02:37 pm | 0 recommendations | Be the first to comment

The Buffet Put

Señor, señor, can you tell me where we're
headin'?
Lincoln County Road or Armageddon?
Seems like I been
down this way before.
Is there any truth in that, señor?

Bob Dylan -- Señor (Tales Of Yankee Power)

OK, so I am a huge fan of Bob Dylan's music. As a wise man once
told me, sometimes our vices, can in fact be a virtue. If Bob Dylan's
music is all I have going against me, then I think I'm doing pretty well....

Anyone with a red cent in this market is desperate to know where
we're heading. Up, down, sideways? Regardless, we have indeed been
down this road before, and so has Warren Buffet. If Mr. Buffet's
plans are not foiled by mass stupidity and avarice, he is about to
pull off a coup that should make every investor take a long hard look
at themselves. While bond insurers MBIA, AMBAC, and FGIC are headed
towards Armageddon, Warren Buffet is talking a leisurely walk
down Lincoln County Road. Making sure to enjoy his cherry Cokes, and
Sees candy.

Buffet's extension of 800 billion dollars of capital to
troubled bond insurers, MBIA, AMBAC, and FGIC is nothing short of
pure genius. Why? Because he is offering to get in on action where
there is enormous market stability, (muni bonds) and offers him the
prospect of putting huge amounts of cash onto his books. This is
classic Buffet investing. Find an undervalued asset, make an offer
that provides the stability of the Berkshire name, and Bond rating,
and pile up mountains of cash to invest in other ares. Notice
that Buffet's offer was stayed away from anything that was related to
CDOs. This is a brilliant move as the Municipal Bond market has an
unparalleled record for defaults; in a good way. The long term
traditional default rate for municipal bonds is .02 percent. (That
number may have edged a bit higher, but it's still very low.)
Governments do not want to default on their debt. Not only is it
considered bad form, but it is generally accepted as being worse than
losing the Super Bowl to Eli Manning. (See the 18-1 Patriots).

So what happens if these companies turn Buffet down? There is
already talk of government intervention. (See article here.)
Will munis begin to shy away from insuring their bonds? Or could
there be an exodus to Buffet's Berkshire Hathaway Assurance Corp.?
Either way the Muni market is beginning to take on a new shine.

Buffet's move sent the Markets on an upward motion, so it raises
another interesting question; how powerful is the Buffet put? Does
The Oracle of Omaha have more sway over the markets than Mr.
Bernanke, Team Fed, and the Central Bankers? Could there possibly be
any truth in that,Señor?

10:16 am | 0 recommendations | Be the first to comment

Hedge Funds

She says, "You can't repeat the past." I say, "You
can't? What do you mean, you can't? Of course you can." -- Bob
Dylan, Summer Days

Summer days, and summer nights are indeed long gone for the hedge
fund business. If you believe the experts, hedge funds still
outperformed the S&P 500 (article here),
but this is a dubious claim, as the S&P was in negative
territory, cumulatively, for all of January. New light is being shed
on this secret world, and we're beginning to see some serious cracks.

Of particular concern is the unwinding of the Sailfish hedge fund.
(Article here)
Markets move in circles, and cycles, and Sailfish looks to be the
headwind on a possible catastrophic unraveling of money that we've
not seen in our life times. If the numbers are correct, these funds
have 1.9 trillion dollars of money for use at their discretion. My
question is, what happens when redemptions are called, and these
funds are required, like Sailfish, to liquidate their portfolio to
cover an event that they know is going to occur?

I believe that market cycles, in a stable environment would be
able to absorb these losses, and move forward with some affect to the
overall economy. But with the meltdown in sub-prime, and the lack of
access to credit, we could be seeing a weird culmination of fear and
greed that would make 1987 look like a Sunday in the Park With
George. If more funds must liquidate their positions, this will drive
the market into a vortex of panic that will cause already sizable
losses, to become even larger.

On the note of sub-prime. Anyone who has any dog in this fight
should pick up Irwin Shaw's short story, "Second Mortgage."
It's a quick read, and a worthwhile read. Shaw, was a product of the
great depression, and this story is eerily similar to what we've seen
in the sub-prime market.

11:08 am | 0 recommendations | 2 comments

Yahoo and Microsoft

Anyone who has ever purchased a car
knows that you always reject the first offer. There is almost a sense
of disgust that the offer was even put on the table. But the bottom
line is that both parties know the outcome that they desire. This is
the sort of camel trading that is now playing out in Microsoft's bid
for Yahoo. The problem for Yahoo, is, they don't know what they want.

I am not a connoisseur of the search
industry. But from everything I've read, and or heard about Yahoo,
this is a company in disarray. (See this article
to get a sense about the company's current state.) If Yahoo could
isolate the areas of its business were they are great, and tops in
the industry, shutter new projects, reduce cost, and focus on their
customer's needs, they could delay Microsoft's bid long enough to
achieve their desired outcome. But they must articulate what it is
they want. (Has anyone heard a focused plan and strategy from any one
of their executive management?)

As of February 11th 20008,
it seems the only thing Yahoo is concerned about, is remaining an
independent company that stays out of the clutches of Microsoft. The
question remains, is this enough of a viable long term business strategy?