Alan Brochstein

http://www.analystforhire.com

224 Comments

    • Forget the Moral Outrage: Just Restore the Mortgage Markets [view article]
      Dude, you need to cover your shorts and get a bit more balanced view. Where were you a year ago? It is NOT 1929, sorry. Sep 07 10:35 PM
    • Forget the Moral Outrage: Just Restore the Mortgage Markets [view article]
      Treasuries aren't getting hammered (and stocks aren't flying) because this is bad - quite the opposite. Treasuries are down because they represent flight to quality. If you want a clue on how this is received, watch the SPREAD between agency debt (what has been saved) and Treasuries. Only a moron would own a Treasury instead of an Agency now.

      By the way, here is something I posted in response to another string of comments:

      This plan is good in terms of accomplishing the objectives of stabilizing the market and buying time to get out of this mess (and time will fix this mess).

      For those of you who can't read apparently, the government hasn't assumed the debt. In fact, it has capped its exposure at what I believe is WAY above a level necessary to sustain the GSEs. As I wrote on Seeking Alpha, the bailout of FNM and FRE is how this bear market was going to end (yes, I was calling it a bear market over a year ago). For those of you who like to invest with mirrors, go ahead and try to find some big negative here. You will be able to sell your stocks higher tomorrow, at least on the open, as a MAJOR overhang on the market is being lifted.

      As far as the value of FNM and FRE goes, one can never tell where a stock will trade when such a cataclysmic event occurs. The dilution was greater than I expected, and the mandated asset reductions (which will take until 2020 to accomplish) greatly diminish the value of the stock. My initial calculations (and this assumes that the warrants have an exercise price of 1-3) is that the stock is worth about $9 or $10 a share in 2013. If one discounts it back at 16% per year, that works out to about $4 per share. Can it trade at 1? I hope so - I am a buyer. Can it trade at 8? I hope so, I am a seller.

      Keep in mind that the equity wasn't wiped out for a lot of reasons, not the least of which is that the government could make an absolute fortune on this deal. Politically, it will look very bad if the stock surges - the massive dilution pretty much limits that possibility. The government has to "sound" as punitive as possible (and they were punitive). So, my best guess is that the range tomorrow is 3-6, while the rest of the market soars incredibly and justifiably.       Sep 07 08:01 PM
    • A First Look Inside the Fannie / Freddie Bailout Plan [view article]
      A few (very few) bright comments here - Old Turk, I am with you. You can read my article that was published this morning ("Forget the Moral Outrage....".

      This plan is good in terms of accomplishing the objectives of stabilizing the market and buying time to get out of this mess (and time will fix this mess).

      For those of you who can't read apparently, the government hasn't assumed the debt. In fact, it has capped its exposure at what I believe is WAY above a level necessary to sustain the GSEs. As I wrote on Seeking Alpha, the bailout of FNM and FRE is how this bear market was going to end (yes, I was calling it a bear market over a year ago). For those of you who like to invest with mirrors, go ahead and try to find some big negative here. You will be able to sell your stocks higher tomorrow, at least on the open, as a MAJOR overhang on the market is being lifted.

      As far as the value of FNM and FRE goes, one can never tell where a stock will trade when such a cataclysmic event occurs. The dilution was greater than I expected, and the mandated asset reductions (which will take until 2020 to accomplish) greatly diminish the value of the stock. My initial calculations (and this assumes that the warrants have an exercise price of 1-3) is that the stock is worth about $9 or $10 a share in 2013. If one discounts it back at 16% per year, that works out to about $4 per share. Can it trade at 1? I hope so - I am a buyer. Can it trade at 8? I hope so, I am a seller.

      Keep in mind that the equity wasn't wiped out for a lot of reasons, not the least of which is that the government could make an absolute fortune on this deal. Politically, it will look very bad if the stock surges - the massive dilution pretty much limits that possibility. The government has to "sound" as punitive as possible (and they were punitive). So, my best guess is that the range tomorrow is 3-6, while the rest of the market soars incredibly and justifiably.       Sep 07 07:57 PM
    • Forget the Moral Outrage: Just Restore the Mortgage Markets [view article]
      I am one who believes in minimal taxes and actually hate the idea that a tax break is a "subsidy". Our system is so convoluted that a whole industry exists just to help people manage (or exploit) it. The actual point I am trying to make is that the government has long decided to incentivize home ownership by allowing borrowers to deduct mortgage interest. In the case of landlords, interest expense is a legitimate operating expense. As they pay taxes only on the profits of their business, this makes sense. If they weren't allowed to deduct those payments, it would be double-taxation. I probably shouldn't have stated it as I did, but a renter doesn't get to deduct rental payments while a homeowner does. Sep 07 06:00 PM
    • Forget the Moral Outrage: Just Restore the Mortgage Markets [view article]
      I like the plan, though it does essentially wipe out the shareholders if my calculations are correct. I have looked at what the total earnings power of a shrinking FNM/FRE will be 5 years from now and incorporated the dilution. Of course, a lot of assumptions go into this, but the combination of lower assets and lower equity ownership implies very little for common shareholders. Preferred stock may very well be worth par (25) in 5 years. It was trading at 14 or so recently, and I expect that initially it will trade as low as 10, but then recover over time.

      This plan is likely to ultimately not cost the government anything. They will get paid handsomely on their investments and won't lose a penny before the Preferred gets wiped out. It certainly, if it works, will cost less than status quo and then a later bail-out. The key to watch is the borrowing costs of the GSEs tomorrow. If the spreads don't come in, we have a big problem.       Sep 07 05:33 PM
    • Forget the Moral Outrage: Just Restore the Mortgage Markets [view article]
      Thank you for your kind words Woodsey and BerkeleyBob. As far as the Chrysler bail-out analogy, which I made in August 2007, I stand by it. I was a teenager back then. I do recall a lot of people vociferously against it, but, yes, it did work out. As I stated in a comment before, I am libertarian and don't like to see government intervention UNLESS IT IS NECESSARY. In this case, many don't seem to understand a couple of issues. First, government is ALREADY involved, whether directly through the GSE charade or through the mortgage interest tax deduction or the capital gains tax exemption from 1995 (which was the official start of the housing bubble, by the way). Second, unfortunately, the free market didn't get us into this situation, and it won't get us out without risking financial catastrophe. To "joe six-pack", ultimately that means you lose your job. Avoiding a Great Depression is what we are talking about ultimately. I don't see how one's party affiliation matters here - the Republicans and Democrats had their elbows in the cookie jars together. The "implicit guaranty" worked forever, until it didn't any longer. IT WAS ALWAYS A CHARADE. The time to fix it was years ago, not this year, this month, or this week. But, it wasn't fixed. We have a big mess, but this isn't news. For investors, as I alluded in my article, this is how the disaster ends. I hope and pray that the solution, which is now officially unveiled, restores confidence in our mortgage market, our financial markets and in our economy. Sep 07 03:51 PM
    • Forget the Moral Outrage: Just Restore the Mortgage Markets [view article]
      Steve, I understand your sentiment. The reason the GSEs are insolvent right now is that they are unable to borrow at rates that make economic sense despite the government having attempted to convince lenders that it would stand behind the obligations. The future losses are unknown. My guess is that they won't be as bad as expected, as I believe that the benchmark securities that analysts use to "mark to market" are overly pessimistic due to the relatively few ways investors can hedge exposure to mortgage losses. As a taxpayer who would like to see this charade fix as least costly as possible, I continue to believe that the current proposal, as I read between the lines, makes the most sense: government investment takes a priority over equities and preferreds. In my view, the government should be providing debt and getting some upside in exchange for doing so. If this is the case, it is a constructive and likely low-cost solution. Further, the government will apparently be investing directly in mortgage-backed securities, another step that will help restore the mortgage market. Sep 07 09:09 AM
    • Forget the Moral Outrage: Just Restore the Mortgage Markets [view article]
      Pelican, I am more of an investor than a political theorist, but I can assure you that no matter what the plan is it will have to have the appearances of being "punitive" for shareholders, especially given the desire by everyone to keep this out of the political debate in coming months. The stocks are priced for punitive, the only question is how punitive the plan will be. Politically, it is a very sensitive issue, as having a recovering common stock over time could prove to be the best and least costly exit strategy for this government intervention.

      I am libertarian to my core - it is the framework I use to address all government/citizen interaction. I also despise hypocrisy. So, I struggle with resolving this issue. We can debate whether or not government should EVER have intervened in the mortgage market 70 years ago and increasingly over time, but the fact is that they are involved. If we want to make it to the point where we can debate the optimal involvement in the future, we have to make it to the future. Quickly restoring the mortgage markets, which this plan will attempt to do, is of vital national importance. The failure to do so will lead to a further collapse in home prices.       Sep 07 08:11 AM
    • Forget the Moral Outrage: Just Restore the Mortgage Markets [view article]
      I was actually referring to the comments of SigmaCom Sep 07 08:03 AM
    • Forget the Moral Outrage: Just Restore the Mortgage Markets [view article]
      User 257229, you make an excellent point, but I am afraid that many who read your words won't understand where the greed was. It was all through society. We must ask ourselves how the root cause of this problem, easy money, came to be. Why were standards relaxed? Who was on watch when Fed Funds were kept so low for so long after 9/11 (that would be Alan Greenspan). FNM and FRE executives were culpable as well, as they have to plead stupidity as a defense. Did they honestly think that they could employ as much leverage as they did and always have access to capital? I don't believe that they were any different than the folks at LTCM or any number of other leveraged companies that have blown up - they believed their sheet didn't smell.

      The greediest of all, though, were the Democrats and Republicans. The status quo, which is what keeps them in power, was nothing but helped by the easy money policies. The regulators for which they were responsible failed. People who actually knew the GSEs were always aware of the chink in the armor, but it was always a game of confidence in how and when the government would honor its commitment. I believe it is disgraceful to end this charade by trying to accuse FNM and FRE for causing the problem. The government should be honest in assessing its own culpability.       Sep 07 08:02 AM
    • Freddie/Fannie Plans In Motion; Why Are They Being Underplayed? [view article]
      While the details haven't fully emerged yet, this "bail-out" will avoid placing the debt onto the Federal balance sheet I believe. I think the right analogy is that the Federal Government is going to be a minority owner with a strong board presence!

      As far as "the federal government now has a vested interest in house prices", they did before as well...       Sep 06 10:49 AM
    • Freddie/Fannie Plans In Motion; Why Are They Being Underplayed? [view article]
      I find the whole moral argument amusing. Let's get something straight - FNM and FRE were a pure off-balance sheet arrangement of our government. They served to keep borrowing rates for mortgages lower than they would be in a free market by minimizing the risk of credit loss to any lender (without bloating the federal debt). In the old days, banks made mortgages and held them as investments. In modern history, banks collected a fee for originating loans that conformed to GSE guidelines and sold the securities to mutual funds/bond investors.

      Now, when the 100-year storm hits, everyone wants to criticize the system? No one complained about the lower mortgage rates that they have paid (due to GSE "guarantees"... Now, we must discuss what an "implicit guarantee" means as opposed to "explicit". I don't understand the moral outrage against common equity holders. I disagree that an investment in FNM or FRE at the current prices is a "lottery ticket" any more than any other equity investment. It is solely a bet that the charade continues. Shareholders have been hammered, as the core weakness of the company has come to center-stage: The company requires external capital.

      Well, the cost of external capital has gone way up. The government, as part of the CAUSE of this problem in many ways (encouraging relaxation of underwriting standards to promote more widespread home ownership leads the list, poor supervision), should TEMPORARILY provide the bridge capital. Of course, they should reform the GSEs too. Of course, common and preferred holders should get no dividends until the bridge funding is repaid (i.e. external capital becomes feasible again).

      To me, the greater moral issue is this: The government may be about to destroy the entire concept of the GSE. While many may not care and may question the entire premise, I believe that a partnership between outside market-oriented firms and government can be superior to simply a bureaucratic government solution. Imagine if our post office had a free-market element to it, though still providing universal delivery. If the equity holders aren't allowed the potential to participate in the eventual recovery of FNM (i.e. shoulder the full blame for this FAILURE), then we will never be able to move forward on privatizing aspects of our government that have social-good elements. The GSE approach to making the mortgage market more efficient and less costly worked well. The only flaw was that FNM and FRE were allowed to leverage themselves too greatly.

      Kedrosky and the critics are mad, justifiably, as I am too. Unfortunately, few of them express constructive ways to resolve the situation. Our mortgage market is in disarray. No one seems to mind the deduction of mortgage interest or the capital gains exemption on mortgages. For anyone that really wants a "free market" in solutions and to kill the GSEs, I suggest that you tell your congressman that you are willing to give up your interest expense deduction and your capital gains break to do so. Otherwise, you are just a hypocrite.       Sep 06 09:25 AM
    • A Perfect Storm: Retail Is a Buy [view article]
      I appreciate the compliment, as at 43 I don't often get called "young". I also appreciate not only yours but also the many other accusations of insanity, as it helps me to get a feel for the psychological state of the market. Sep 02 08:19 PM
    • A Perfect Storm: Retail Is a Buy [view article]
      Thanks 300mph. secmaven, TLB price action may be confusing, but often (usually) stocks bottom before the news gets better. Just because it got a good reaction to a crappy report doesn't prove the worst is behind them, but someone with some bucks thinks so. I have a client that has had a position there - deep value. Their thesis is that the depressed margins can expand dramatically when the economy recovers. Of course, they were early on the stock, but I think it looks ok. The stock trades at 1.8X book value, having bottomed (for now) at about 1X. I would note, though, that there are significant intangibles. Additionally, the company has a lot of debt in my view. It's certainly not the one I would buy, but I can see how folks got excited by the plunge in inventories. Maybe they will get those margins back into the historical range... Sep 02 12:58 PM
    • A Perfect Storm: Retail Is a Buy [view article]
      I am not sure what you are talking about. I wasn't saying that the economy isn't absolutely in the dumps now, as it is (though you are somewhat correct about Houston but not for the right reason). The argument is really about the valuation of stocks, investor expectations, consumer sentiment, the potential impact of falling gasoline prices and the removal of inflationary pressures. Sep 02 09:10 AM
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