Moishe sold a can of sardines to Joe for $2. Joe sold it to Robert for $4. Robert sold it to Tom for $8. Tom sold it to Henry for $16. Eventually , Yankele bought it for $64.
That Friday night Yankele produced the can. He explained to his family that this was “some sardines.” It was the most expensive can he’d ever bought. The family was excited. He opened the can with a flourish. The family gasped. The sardines were rancid.
Yankele was furious. He traced the sardine sales cycle through all the buyers. Eventually he found Moishe who had bought the sardines for $1 and sold it for $2.
“How could you sell this can? It’s rancid!”
Moishe explained, “You schmock. That can is for trading, not for eating.“
And so I come to the latest Washington insanity:
The Federal Housing Finance Agency (FHFA) is suing 17 big banks for billions. The FHFA, which took over Fannie Freddie, alleges negligent misrepresentation, securities laws violations and common fraud as the big banks issued, bundled and sold Mortgage Backed Securities (MBS) to Government Sponsored Enterprises (GES).
The 17 banks include those the Federal Government gave huge TARP bailout monies. Here is a list of the big banks that have been targeted in the lawsuit and how much money the FHFA argues Fannie and Freddie got ripped off:
1. Bank of America with Countrywide and Merrill Lynch = $57.4 billion (USA)
2. JPMorgan Chase = $33 billion (US)
3. Royal Bank of Scotland = $30.4 billion (UK)
4. Deutsche Bank = $14.2 billion (Germany)
5. Credit Suisse = $14.1 billion (Switzerland)
6. Goldman Sachs = $11.1 billion (US)
7. Morgan Stanley = $10.6 billion (US)
8. HSBC = $6.2 billion (UK)
9. Ally Financial (GMAC) = $6 billion (US)
10. Barclays = $4.9 billion (UK)
11. Citigroup = $3.5 billion (US)
12. Nomura = $2 billion (Japan)
13. Société Générale = $1.3 billion (France)
14. First Horizon = $0.88 billion (US)
15. General Electric = $0.55 billion (US)
If you’re wondering if our administration hasn’t the faintest idea of what its right and left hands are doing, you’d be 100% right.
The mortgage mess is easy to understand if you think sardines. The mortgages were not for “eating.” They were for trading. and everyone in the chain — from the mortgage brokers at the bottom to the investment banks that bundled them for resale (called securitization) — knew that. Mortgage brokers were pushed to originate mortgages — any mortgages. And the result was NINJA mortgages (no income, no job) and liar loans — the mortgagee lied about his income and no one checked the application. Overseeing the whole thing was Congress pushing everyone — including its agencies, Fannie and Freddie — to lend everyone and their uncle (including the deadbeat one) money to buy a home. It was the American dream. It was populist politics at its worst. It was the absolute best example of how goverenment interference in the private sector can mess things up beyond our wildest belief.
I have no idea what’s going to happen to this suit. I’m interested only in the investment implications:
The overwhelming conclusion is the one I’ve beem hammering for months — Stay away from financials. They are the classic cockroach stocks — viz, the FHFA’s suit. Out of the blue. Who knew it was coming. Who knows where the next cockroach will appear. Don’t try to catch them as they fall. “Don’t catch a falling knife.” Look at these two:
I only wish I had thought this through earlier and sold them all short. Would I sell them short here? I think yes. But I’m not sure. Need to mull this morning. Your thoughts?
Another reason never, ever to buy Verizon. I returned to New York City last night to find the following on my Verizon FiOS TV screen:
Yes, dear readers, those “nice” people at Verizon took The Tennis Channel off right in the middle of the most important tennis tournament of the year — The U.S. Open.
Here’s their explanation from Peter Thonis, head of Verizon PR:
Harry – I’ve looked into this issue. Verizon had been in an agreement with the NCTC that included carriage of the Tennis Channel. When the agreement expired, we pursued a separate agreement with the Channel. Their proposal at this point, however, includes an unreasonable price hike that would cost us many millions of dollars more than what we have been paying up until now. We continue to talk to the Tennis Channel, but have yet to reach an agreement. I’ll follow this and let you know when that changes. Sorry for the inconvenience. – Peter
Now, think this through. Do I honestly buy this stuff about “many millions of dollars more?” No way. Do I hear anything about a refund for subscribers? I hear “Sorry for the inconvenience.” Pretty lame.
I feel particularly stupid and hurt on this one. I stuck my neck out to recommend Verizon FiOS to our apartment building. I got their service into this building. I’ll now have to answer to the tenants. “Are you an idiot or what, Harry, putting us into Verizon?”
Suffice, if Verizon makes dumb decisions like this, Verizon is not a stock worth owning — ever. Look where it’s gone in the past five years — nowhere.
Though I’m tempted to sell it short, Verizon’s stock has too many admirers — because of its 5.62% dividend yield.
The US Tennis Open continues. Fortunately I can still watch some live matches on ESPN2 and CBS. The best coverage is on DirecTV. Go to channel 701. You can pick between six matches under way and pick the one you want to watch. Verizon hasn’t got to that level of creativity and probably never will. How can you be so stupid.
From a kind reader who’s good on math:
Hey, let’s be supportive OK! We all have to do ‘our’ part, right? So I decided to follow the Presidents lead, and I hope you will participate too.
The President ordered the cabinet to cut $100 million from the $3.5 trillion federal budget.
I’m so impressed by this sacrifice that I have decided to do the same thing with my personal budget. I spend about $2000 a month on groceries, household expenses, medicine, utilities, etc. but it’s time to get out the budget cutting axe, go through my expenses, and cut back.
I’m going to cut my spending at exactly the same ratio, 1/35,000 of my total budget. After doing the math, it looks like instead of spending $2000 a month; I’m going to have to cut that number by, six cents. Yes, I’m going to have to get by with $1999.94/
That’s what sacrifice is all about. I’ll just have to do without some luxuries.
Harry Newton who read much on the FHFA suit. What was best were some of the priceless comments left by readers on the New York Times’s site (underneath the article):
+ Remember when everybody, especially politicians, were happy as larks that “everyone can own their own home.” That worked out well, didn’t it. The banks would never have made those loans without a government guarantee. The Fed needs to keep its nose out of private industry.
+ It was Fannie and Freddie that created the securitization of loans in the late 70’s as a mechanism to indirectly create a way to finance the needs of the baby boomers desire to be part of the American dream which was to own a home. Its quite ironic that they are are suing the banks for something they created. Its amazing how ignorant our government is. The policies they create are based on emotions of the current situation without any regard to how the whole problem was created.
+ What a joke. Fannie and Freddie were at the very heart of the financial collapse stemming from the housing bubble and easy loans to unquallified buyers. Now they say they didn’t know what they were getting? Unless they can point to very clear and compelling instances of being misled by the banks, this is a CYA lawsuit by the government and it should go nowhere. Let’s see if the judge has any guts.
+ The suit is nothing more than a campaign issue for Obama. It will never go before a jury. Either the banks will be offered a favorable settlement or the new president will let it die.
I would like to nominate the greatest idiots team of current human history: Franks, Dodd, Pelosi, Reed and new member Obama. Did I miss anyone? What, they're still in charge? How'd that happen?
Giving it a nano-seconds worth of thought I believe you can add Boxer, Feinstein, Durbin, Blumenthal, Menendez, Lautenberg, Schumer, Sanders and Rockefeller without any argument from me, but of course Harry might not agree.
I'm confused, 47 people shot this weekend in NYC and for all intents and purposes ZERO NEWS COVERAGE. I mean, come-on, clearly it's the NRA's fault!!!
Boys……keep your powder dry, the “Night Of Fire” is approaching……mark my words.
Harry,
I just watched this documentary on Sunday http://www.imdb.com/title/tt16… (Inside Job) about the financial crisis. It's very infuriating and every american should watch this to clearly understand how our taxpayer money bailed out the crooks that created this mess.
I just watched this movie
Brian,
For a bit more insight into the film “Inside Job” you may want to listen to an interview of Daniel Alpert (one of the stars of the movie) conducted by Jim Puplava of FinancialSense.com. This interview it from February 2011. But I must warn you up-front, Jim Puplava and his website FinancialSense.com are conservative, which is why Harry refuses to include a link to them in his “Useful Investing Links” section. See my link below for this fantastic interview. If the link doesn't work go to Financialsense.com and do a search for “Inside Job”.
Brian, if you wanted to gain further understanding you are probably already aware of the book by the NY Times business/financial writer Gretchen Morgenson titled Reckless Endangerment. But even beyond that in the August 2011 issue of the “Limbaugh Letter” Rush interviews Gretchen in a 5 page hard hitting interview. Rush is simply masterful with his questions and Gretchen pulls-no-punches in revealing the truth. Let me put it this way; Gretchen Morgenson is one brave lady to be walking around the streets of NYC. The people and deeds she further reveals in this interview point directly to the Democrat Party and their insanity. God bless Gretchen Morgenson.
Harry, we're just over two and a half years into the Obama Administration and I can't remember the last time I herd one of you liberals echoing “Hope and Change”……..I do continue to here the conservatives slogan of “Jimmy Carter 2” though.
http://www.financialsense.com/…
Harry,
Ricky Sandler discussed his short position in Verizon in a recent Value Investor Insight. Here are his comments:
“While we’re more focused on both the long and short sides on ideas in which we see investor perceptions changing in the near future, this is more of a long term secular-decline story. The problems on the wireline side are fairly well known. How many people do you know under the age of 30 who still have a home phone, rather than relying on their cellphones or free voice-over- Internet services? On top of that, the traditional DSL business is getting hammered by cable competition. Verizon’s fiber-optic FiOS service is meant to combat that, but it’s been extremely expensive to roll out and still isn’t available in many Verizon markets.
We’d also argue that the wireless side of the business, through 55%-owned Verizon Wireless, isn’t as exciting as people seem to think. The overall business is only growing in the mid-single digits, as declines in voice and text revenues – which still make up 63% of Verizon Wireless’ ARPU [average revenue per user] – partly offset the mid-teens growth in selling wireless-data services. As the massive new 4G networks from companies like Clearwire and LightSquared come online with $15-per-month wireless- data plans, there’s a good chance Verizon’s wireless ARPUs don’t develop the way people think.
Given all that, it’s hard for us to understand why Verizon is one of the highest multiple large-cap stocks out there, trading at 16x 2011 consensus EPS and 14x consensus 2012. In a large-cap environment where growth companies trade at 11x earnings, here’s a slow-growth company facing secular headwinds trading at a premium. With shorts in general, we’re less focused on a specific target price and more on tracking our thesis against new information coming out and what’s built into the stock. We’ll cover if it looks like we’re wrong or when it appears our negative thesis has become the consensus and there’s a lower multiple on lower earnings.
But to give you a sense of what we think the potential is here, we wouldn’t be shocked if earnings start to fall in 2013, rather than follow the orderly consensus of $2.20 per share in 2011, $2.60 in 2012 and $3 in 2013. So if Verizon earns, say, $2.40 in 2013, we could easily see a sub-10x multiple on that, resulting in a share price closer to $20. There are other potential negatives that we’re not explicitly building in. Now that Verizon Wireless has started to pay out 45% of its profits to minority partner Vodafone, there’s a real risk the Verizon parent – if we're right about looming earnings pressure – won’t be able to fund its current dividend, which would obviously alienate many investors. Labor issues are likely to be an ongoing problem in the wireline business, which will make it tough for them to cut costs as fast as they should as revenues decline. There’s also a big underfunded off-balance-sheet pension liability that nobody talks about. If we’re wrong and the headwinds aren’t as bad as we expect, we’re left with a low- to mid-single-digit growth company trading at 16-17x earnings. It’s hard for us to imagine in this market much upside from there.”