Canadian Housing Bubble?

Tuesday, February 9th, 2010

Tags: Bank Lenders, Barry Ritholtz, Borrowers, Canada, Canada 2, Cleveland Fed, Hodge Podge, Housing Bubble, Housing Market, Insurance Mortgage, Investment Houses, Ltv Ratio, Mortgage Debt, Mortgage Insurance, oil, Pmi, Recourse, S Market, State Regulators, Subprime Market, Subprime Mortgages, Wsj
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John Paulson’s Big New Bet on Gold

Friday, November 20th, 2009

Gold is getting a great deal of sponsorship, in general, but it is even more notable, when some of that sponsorship is coming from the likes of this era’s new contrarians. John Paulson, who personally made $4-billion betting against subprime mortgages in 2007, has shifted his focus to gold during the last 9 months, and now he is ramping it up yet another notch. On another note we’ve also covered in the recent past, David Einhorn’s now well-known accumulation of gold bullion, as well as S&P500 Puts.

Yesterday’s Wall Street Journal discusses Paulson’s latest plans:

John Paulson, who scored about $20 billion of profits between 2007 and early 2009 wagering against the housing market and financial companies, is launching a hedge fund dedicated to buying up shares of gold miners and other bullion-related investments, according to investors.

He is starting a new fund with his own money:

Mr. Paulson told his investors he personally would invest between $200 million and $250 million in the new fund, which he said will begin on Jan. 1, according to an investor at the meeting.

His theory on gold differs, in that Paulson seems to have recognized quite rapidly that central banks’ appetite has shifted in favour of the shiny stuff, and that their appetite is not strictly based on concerns of inflation. If you read between the lines, Paulson is suggesting that will be the gravy (when it indeed happens), and the real impetus is the constrained supply:

He noted that central banks around the globe have gone from sellers of gold to buyers, and that the global supply of gold is constrained.

While harmful inflation isn’t on the horizon, he said, Mr. Paulson argued that there is a risk of a burst of inflation down the road. That’s because in the past there’s been a lag between a surge in money supply and higher inflation. Gold often does well when inflation rises.

Mr. Paulson told investors that the Federal Reserve will prove reluctant to raise interest rates, given the weakness in the economy, which also could pave the way for higher inflation, at least at some point, another reason for his growing conviction about gold.

This is an interesting development for the stocks of gold producers. At the very least Paulson and other investors who are devoted to this theme will add key support to the market’s appetite for gold equities and bullion.

John Paulson Making Big New Bet on Gold

Tags: 9 Months, Central Banks, Contrarians, David Einhorn, Global Supply, Gold, Gold Bullion, Gold Gold, Gold Miners, Gravy, Hedge Fund, Housing Market, Impetus, inflation, John Paulson, Money Supply, New Bet, P500, Shiny Stuff, Subprime Mortgages, Wall Street Journal, Wea
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Mortgage Resets: Have We Been in The Eye of the Hurricane?

Monday, September 28th, 2009

We originally published the main body of this story in mid-June this year, and are reprising it now as the chart below from Credit Suisse’s chart is making the rounds again, given there is talk that the monetary authorities are considering halting quantitative easing operations (i.e. printing money). We may have gotten through the last 6 months, thanks largely to the Fed’s QE induced liquidity, which fuelled a very strong rally off the March lows. The question is, “Has it worked?”

The equity market seems to indicate “yes,” and now it remains to be seen in the next two quarters if it has indeed worked.

The passing of a hurricane is quite an event, and a strong one can wreak havoc. In the eye of a hurricane, there is an eerie calm, and quiet, and the sun often shines brightly. The bigger the hurricane, the bigger the eye. This is then usually followed by a secondary lashing as the back end of the hurricane passes. Is this what’s in store for the mortgage and credit market over the next 2 years as the banking system faces its next round of resets?

Have the banks hoarded cash for this reason? Is it enough?

According to statistics provided by Credit Suisse, we are in the midst of a mortgage-paper-resets lull (the space between the two humps), as seen by the chart below. Doug Short (dshort.com) has kindly added the S&P500 chart to the one produced by CS. In a nutshell, banks (and the credit market) have gotten a much needed break from the enormous pressure of having to ensure that the liquid assets are available for the re-financings that are in the works.

Given the size of the Option-ARM (Adjustable Rate Mortgages) portion of the scheduled resets, there is much cause for concern, especially for the banking sector, and the credit market in general. This picture of the mortgage reset histogram is reminiscent of the passing of a hurricane. The tail end of the hurricane this time includes not only the Option ARMs but also the Alt-A (better than subprime) mortgages.

The S&P 500 is up nearly 36% from its bear market low on March 9th. Sentiment is somewhat less negative on several fronts. Credit crisis indicators, the ADP employment report, bank stress test leaks, and the market rally itself have all encouraged optimism that the worst is over.

According to Wall Street, the market is forward looking. But has the market really discounted the future impact of continuing mortgage resets? Here’s a widely circulated Credit Suisse histogram of resets to which I’ve added a thumbnail of the S&P 500 matching the timeline from October 2007 to the present. There are a lot more resets ahead — option-adjustable, prime and alt-A — over the next 2 1/2 years.

Click image to enlarge:

Tags: Adjustable Rate Mortgages, Banking Sector, Banking System, Bear Market, Credit Crisis, Credit Suisse, Employment Report, Eye Of A Hurricane, Eye Of The Hurricane, Financings, Histogram, Lashing, Liquid Assets, liquidity, Lows, Market Rally, Monetary Authorities, Mortgage Paper, Mortgage Resets, Option Arms, P500, Printing Money, Qe, Stress Test, Strong One, Subprime Mortgages
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Mortgage Resets: The Eye of the Hurricane?

Friday, June 19th, 2009

The passing of a hurricane is quite an event, and a strong one can wreak havoc. In the eye of a hurricane, there is an eerie calm, and quiet, and the sun often shines brightly. The bigger the hurricane, the bigger the eye. This is then usually followed by a secondary lashing as the back end of the hurricane passes. Is this what’s in store for the mortgage and credit market over the next 2 years as the banking system faces its next round of resets?

Have the banks hoarded cash for this reason? Is it enough?

According to statistics provided by Credit Suisse, we are in the midst of a mortgage-paper-resets lull (the space between the two humps), as seen by the chart below. Doug Short (dshort.com) has kindly added the S&P500 chart to the one produced by CS. In a nutshell, banks (and the credit market) have gotten a much needed break from the enormous pressure of having to ensure that the liquid assets are available for the re-financings that are in the works.

Given the size of the Option-ARM (Adjustable Rate Mortgages) portion of the scheduled resets, there is much cause for concern, especially for the banking sector, and the credit market in general. This picture of the mortgage reset histogram is reminiscent of the passing of a hurricane. The tail end of the hurricane this time includes not only the Option ARMs but also the Alt-A (better than subprime) mortgages.

The S&P 500 is up nearly 36% from its bear market low on March 9th. Sentiment is somewhat less negative on several fronts. Credit crisis indicators, the ADP employment report, bank stress test leaks, and the market rally itself have all encouraged optimism that the worst is over.

According to Wall Street, the market is forward looking. But has the market really discounted the future impact of continuing mortgage resets? Here’s a widely circulated Credit Suisse histogram of resets to which I’ve added a thumbnail of the S&P 500 matching the timeline from October 2007 to the present. There are a lot more resets ahead — option-adjustable, prime and alt-A — over the next 2 1/2 years.

Click image to enlarge:

Tags: Adjustable Rate Mortgages, Banking Sector, Banking System, Bear Market, Credit Crisis, Credit Suisse, Employment Report, Eye Of A Hurricane, Eye Of The Hurricane, Financings, Histogram, Lashing, Liquid Assets, Market Rally, Mortgage Paper, Option Arms, P500, Presen, Stress Test, Strong One, Subprime Mortgages
Posted in Markets | 1 Comment »

What is John Paulson doing?

Monday, February 16th, 2009

Thanks to the work of MarketFolly.com, we can get a glimpse into the dealings of some of the most prominent and successful hedge funds. These are useful as they point to tactical opportunities and sometimes, when hedge funds take short positions, they provide lucid guidance pointing to areas or stocks in the market that should be sold or avoided, or for those with the stomachs, to follow short.

Below, MarketFolly.com details the trading activities of John Paulson’s, $36-billion hedge fund, Paulson & Company. Paulson is famed for having bet massively against subprime mortgages, and earning returns for his partners over the past 2 years which at one point, were in excess of 1,000%.

Among Paulson’s holdings are some notable Canadian companies, Kinross Gold, and BCE. Among the financials, Paulson is long Wachovia, National City, Wells Fargo, and Merrill Lynch; at the same time, Paulson is also long Proshares Ultrashort Financials (SKF). Among the defensive consumer non-durable companies Paulson likes tobacco majors Philip Morris, and UST.

More recently, Paulson appears to be initiating an effort to compel Dow, by sending the company a letter, urging its management to close the acquisition of Rohm. This could get interesting. Paulson reported in a 13G filing that it held 9.24% of Rohm. Who knows what additional interest Paulson owns in Rohm via swaps.

Blue Horseshoe loves Rohm and Haas…

The following is a guest contribution from MarketFolly.com.

This is the 4th Quarter 2008 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out the Hedge Fund 13F filings preface.

Next up is Paulson & Co ran by John Paulson. His hedge fund has generated massive returns over the past two years, as he bet against financials and all things subprime. One of his funds was even up 589%. Most recently, he has profited by shorting UK banks. Although Paulson is obviously one of the main brains behind the operation, there are also many talented individuals. One of their co-portfolio managers has left to start his own fund, and we’ll be keeping an eye on that. At the end of 2008, his Advantage Plus fund ended the year +37.58%, as detailed in our year end 2008 hedge fund performance post. For more info on how Paulson performed in 2008, be sure to check out their year end letter & report.

The following were their long equity, note, and options holdings as of December 31st, 2008 as filed with the SEC. We have not detailed the changes to every single position in this update, but we have covered all the major moves. All holdings are common stock unless otherwise denoted.

Some New Positions (Brand new positions that they initiated in the last quarter):
At&t (T)
Embarq (EQ)
iStar Financial (SFI)
Liberty Media Corp (LMDIA)
National City (NCC)
Northern Trust (NTRS)
Peoples United Financial (PBCT)
St Jude Medical (STJ)
Teva Pharmaceutical (TEVA)
Centennial Communication (CYCL)
UST (UST)
Proshares Ultrashort Financial (SKF)
Wells Fargo (WFC)
Wachovia (WB)

Some Increased Positions (A few positions they already owned but added shares to)
Merrill Lynch (MER): Increased position by 327%
BCE (BCE): Increased position by 308%
Genentech (DNA): Increased position by 242%
NRG Energy (NRG): Increased position by 163%
Cheniere Energy (LNG): Increased position by 60%
Philip Morris International (PM): Increased position by 50%
Rohm & Haas (ROH): Increased position by 20.5%
Boston Scientific (BSX): Increased position by 18%

Some Reduced Positions (Some positions they sold some shares of)
Brocade Communications (BRCD): Reduced position by 28.6%

Removed Positions (Positions they sold out of completely)
Anheuser Busch (BUD)
Barr Pharmaceuticals (BRL)
Applied Biosystems (inactive)
Hercules Offshore (HERO)
Macrovision (MVSN)
Wrigley (WWY)

Top 20 Holdings (by % of portfolio)

1. Rohm & Haas (ROH): 18.36% of portfolio
2. Boston Scientific (BSX): 12.64% of portfolio
3. UST (UST): 11.31% of portfolio
4. Kinross Gold (KGC): 8.66% of portfolio
5. BCE (BCE): 7.7% of portfolio
6. Wachovia (WB): 7.62% of portfolio
7. Philip Morris International (PM): 6.45% of portfolio
8. Mirant (MIR): 5.72% of portfolio
9. Genentech (DNA): 4.68% of portfolio
10. Merrill Lynch (MER): 2.68% of portfolio
11. National City (NCC): 2.54% of portfolio
12. NRG Energy (NRG): 2.02% of portfolio
13. At&t (T): 1.41% of portfolio
14. Ultrashort Financials (SKF): 1.36% of portfolio
15. Embarq (EQ): 1.18% of portfolio
16. Northern Trust (NTRS): 0.79% of portfolio
17. Peoples United Financial (PBCT): 0.72% of portfolio
18. Liberty Media (LMDIA): 0.68% of portfolio
19. Centennial Communications (CYCL): 0.66% of portfolio
20. St. Jude (STJ): 0.54% of portfolio

Assets from the collective long US equity, options, and note holdings were $7 billion last quarter and were $6 billion this quarter. Keep in mind that many of Paulson’s holdings are not listed in these filings because they aren’t equities, but rather securities in other markets. However, as evidenced above, he does hold a decent amount of equities due to merger arbitrage and other strategies. We’d be remiss if we didn’t also point out that Paulson’s team has been hard at work, as they recently filed 13Gs on Rohm & Haas (ROH) and Boston Scientific (BSX). This is just one of many funds in our hedge fund portfolio tracking series in which we’re tracking 35+ prominent funds. Look for our updates everyday over the next few weeks.

The above article was contributed by MarketFolly.com.

Tags: 4th Quarter, Bce, Bet, Brains, Canada, City Wells, Common Stock, ETF, Fund Portfolio, Glimpse, Hedge Fund, Hedge Fund Performance, Hedge Funds, John Paulson, Major Moves, Massive Returns, Merrill Lynch, National City, Philip Morris, Portfolio Managers, Preface, Rohm And Haas, SKF, Stomachs, Subprime Mortgages, Tactical Opportunities, Talented Individuals, Uk Banks, Wachovia, Wells Fargo, Year End
Posted in Gold, Markets | No Comments »

The Man Who Made Too Much: The Other Paulson

Sunday, January 11th, 2009

Portfolio.com’s February 2009 issue profiles John Paulson, the now legendary hedge fund manager whose record payday in 2007-’08 came as a result of doing what can only be described in its entirety as “shorting Subprime.” What’s remarkable about his feat is that there was no simple way to do so at the time 2 years ago. No subprime instruments existed that one could short, and no representative futures or other derivatives were available to make this a strategy that others, no less, Paulson, could employ in order to facilitate his gigantic bet against subprime mortgages and housing.

This is this weeks must-read piece. Here are a few excerpts to whet your appetite:

Hedge fund manager John Paulson has profited more than anyone else from the financial crisis. His $3.7 billion payday in 2007 broke every record, and he made it all by betting against homeowners, shareholders, and the rest of us. Now he’s paying the price.

By scoring returns of this magnitude, Paulson has dwarfed the success of George Soros, whose currency trades in the 1990s made him so much money that he has spent much of the rest of his career atoning for them.

Paulson makes no apologies. During our conversation in his conference room, he describes in detail how he pulled off the greatest financial coup in recent history—a two-year bet that the calamity we are now experiencing would take place. It was a megatrade involving dozens of financial instruments, along with prescient wagers that banks like Lehman Brothers would eventually go under.

The article also features an eye-opening conversation between Jim Chanos and Bear Stearns’ Alan Schwartz:

Chanos, for one, is tired of the blame-the-shorts litany, and he recalls a conversation with Bear Stearns’ Schwartz to make his point.

The day before the Fed’s rescue of Bear Stearns, Chanos says he was walking to the Post House restaurant in New York City, when, at 6:15 p.m., his cell phone rang. He saw the Bear Stearns exchange come up on his caller I.D. and took the call.

“Jim, hi, it’s Alan Schwartz.”

“Hi, Alan.”

“Well, Jim, we really appreciate your business and your staying with us. I’d like you to think about going on CNBC tomorrow morning, on Squawk Box, and telling everybody you still are a client, you have money on deposit, and everything’s fine.”

“Alan, how do I know everything’s fine? Is everything fine?”

“Jim, we’re going to report record earnings on Monday morning.”

“Alan, you just made me an insider. I didn’t ask for that information, and I don’t think that’s going to be relevant anyway. Based on what I understand, people are reducing their margin balances with you, and that’s resulting in a funding squeeze.”

“Well, yes, to some extent, but we should be fine.”

“This is now 6:15 on Thursday night, the night before the collapse,” Chanos says. “It was after a meeting with Molinaro”—Bear Stearns C.F.O. Sam Molinaro—“who basically told him at that meeting, ‘We’re done. We’re gone. We need money overnight we don’t have.’ So here he is, calling one of his biggest clients to go on CNBC the next morning to say everything’s fine when clearly it’s not. And he knew it wasn’t.”

Chanos refused to go on CNBC. By 6:30 the next morning, word was out that the Fed was engineering the rescue of Bear Stearns. Chanos realized that he could have been on CNBC while that was ­announced. “I thought, That f*cker was going to throw me under the bus no matter what.”

Then, Paulson’s outlook:

Paulson is astounded that some optimists continue to expect that somehow the formerly unsinkable economy will remain afloat, at least long enough for the government’s rescue boats to arrive. “Now that we’re in a recession, they’re probably admitting, ‘Okay, we’re in a recession, but it will probably last just two to three quarters.’ So they’re always underestimating the severity of the magnitude,” he says.

Paulson’s own view of the current situation is much darker. He predicts that the recession will last well into 2010 and that unemployment will reach 9 percent, a sharp increase from its current perch just below 7 percent. “We have a long way to go before we reach the bottom,” he says.

About his recent presentation:

Slides in Paulson’s presentation declared that the U.S. had slipped into its deepest recession since World War II. His charts displayed the usual parade of bad tidings: a steep decline in home prices, soaring mortgage delinquencies, credit contracting, and hemorrhaging in the financial sector. The 14th chart showed his strategy. It read, “How do we benefit near-term?”

Paulson’s answer came in four bullet points: Cut leverage and build cash, eliminate exposure to the equity markets, maintain only short-term securities, and prepare for bargains in debt securities of distressed companies—a “$10 trillion opportunity,” another chart pointed out

/Read on

Tags: Alan Schwartz, Bear Stearns, Bet, Calamity, Coversation, Derivatives, Financial Crisis, Financial Instruments, George Soros, Hedge Fund Manager, Issue Profiles, Jim Chanos, Lehman Brothers, Litany, Megatrade, No Apologies, Paulson, Recent History, Subprime Mortgages, Time 2, Wagers
Posted in Credit Markets, Economy, Markets, Outlook | No Comments »