mae is facing a rollover of $11B in debt with only $6B in cash and a hostile credit market. In March Sallie Mae completed a new 1.5B 10-year offering at a horrific 8% fixed. Although this is horrific at first glance in comparison to their current lending rates (5.5% - 6%), since Federal loans often float with interest rates, a rate increase could make this offering cheap in comparison to the discount rate.
Bottom line, the author believes that the Federal Goverment will do whatever it takes to make sure Sallie Mae can rollover their debt. It is not in the interest of the Federal Government to have another major lender fall due to a lack of liquidity, and that has been the minimum criteria for applying moral hazard.
So what do we do? Buy Sallie Mae senior unsecured exchange traded debt (NYSE:JSM) yielding close to 8.3% ($18 price / $25 par) maturing 12/15/2043. Buy at the limit price - $17.50.
Recent policy changes by the Federal government banned the private origination of Federal student loans, Sallie Mae's most profitable activity.
As a result, Sallie Mae has contended that it will need to layoff 2000 workers as it retools to be one of the four designated Federal student loan servicers.
This rebalance in revenue streams pales in comparison to the current liquidity issues facing Sallie Mae. In 2010 and 2011 Sallie Mae is facing a rollover of $11B in debt with only $6B in cash and a hostile credit market. In March Sallie Mae completed a new 1.5B 10-year offering at a horrific 8% fixed. Although this is horrific at first glance in comparison to their current lending rates (5.5% - 6%), since Federal loans often float with interest rates, a rate increase could make this offering cheap in comparison to the discount rate.
Bottom line, the author believes that the Federal Goverment will do whatever it takes to make sure Sallie Mae can rollover their debt. It is not in the interest of the Federal Government to have another major lender fall due to a lack of liquidity, and that has been the minimum criteria for applying moral hazard.
So what do we do? Buy Sallie Mae senior unsecured exchange traded debt (NYSE:JSM) yielding close to 8.3% ($18 price / $25 par) maturing 12/15/2043. Buy at the limit price - $17.50.
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