American Securitization Forum 2012: Groundhog Day Year 3

Happy New Year and may 2012 not suck as much as 2011!

I’ve been on forced hiatus due to issues relating to a trip to Cuba, a woman named Carla and a small golden statue of significant religious value. I won’t bore you with the details.

Now that I’ve been released …err… returned to work, I just got back from the preeminent fixed income structured finance (FISF) conference; the American Securitization Forum (ASF). For those outside of the business, the FISF brought you such fine investment products as Collateralized Debt Obligations (CDOs), Subprime mortgage backed securities, Liar Loan mortgage securities, Commercial Mortgage Backed Securities (CMBS) and synthetic version of all the above.


Participants of ASF demonstrated cautious optimism of a prisoner believing the governor would free him at any moment. While CMBS, Autos and Credit Cards have come back in a stunted form, non-government residential mortgage backed securities (RMBS) still lack the appropriate economics to get deals done. Many participants complained about the lack of final Dodd-Frank Act rules but CMBS, Auto and Credit Cards are functioning while waiting for the same regulations. RMBS has too much supply overhang to have spreads tight enough to get a deal done. According to Laurie Goodman, Amherst Securities, the US has a 33 month shadow inventory of defaulted & foreclosed upon houses to process before a supply/demand equilibrium can be hit to make deals economic. To make the situation more painful, most bullish participants believe the home prices will decline another 3-5% before stabilizing. (And yes I said bullish!)

BTW, the private residential mortgage backed securities continues to be stalled with two small deals in 2010 and the first deal of 2012 announced just before the convention.

For those having gone to the previous two ASF conferences will seem like Bill Murray’s Groundhog day all over again. I’m thinking of the scene where the main character drops a toaster into his bath.

Dems who?

Members of the ASF have given up on the democrats and had two very pro-business GOP congressmen speak at the conference. In fact both congressman were so pro-business that they willfully forgot about the abuses caused by the industry. While I agree the Dodd-Frank Act has many issues it also has several really good features. Take what works and ditch the rest.

Perfect Irony

After the colossal market meltdown which lead to the bursting of the credit bubble and implosion of several small countries, the ASF held its 2010 conference in Washington DC as a sign of contrition and to let congress know we’ve learned our lesson and don’t need pesky laws regarding risk retention. In 2011, ASF ventured to Orlando because the business is family friendly and gave Rep. Garrett the forum to espouse his hatred for all things government especially the President, Fannie Mae, and Freddie Mac though he seemed to forget about FHA/VA loans. The time for slinking around is over and the ASF is back in its favorite city, Las Vegas!!

In a bit of delicious irony, the ASF chose to hold the convention in the opulent Aria Hotel. The Aria is located in the new City Center in Las Vegas. The construction of City Center was financed by a loan originated by a large investment bank with extremely loose underwriting standards (pro-forma underwritten and had interest only payments due). This large investment shop placed the loan into its own CMBS and made themselves a good deal of money.

The City Center loan failed as the construction project ran out of money. The equity owner was highly levered and had no interest in putting his own money into the work. The project stalled for over a year until a new partner came with a cash infusion for a significant ownership of the project. Moreover, one of the towers has just been condemned without ever being occupied by the local county. The ASF, having not learned its lesson, holds its conference in the very hotel which represented a shining example of how messed up the originate to securitize model had become.

Naked Bond Bear

What ZAGG Bulls Are Missing & Why

Today, one of the most ugly stocks I’ve seen in a while (that isn’t a total fraud ala China MediaExpress Holdings etc) is up >5%, much of which is probably due to a bullish mention from The Motley Fool, and possibly from seemingly higher bullish sentiment/posting on some message boards. I’ve heard the latter is part of a pump-up effort paid for by the company, but that’s for the SEC/DOJ to investigate. Moving on to the more concrete stuff, and there’s a whole bunch of it so prepare yourselves!

I want to focus first on why I think people tend to be so bullish on many of these momo/”hot” stocks even in the midst of much publicly available information to suggest they should reconsider their views. With a company like Zagg, you’ve got a combination of factors conspiring against investors’ ability to make intelligent decisions, leading many to adopt bullish views when such views are very unlikely warranted:

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Time to Set Sail with Carnival?

Television screens and newspapers have been inundated by pictures of Costa Cordia listing off the shore of the island of Giglio. While this is a PR nightmare for Carnival Corporation & plc (NYSE: CCL), could it be an opportunity for intrepid investors? On Tuesday, the first day the US shares traded after the ship ran aground, the shares tumbled 13.7%. With 780 million shares outstanding, the drop equaled $3.7 billion in market capitalization. On that day, I tweeted that the sell-off was overdone. The shares have since recovered 6.6%. Did you miss the boat? To find out, read on. Continue reading

On the Upcoming Carlyle Group IPO: Is the Juice Worth the Squeeze (Glencore Redux)

Surely I am unlikely to be the only one to write a post warning those of you considering buying the Carlye Group IPO, however, instead of boring you with any sort of complex financial and other analysis, I’m going to keep it simple, real simple, as I did when I explained some risks associated when the possibly most evil company on the planet went public last year. For a slightly more complicated take on investing in PE/alternative asset manager IPOs, this post from The Epicurean Dealmaker is a very good starting point (and includes links to other similarly excellent writeups).

1. While we’re not totally comparing apples to apples here, I’d like to present the following chart of the performance of publicly traded alternative investment management firms, without further comment (if you don’t get the point, I really can’t help you, its that obvious):

Ok, I’m adding further comment. When people whose job is to buy low and sell high – and who have done a pretty damn good job doing it – are selling, why the hell would you be buying??? Do you think you’re going to get a better return than they are? Best of luck!

2. Valuing some of Carlyle’s various investments its incredibly difficult, time consuming, and subject to much, oh, shall we say “educated guess work,” to put it nicely. Valuing the fund management company is even worse. This is even more the case given the way in which Carlyle is listing, not as a typical corporation, but as a fairly convoluted sort of – as a securities lawyer friend of mine commented – a “baby Limited Partnership,” as the NYT has so kindly (attempted to) explain for those lacking the time/expertise to read the full explanation in the registration statement. You’re basically giving them your money without getting any of the typical rights associated with so doing. Imagine not being able to sue a Doctor if he or she committed malpractice. Again, not apples to apples, but I think you get the gist of what I’m trying to get at.

3. Do you know every project/company in which Carlyle invests? While I’m no fan of “socially responsible investing,” some people who like to make their views held with their wallet might not want to own a public Carlyle. When your goal is to achieve tremendous investment returns, you don’t much care about the morality of an investment unless its actually a legal/regulatory/etc issue, and even then, those can sometimes be mitigated/hedged. If you own mutual funds or invest in stocks through your retirement/pension/endowment/etc funds, there’s a fair chance you’re going to end up owning a little bit of Carlyle, as managers inevitably try to buy (what’s perceived as) “best of breed” (which is another conversation for another time).

4. I haven’t even read more than a few pages of the S-1, let alone performed any real analysis, so for all I know maybe these (potential) reward outweighs these basic risks. Carlyle is one of the biggest, strongest PE firms in the world, something which is unlikely to change in the immediate future (although brain drain is certainly not impossible).


A Few Coincident Indicators

Previously I showed some skepticism with the likes of ECRI and BNP Paribas when in Q3 2011 they asserted that the US Economy was tipping into a double dip recession. Now that Q4 is in the books, and tracking for 3.5% GDP, I thought it was time to look at some coincidence indicators for the quarter since many have pointed out recessions often begin in the last month of a quarter that ends up having a positive GDP print.

So yesterday I took a look at a few coincidence indicators and noticed three with rather solid records of showing when a recession had started, while not doing much on the prediction end.

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12 Things You Should Know Before Buying BJ’s Restaurants in 2012

I’m baaaaaack, happy New Year! Presented without graphics. I have been watching BJ’s Restaurants, Inc. for several months to see if the stock would fall from its Icarus like heights. The short story is that during the time I was on the sidelines, it has yet to come back to a level that seems more “attractive” to my somewhat trained investment eye. For my first post of 2012, I present to you my top 12 reasons why you would be better served to buy one of the menu items before buying the stock: Continue reading