I'm Back . . .

sort of. My house still has no power but I scored a small generator yesterday. Enough juice to have heat and hot water. And my cell reception is better today, so I can do minimal surfing from home. Doubt I will do much before I get full power and internet service back, but I will do what I can. So why the big power outage? In a word - ice. Don't take my word for it, check out the photos.

http://www.unionleader.com/uploads/media-items/slideshows/IceStormDay2121308/index.html

Some of these are of work crews, but I drove around a lot this weekend trying to get a generator and did not see a single work crew, not a one. Probably explains why I am one of the 168,000 still without power.

Trimming the Hedges

Solidly in the long overdue category, it seems that a number of hedge funds are about to go belly-up or merge. Hardly a surprise. Mounting redemptions are daily news. Moreover, the whole hedge fund model always seemed a bit questionable to me. Let's see, I will pay you a 1-2% fee and "if" you use of massive leverage on my money and happen to make me money, you will take 20% of it.

Okay folks, a monkey picking stocks with darts and the WSJ pinned to the wall can make lots of money with massive leverage in good times - and you can pay him with bananas. Moreover some of these funds did little more than pass the money on to money managers, who did all the work, yet the funds still collected their fees. Not all of them, mind you, picked the right manager. Those that picked Madoff are going to be dealing with some very unhappy - and perhaps litigious - clients.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a4DPPfKKvPsM&refer=home

Of course, the problem with leverage is that it magnifies things in both directions. And it takes more expertise to make money on the way down. Admittedly, a few funds have done nicely in both directions, but only a few. The fact that only a few of these bozos were smart enough to see this mess coming and make money on the way down is telling. And if you are going to pay ridiculous fees, you would think it would come with the benefit of someone smart enough to see this coming. Oh well, a fool and his money are soon departed.

http://www.bloomberg.com/apps/news?pid=20601087&sid=agmxqxRJfrCI&refer=home

Been There Said That

I have talked a good bit about the pain coming to Asia because that decoupling thingy ain't what it's cracked up to be. Well, here is a good Financial Times article on it that lays it out nicely from a macro economic level. The author is a professor of finance at Peking University, so he is in a position to know what is happening in Asia. He is anticipating something akin to what the U.S. went through in the Great Depression because Asia, and especially China, are now in the role that the U.S. was fulfilling in 1929, i.e. running a large trade surplus as exporter of first resort. The one word in this article that worries me the most is "destabilising." You don't want a destabilised Asia by any means.

The flip side of this coin is that the U.S. is in the opposite role to the one it had in the Great Depression. Throwing money at the problem and trying to spend our way out of it is not going to work. As the author of the attached article notes, replacing debt-laden consumers in the U.S. with a debt-laden government in the U.S. is not the answer, though it is what we are trying to do. The answer is to start living within our means, pay down debt and increase savings. But as my daughter would say, "that's no fun daddy." It rarely is fun the morning after the party.

China does need to throw money at the situation and increase domestic demand, but as the article notes there is a very real limit to what it can achieve. In short, Asia, and China in particular, are in for some very tough years ahead.

Lest some China bashers out there take some hidden pleasure in China's pain, keep in mind that the decoupling thingy turned out to be wrong and coupling is a two way street. We too will fill China's pain.

I will be traveling to China in a few months and I will post then on what I see. I was there four years ago and it was booming. I suspect next time will be a bit different.

http://www.ft.com/cms/s/0/9f5cfb76-ca0b-11dd-93e5-000077b07658.html

For some discussion on why the U.S. throwing money at the situation not necessarily being the best medicine, you might check this out.

http://economistsview.typepad.com/economistsview/2008/12/fed-watch-what.html

The author still seems to be on the fence a bit. Note his caution about the possibility that the bottom is going to fall out on the dollar and Treasuries. That is a very real possibility and not a very pretty one at that.

Detroit Gets No Respect

The next couple of pieces discuss a valid point; Detroit gets no respect. Now I am not saying Detroit deserves a lot of respect, but certainly more than the shadow banking system that is largely to blame for our economic mess. Nonetheless, the big banks get hundreds of billions almost literally thrown at them - even those that did not ask for it - while the Big 3 is on life support with no help yet in sight. I am fairly sure that the Big 3 at this point, at least GM and Chrysler anyway, would agree to some rather onerous terms and conditions, unlike the financial firms that got the money free of conditions, yet they get no money and no respect. If they fail, those that held up the aid will learn quickly how much respect they should have gotten as the knock-on effects will be significant.

http://www.nytimes.com/2008/12/15/opinion/15kristol.html?_r=1&ref=opinion

http://www.portfolio.com/views/blogs/market-movers/2008/12/15/detroit-bailout-no-news-is-bad-news?tid=true

I have talked some on the prospect of the government providing debtor in possession financing for a Chapter 11 bankruptcy for GM. Yves has a nice discussion on some of the pros and cons of same. She is particularly worried that a bankruptcy could drive away customers. Who knows for sure, but it is certainly worth some research, as she suggests. One con she fails to discuss is the impact a bankruptcy would have in the credit default swap world, which is another aspect that is hard to define with much precision.

http://www.nakedcapitalism.com/2008/12/is-gm-bankruptcy-inevitable.html

Unemployment Rising - Unemployment Benefits Running Out

Not a good combination for state funds that pay unemployment benefits to be running out of money just as unemployment rates are really picking up steam. There will be worse ahead. The states can get a loan from the federal government, but then they have that obligation on the books, which will further delay any state level recovery when the economy turns. Or they could do the highly popular tax increase to those businesses that have managed to hold on so far, but that might add to the unemployment woes in the long run. Not good any way you look at it.

http://www.nakedcapitalism.com/2008/12/states-running-out-of-unemployment.html

Gonna Get Worse Before It Gets Better

Said it before and I will say it again. We need to reach a bottom in housing before we have any hope of turning the corner. Unfortunately, there seems to be no bottom in sight. Indeed, with mounting foreclosures, things are going to get a good bit worse before they get better. I suspect the worst of the subprime is behind us, but Alt-A and prime lie ahead. A lot of Alt-A is in the adjustable rate category and a lot of ARMs are resetting now and next year. Many of these are tied to LIBOR, which means they will reset higher. Especially on option ARMs where some fools chose to pay interest only or other forms of minimum payment. Watch out below! Fitch is now revising its forecast on Alt-A and expects things to be much worse than they previously thought.

http://www.housingwire.com/2008/12/15/fitch-alt-a-mortgages-deteriorating-more-rapidly-than-expected/

Becoming Bearish

Obviously I am not talking about myself. You know I am bearish and have been for quite some time. No, I am talking about how some people not previously in the bear category are beginning to reconsider their positions. Sooner or later, folks are going to wake up and smell the coffee and this coffee is a bit on the bitter side. The following post from Seeking Alpha is from a recent convert to the dark side. Mind you, I do not relish in being bearish, but I prefer to say it the way I see it and right now that is bearish. I agree with this guy's rather dismal forecast, for what it's worth.

http://seekingalpha.com/article/110670-we-can-t-spend-and-save-our-way-out-of-this-recession

Disclosures: None