April 2008 – Page 4 – The Aleph Blog

Industry Ranks April 2008

Posted on 9 April 200810 April 2008 by David Merkel

Okay, here are my industry ranks for April 2008. Please remember that my model can be used in value mode (the green zone) or in momentum mode (the red zone). I usually just stick to the green zone, but this time I included a few red zone ideas. So, this time I added in technology companies, insurance, industrial and healthcare companies. Yeah, I know that’s a lot, and my results reflected that — usually I have just 20 or so companies from the screen, but this time it is 80+.

Oh, my screen, aside from industry, has only two factors: market cap greater than $100 million, and Price-to-book times Price-to-forward earnings must be less than 10. Ben Graham had a similar criterion, except that he used trailing P/E, and his cutoff was 22.5. Here are the tickers:

ABG ACGL ACMR ACW ADPI AEL AFFM AGYS AHL AIG AMSF ARM AWH AXS BBW BC BRLC BRNC CBR CHUX CLS CMOS CNA CVGI DK EDS ENH ENSG FFG FL FLEX FMR FRPT GPI HMX HOTT HTRN IKN INDM IPCR IRF KEM KG LAD LNY LTR MENT MIG MRH MRT MWA MXGL NCS NNBR NSIT NSTC NYM OCR ODP PCCC PDFS PKOH PLAB PMACA PNX PRE PSS PTP RE RMIX RNR ROCK RTEC SAF SAH SANM SEAB SMP SNX TECUA THG TRS TRW TRX UAM UNM XL XRIT

Lots of insurers — what can I say, the group is cheap… cheaper than the lack of pricing power should make them. Add in two more tickers that crossed my desk today: MRO and AWI, and I think I am ready to put my spreadsheet together and start analyzing promising cheap companies. One nice thing about my methods is that it can accommodate a large number of tickers. When you add up the tickers from yesterday and today, and add in the 32 existing tickers, that’s almost 300 tickers altogether.

Fortunately, my ranking system helps my winnow down the list pretty quickly, as it scores cheapness on a wide number of variables at once, and throws in many of the anomalies that are mispriced in the markets. Then it is up to me to use business judgment to decide what makes sense, because most cheap stocks are cheap for a reason, while the gems are merely overlooked.

Feel free to pitch in more stock ideas. I should come to decisions within a week or so.

PS — Have you checked out Newsflashr.com yet? It looks like a promising way of aggregating financial news, as well as other news.

The Financings of Last Resort

Posted on 9 April 2008 by David Merkel

After seeing the amazing “refinancings” done by entities like MBIA, Thornburg, WaMu, and Rescap, I felt it was right to comment on last-ditch financing methods, so that you can recognize desperation (if it’s not obvious already).? Here are some methods:

Borrow money using a healthy subsidiary while limiting capital flows up to the less than healthy holding company (e.g., MBIA) .
Do a rights offering at a significant discount, diluting existing shareholders if they don’t participate.
Offer common stock at a significant discount to a private buyer (perhaps with warrants), diluting existing shareholders, but perhaps allowing the company a chance to play again another day. (e.g. WaMu, Thornburg).
Offer a convertible bond/preferred to monetize the volatility of the stock price, contingently diluting existing shareholders. (e.g. Lehman, Citigroup, Merrill)

With the exception of the first one, all of these dilute existing shareholders, usually driving the stock price down in the short run, unless the removal of fear of bankruptcy is the dominant factor.? With the first one, it is an example of structurally subordinating lenders to the holding company, who now lose “first dibs” on the value of the healthy subsidiary.

I try to avoid companies that do financings like these, or are likely to do them.? They have a high default rate.? And what goes for the stock here, goes triple for the corporate bonds, where you have all of the downside of the stock, and little of the upside, if the company should manage to survive.

Beginning of the Second Quarter Portfolio Reshaping

Posted on 8 April 20088 April 2008 by David Merkel

Well, it’s that time again. Time to make a few portfolio swaps. At present I have two placeholder securities, the industrial Spider, and the technology Spider. Those will go, and I may sell one more security, but that’s it. I will use the proceeds to buy 2-4 positions, so that I will end with 34-35 positions.

When I run across an idea between quarters, I write it down on a sheet and wait for the next reshaping. Well, here is the list of tickers I came across over the last 3 months:

AAUK ACE ADI ADPT ADSK ALB ALL ALV AMAT AMGN AMH AN ANDS APD ARG ASH AW AZN BA BDK BGC BNI BRCD BTU CAG CB CC CCI CHRS CIU CLNE CNQ CONN CPB CRC CRI CSCO CSE CSX CTHR CVG CVI DEO DITC DKS DNR DRI EMC EQ ETFC ETP FMX FRX FSII FTD GDI GIII GT GTI GTS HAR HBOOY HCC HD HOC HTCH HTH HUM IBM INFS ISLN ITRN JBL JCI JCP JRT JTX KFS KMP KMX KOP KR KSS LAMR LDIS LM LOW LXK MAS MCHP MMP MNKD MSN MTA MTW MYE NII NSC NTGR NTT NUHC OMX ORCL OVTI OXY PARL PAYX PBR PCZ PERY PHH PMRY POM PTEN PVX PX QTM RAI RDC RDS RELL RES RHD RJF ROST RSC S SCSS SCX SHW SIRF SNDK SNY SPIL STX STZ SU SUN SUR SVU T TBAC TDW TGT TM TOT TRV TSN TSO TXN TXT TZOO UNP UPRT URBN VMW VOXX VZ WAG WC WDC WHR WIN WLP WNR WPC WTM XRX YUM ZURNY

One of the fun parts of this exercise is that I invite readers to submit their own ideas as well. Feel free to leave them in the comments below.

From here, I will update my industry model, run some screens, and post additional tickers. After that, I will compare the replacement candidates against my existing portfolio, using my multifactor appoach. I will keep you apprised of my thoughts as I move toward making the portfolio changes.

Full disclosure: long XLI XLK

Fourteen Notes on Monetary Policy

Posted on 8 April 2008 by David Merkel

This post is on current monetary policy. The review piece on how monetary policy works is yet to come.

1) Let’s start out with the regulatory issues to get them out of the way, beginning with Bear Stearns. To me, the most significant thing to come out of the “rescue” was the Federalizing of losses from the loans that were guaranteed by the Fed (something which I noted before had to be true, since the Fed turns over its profits to the Treasury), and the waiving of many leverage rules for the combined entity (also here and here). These in turn led to an attitude that if the Fed was going to lend to Bear (however indirectly), then they should be regulated by the Fed.

Now, I don’t blame the Fed for bailing out Bear, because they were “too interlinked to fail.” You could say, “Too big to fail,” but only if you measure big by the size of the derivatives book. The last thing that the investment banks needed was a worry on concentrated counterparty risk affecting the value of their derivative books.

That said, given that Jamie Dimon was very reluctant to help unless the Fed provided guarantees, and the low price paid, it indicates to me that Bear and the Fed were desperate to get a deal done. What was in it for Bear? I’m not sure, but the deal avoided greater ignominy for the board, and might preserve jobs at Bear for a longer period of time.

2) At a time like this, many cry for tighter regulation in the the intermediate-term and more aggressive actions in the short-term to restore liquidity. Forget that the two of these fight each other. Personally, I find the comments from the IMF amusing because they are an institution in search of a mission; the IMF was designed to help developing nations, not developed ones. The comments from the FDIC Chairwoman are good, but really, where were the banking regulators in 2005-2006, when something useful could have been done?

3) Does the Fed want to be a broader financial regulator? My initial guess would be “no,” but I could be wrong here. Part of my reasoning is that they have not used the powers effectively that they already have. Another part is that monetary policy has often been misused, and been pro-cyclical. With their new powers, they will still face significant noise and data lags. Why should they be more successful at a more complex task than they have been with the less complex task of monetary policy? Schiller is way too optimistic here. The central bankers are part of the problem here, not part of the solution. For years they provided too much liquidity in an effort to keep severe recessions from occurring, and in the process they removed fear from the financial system, and too much leverage and bad underwriting built up. Now the piper has to be paid.

4) Eric Rosengren, president of the Federal Reserve Bank of Boston, comments on the difficulties involved in effective regulation of financial institutions as a lender of last resort.? The Fed will have to build new models, and think in new paradigms.

5)? Charles Plosser, President of the Philadelphia Fed, tells us not to overestimate monetary policy.? Sage words, and rarely heard from the Fed (though in my experience, more often heard toward the end of a loosening cycle).? Plosser moves up a couple of notches in my view… monetary policy can deal with price inflation, and that’s about it.? Once we try to do more than that, the odds of making a mistake are significant.

6)? Who loses when the Fed loosens?? Savers.? They earn less; there is a net transfer of wealth from savers to borrowers.? Holders of US-dollar based fixed income assets also bear the brunt, if thy have to convert it back to their harder currency.

7)? Perhaps the TSLF is succeeding.

8 ) But perhaps all of the Fed’s efforts on the asset side are making it more difficult for Fed to keep the fed funds market stable.? I have one more graph that stems from my recent piece on the Fed:

Note that during the past six months, the low transaction on Fed funds was significantly below the effective rate.

9) VIX and More has latched onto this calculation of M3.? Given the changes and the adjustments that they have made, and the 20% or so rate of growth for M3, I would want to see a “spill” of the calculation to see what’s going on.? Perhaps there has been some double-counting.

Now, if we are talking about MZM (all monetary liabilities immediately redeemable at par) , we are facing high rates of growth — around 17% YOY.

My M3 proxy, total bank liabilities, is running ahead at a 13%+ rate.? Only the monetary base stays in the mud with barely 2% growth.? I still think that the Fed is trying to restrain inflation through no monetary base growth, while allowing the healthy banks to grow aggressively.? So much for supervision.

10)? Reading the H.4.1 report the past weeks have had the Fed lending more directly through their new programs, and selling Treasuries to keep the Fed’s balance sheet from growing.

11) I expect the minutes tomorrow to reveal little that is new; if anything, it will highlight the competing pressures that the Fed is trying to deal with.

12) For a view compatible with mine, read Bob Rodriguez of First Pacific Advisors.? One of my favorite equity managers, and he is doing well in the present environment.

13) The yield curve and Fed funds futures indicate another 25-50 basis points of easing in this cycle, at least, until the next institution blows up.

14) Finally, and just for fun — two guys I would nominate for the Federal Reserve Board — Ron Paul and James Grant.? Toss in Steven Hanke, and it starts to get interesting.

Broker Solvency as a Marketing Tool

Posted on 7 April 20087 April 2008 by David Merkel

I received this in the mail on Saturday:

ABC logo

March 31, 2008

Dear Investor,

I am writing to tell you that my firm is in very good financial condition. Normal market conditions would not require this correspondence. But I understand that many people are deeply concerned about the stability of their brokers at this time.

I have always tried to earn my clients? trust by running the firm conservatively, with clients? interests in mind. Today, 75% of the Company?s assets are in cash or cash equivalents and we have no debt. In addition, we have no investments in collateralized debt obligations or similar instruments. As a matter of policy, we do not carry positions or make markets.

Throughout the years, in making decisions about my business, I have always put the safety of my clients? assets first. This is one of the primary reasons my firm clears on a fully disclosed basis through DEF LLC (DEF), a GHI company. DEF clears our clients? trades and is in custody of their accounts. Their name appears with ours on monthly statements and confirmations. As of December 31, 2007, DEF had net capital in excess of $2.1 billion which exceeded its minimum net capital requirement by more than $1.9 billion.

In addition, when you do business at ABC, your account receives coverage from the Securities Investment Protection Corp. (SIPC) as primary protection for up to $500,000, including a limitation of $100,000 for cash. SIPC coverage is required of all registered broker-dealers. Since most ?cash equivalent? money market mutual funds are considered securities under SIPC, investments in money market mutual funds held in a brokerage account are protected by SIPC along with your other securities to a maximum of $500,000. Of course, there is no protection that will cover you for a decline in the market value of your securities. You may visit www.sipc.org to learn more about SIPC protection.

Furthermore, DEF has arranged for additional protection for cash and covered securities to supplement its SIPC coverage. This additional protection is provided under a surety bond issued by the Customer Asset Protection Company (CAPCO), a licensed Vermont insurer with an A+ financial strength rating from Standard and Poor?s. DEF?s excess-SIPC protection covers total account net equity for cash and securities in excess of the amounts covered by SIPC, for accounts of broker-dealers which clear through DEF. There is no specific dollar limit to the protection that CAPCO provides on customer accounts held at DEF. This provides ABC clients the highest level of account protection available in the brokerage industry to the total net equity with no limit for the amount of cash or securities. And, unlike many other brokers, there is no ?cap? on the aggregate amount of coverage for all of our customers? assets. You may access a CAPCO brochure about ?Total Net? Equity Protection? at ABC.com [deleted]?.

If you are concerned about the status of your assets at another brokerage firm, you might consider moving them to ABC. It is easy to transfer assets. If you have friends who are concerned about their brokers, you might consider referring them to us. We continue to offer free trades for asset transfer and referrals. If you have questions about anything in this letter, please feel free to call us at 800-xxx-xxxx from 7:30 a.m. –7:30 p.m. ET, Monday-Friday. Once again, thank you for your trust and your loyalty.

Sincerely,

President and Chief Executive Officer of ABC

I used to do business with ABC, and I presently do business with GHI. Both of them are good firms, doing business on a fair basis for their clients. To me, it is interesting to use financial strength as a marketing tool.

On another level, how many people actually check the solvency of their brokers before doing business with them? On a retail level very few, if any. On an institutional level, that’s a normal check for sophisticated investors.

That said, I would be surprised to see any major retail brokers go insolvent aside from those with significant investment banking exposure. Even there, accounts are segregated, and client cash typically has the option of being in a money market fund.

This is not something that I worry about in investing, but if I were worried about my broker, I would make sure that my liquid assets over $100,000 were in a non-commingled vehicle, most likely a money market fund.

What of Excess Insurance?

Now, I will add just one more note in closing. CAPCO is a nice idea, but I am always skeptical of small-ish insurers backing large liabilities with a remote possibility of incidence. There aren’t that many AAA reinsurers out there, and I am guessing that Berky is not one of them. Buffett does not like to reinsure financial risks, aside from municipal debt. That leaves the AAA financial guarantors — Ambac, MBIA, Assured Guaranty, and FSA (though I am open to a surprise here). I’m guessing it’s the first two, and not the last two. CAPCO is owned by many of the major brokers, but in a crisis, CAPCO has no recourse to its owners, but only to its reinsurers, should that coverage be triggered. The recent financial troubles have led S&P to place CAPCO on negative outlook, mainly because:

Standard & Poor’s assigns a negative outlook when we believe the probability of a downgrade within the next two years is at least 30%. The revised outlook reflects the challenging environment for broker/dealers and their parents. Deterioration in their credit quality and risk-management capabilities could affect CAPCO’s financial strength. In the past couple of months, Standard & Poor’s has revised the outlook on several of CAPCO’s members’ parents to negative. Also, the ratings on a couple of members are on CreditWatch with negative implications, which means there’s the potential for a more imminent downgrade. The capital of CAPCO’s members and–in some cases–their parents is an important resource for mitigating CAPCO’s potential payments for its excess SIPC (Securities Investors Protection Corp.) coverage.

It would be interesting to know for certain the underwriters and terms of CAPCO’s reinsurance. I’m not losing any sleep over it, though… there are bigger things to worry about, my personal broker is well-capitalized, and I have less than $100K at risk in cash, and that is in a money market fund. So long as accounts remain segregated, risks are small.

Uptight on Uptick

Posted on 5 April 20086 April 2008 by David Merkel

There have been many writing about the impact of the lack of an uptick rule in the present market.? In the past, before a player could sell short, the stock had to trade up from the last trade — an uptick.? This made it hard to short a stock too heavily, forcing the price down.

Well, maybe.? I still think shorting is a pretty tough business.? First, the long community is much larger than the short community.? Second, the longs can always move their positions to the cash account if they don’t like other players borrowing their shares.? (Move to the cash account, squeeze the shorts.? Wait.? You don’t want to lose the securities lending income?? Shame on you; you should put client interests first.)

The thing is the uptick rule is not the real problem.? The real problem is that shorts don’t have to get a positive locate at the time of the shorting; a mere indication from the broker enables the short for a few weeks, while search for loanable shares goes on. This is a computerized era.? There is no reason why there can’t be real-time data on loanable shares.

There is a second problem, and less so with stocks, than with other financial instruments that are borrowed.? There needs to be stricter rules/penalties on what happens when a party fails to deliver a security.? As it is, when the cost of failing to deliver is miniscule, it can really bollix up the markets.

The longs have adequate tools to fight the uptick rule; they don’t have adequate tools to help against naked shorting and failures to deliver.

Eleven Notes on our Cantankerous Credit Markets

Posted on 5 April 2008 by David Merkel

1) Note to small investors seeking income: when someone friendly from Wall Street shows up with an income vehicle, keep your hand on your wallet.? One of the oldest tricks in the game is to offer a high current yield, where the yield can get curtailed through early prepayment (typically in low interest rate environments), or some negative event that forces the security to change its form, such as when a stock price falls with reverse convertibles.? Wall Street only gives you a high yield when they possess an option that you have sold them that enables them to give you the short end of the stick when the markets get ugly.

2) When times get tough, the tough resort to legal action.? Financial Guarantee Insurance contracts are complicated, and the guarantors will do anything they can to wriggle off the hook, particularly when the losses will be stiff.

3)? The loss of confidence in financial guarantors has not changed the operations of many muni bond funds much.? With less trustworthy AAA paper around, many muni managers have decided that holding AA and single-A rated muni bonds isn’t so bad after all.? Less business for the surviving guarantors, it would seem.

4) Jefferson County, Alabama.? Too smart for their own good.?? So long as auction rate securities continued to reprice at low rates, they maintained low “fixed” funding costs from their swapped auction rate securities.? But when the auctions failed, the whole thing blew up.? There will probably be a restructuring here, and not a bankruptcy, but this is just another argument for simplicity in investment matters.? Complexity can hide significant problems.

5) Spreads were wide one week ago, even among European government bonds, and last week, as these two posts from Accrued Interest point out,? we had a significant rally in spread terms last week.? Now, credit can be whippy during times of stress, and there are often many false V-like bottoms, before the real bottom arrives.? Be selective in where you lend, and if the sharp rally persists for another few weeks, I would lighten up.? That said, an investor buying and holding would see spreads as attractive here.? When spreads are so far above actuarial default rates, it is usually a good time to buy.? I would not commit my full credit allocation here, but half of full at present.

6)? I don’t fear ratings changes, if that is the only thing going on, and there is no incremental credit degradation, or increased capital requirements.? But many investors don’t think that way, and have investment guidelines that can force sales off of downgrades that are severe enough.? Personally, I think Fitch is best served being as accurate as possible here; they don’t have as large of a base to defend, as do S&P and Moody’s.? So, if downgrades are warranted, do them, and then make the other rating agencies justify their views.

7) I have not been a fan of the ABX indices, and I thought it was good that an ABX index for auto ABS did not come into existence.

8) So what is a auction rate security worth if it is failing?? Par?? I guess it depends on how high the coupon can rise, and the debtor’s ability to pay.? It was quite a statement when UBS began reducing the prices on some auction rate securities.? Personally, I think they did the right thing, but I understand why many were angry.? A complex pseudo-cash security is not the same thing as owning short-term high-quality debt.

9) Then again, there are difficulties for the issuers as well, particularly in student loans.? Not only are costs increased, but it is hard to get new deals done.

10)? GM just can’t seem to shake Delphi.? In an environment like this, where liquidity is scarce, marginal deals blow apart with ease, and even good deals have a difficult time getting done.

11)? Regular readers know that I am not a fan of most complex risk control models that rely on market prices as inputs. My view is that risk managers should examine the likely cash flows from an asset, together with the likelihood of the payoff happening.? With respect to bank risk models, they were too credulous about benefits of diversification, as well as what happens when everyone uses the same model.? Good businessmen of all stripes focus on not losing money on any transaction; every transaction should stand on its own, with diversification as an enhancer in the process.

Dropping Subscriptions

Posted on 5 April 200822 June 2017 by David Merkel

When I was younger, twenty years younger, I subscribed to the WSJ, Forbes and Barrons.? Though I am retaining my subscription to the WSJ (my wife wants it for one of my older sons), I am letting my subscriptions to Forbes and Barrons lapse.? What good that they do, I can get online.? (I will probably keep my Barrons Online, but dump WSJ Online.)

I just don’t get enough from Forbes to justify reading it anymore.? Their lists are a convenient way to fill space, and the advertising to articles ratio is high.? I like Barron’s, but I can read it online.? As for the Wall Street Journal Online, it may already be free.

I learned a lot from all of these publications when I was younger, but time is shorter now, and I get more information from online sources at present.

Shelter Fallout

Posted on 4 April 2008 by David Merkel

Though sometimes I do posts that are a melange of different items that have caught my attention, I do try when possible to gang them up under a common theme.I try not to do “linkfests” because I want my readers to get a little bit of interpretation from me, which they can then consider whether I know what I’m talking about or not. Anyway, tonight’s topic is housing. I didn’t get to my monetary policy 101 post this week — maybe next week. I do have three posts coming on Fed policy, credit markets, and international politics/economics. (As time permits, and ugh, I have to get my taxes done…. 🙁 )

1) The big question is how much further will housing prices fall, and when will the turn come. My guess is 2010 for the bottom, and a further compression of prices of 15% on average. Now there are views more pessimistic than that, but I can’t imagine that a 50% decline from the peak would not result in a depression-type scenario. (In that article, the UCLA projections are largely consistent with my views.) It is possible that we could overshoot to the downside. Markets do overshoot. At some level though, foreigners will find US housing attractive as vacation/flight homes. After all, with the declining dollar, it is even cheaper to them. Businesses will buy up homes as rentals, only to sell them late, during the next boom.
2) But, the reconciliation process goes on, and with it, losses have to go somewhere. In some cases, the banks in foreclosure refuse to take the title. Wow, I guess the municipality auctions it off in that case, but I could be wrong. Or, they let the non-paying borrowers stay. I guess the banks do triage, and decide what offers the most value to act on first, given constraints in the courts, and constraints in their own resources. Then again, developers can reconcile the prices of the land that they speculated on to acquire. In this case, cash is king, and the servant is the one that needs cash. I just wonder what it implies for the major homebuilders, with their incredible shrinking book values. Forget the minor homebuilders… Can one be worse off? Supposedly my father-in-law’s father lost it all in the great depression because he was doing home equity lending. There are wipeouts happening there today as well. Add in the articles about unused HELOC capacity getting terminated (happened to two friends of mine recently), and you can see how second-lien lending is shrinking at just the point that many would want it.

3) The reconciliation process goes on in other ways also. Consider PennyMac, as they look to acquire mortgage loans cheaply, restructure, and service them. Or, consider Fannie and Freddie, who are likely to raise more capital, and expand their market share (assuming guarantees don’t get the better of them). Or, consider the Fed, which has tilted the playing field against savers, and in favor of borrowers, particularly those with adjustable rate loans. No guarantee that the Fed can control LIBOR, though…

4) The reconciliation process steamrollers on. We’ve seen Bear Stearns get flattened trying to pick up one more nickel, and maybe Countrywide will get bought by Bank of America, but you also have banks with relatively large mortgage-lending platforms up for sale as well, like National City. Keycorp might bite, but I’ve seen Fifth Third rumors as well. Then there is UBS writing down their Alt-A book, along with a lot of other things.

5) A moment of silence for Triad Guaranty. A friend of mine said that they were the worst underwriter of the mortgage insurers. Seems that way now. Another friend of mine suggested that MGIC would survive off of their current capital raise. They stand a better chance than the others, but who can really tell, particularly if housing prices drop another 15%.

6) Beyond that, the financial guarantors have their problems. FGIC goes to junk at S&P. MBIA goes to AA at the operating companies, and single-A at the holding company at Fitch. I personally think that both MBIA and Ambac will get downgraded to AA by S&P and Moody’s. I also think that the market will live with it and not panic over it. That said, BHAC (Berky), Assured Guaranty, and FSA (Dexia) will get to write the new business, while the others are in semi-runoff.

7) Now for the cheap stuff. Amazing to see vacancy rates on office space in San Diego rising. I think it is a harbinger for the rest of the US.

8 ) Buy the home, take the copper, abandon the home, make a profit. Or, just steal the copper.

9) Bill Gross. A great bond manager, but overrated as a policy wonk. Many would like to see home prices rise, but others would like to buy a home at the right price. How do we justify discriminating against those who would like to buy a cheap house?

10) “The prudent will have to pay for the profligate.”? Well, yeah, that is much of life, in the short run.? In the long run, the prudent do better, absent aggressive socialism.? The habits of each lead to their rewards, and the ants eventually triumph over the grasshoppers.

Why I Don’t Think the Troubles in Financials are Over Yet

Posted on 4 April 20084 April 2008 by David Merkel

When I was a investment grade corporate bond manager back in 2002, there were three “false starts” before the recovery began in earnest. The market started rallies in December 2001, August 2002, and October 2002. I remember them vividly, and I behaved like the estimable Doug Kass during that period, buying the dips, and selling the rips.

In this bear market for the financials, we are only through the first leg down. Here is what remains to be reconciled:

Residential housing prices are still too high by 10-20% across the US on average.
The same is true of much of commercial real estate.
The mortgage insurers have not failed yet. Triad Guaranty is close, but at least two of them need to fail.
There is still too much implicit leverage within the derivative books of the investment banks.
Too many credit hedge funds and mortgage REITs are left standing.

I have tried to avoid being a pest on issues like these, but the overage of leverage has not been squeezed out yet.