February 22, 2008

1) A new wrinkle has developed in the housing crisis. Loans have been sold so many times that banks are unable to foreclose because they can’t find the original loan documentation. This could affect up to 40% of the anticipated 1.5 million foreclosures in 2008. New businesses like youwalkaway.com have sprung up to help borrowers head off foreclosures by finding deficiencies in the?? disclosures in the original loan documentation. Some 19% of home mortgages in the US, or $2.1 trillion, have been securitized.

2) Another economic indicator: MGM Mirage says that middle market gamblers have been drying up because of the high price of gas to get to Las Vegas and economic worries. High end gambling and foreign gamblers continue strong, as is the management of foreign casinos like in Dubai. Yet another industry that sees all of its future growth in the overseas markets.

3) Here is another extreme anomaly in the market. Crocs, the maker of the world’s ugliest shoes, has seen earnings rise 147% in the past year. But the stock has fallen from $75 to $26 since June because investors are shunning all high end discretionary consumer stocks and is now at eight times next year’s earnings. Put it on your watch list.

4) Another one of these is Garmin, maker of navigational devices. Earnings are up 65% but the stock is down 50%. The company has spent $350 million on R & D in the last three years so there are many highly profitable products in the pipeline.

5) Merrill Lynch put out a report predicting that the residential real estate market will fall another 25% by the end of 2009. Freddie Mac, Fannie Mae, and the home builders got slammed.

6) Rumors of a bailout of mortgage insurer Ambac in the last 30 minutes of the day. The market rallied 250 points in 30 minutes.


With commodity prices as high as they are now, inflation will rocket when the economy comes out of the recession next year. The best way to play this is to short long bonds. If the 30 year goes from a 4% yield to an 8% yield, which they may do over the next three years, the underlying price of the bond will drop by half. Zero coupon bonds could drop by up to 80%. We are already seeing the beginnings of this trade now. Last June the yield curve was virtually flat with two year and 30 year paper yielding close to 5%. Now two year paper is at 1.9% with the 30 year at 4.4%. This curve steepening trade is now a major trade for hedge funds.