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Friday, April 3, 2009

… and its gone.

Though the government is flooding the system with liquidity, there are still major gates to this capital actually reaching the people that need it.  While fixing the banks is an understandable response, the underlying problem of deteriorating creditworthiness remains.  Those with cash seem content to try to ride the cycle out – the environment remains extremely risky.  In some respects, the cash rich see there is a mass conspiracy of hope that things will get better.  The real strain, though, is not on people with cash.  It’s on people and companies who are levered up in debt… and these are exactly the people who are NOT being offered loans.

Just a few of the scary signs out there:

Commercial property defaults are on the rise.

Delinquent loans climbed 43 percent in the first three months of this year to $65.9 billion, according to data from New York-based research firm Real Capital Analytics Inc. That’s up from $46 billion at the end of 2008.

A total of 3,678 U.S. properties are now listed as in distress by Real Capital. Commercial real estate values have fallen at least 30 percent since their 2007 peak and may decline another 11 percent this year, increasing the number of properties that may be repossessed, Deutsche Bank AG’s real estate unit said in a March 25 report. AREA Property Partners Managing Partner William Mack said today lost value may already stand at 33 percent.

Why would you loan money to underwater, overleveraged borrowers in a still declining market?

Student loan default rises are taking off.

NEW YORK ( -- An increasing number of students aren't making their student loan payments according to the Department of Education.

According to the recent data, student loan defaults are up to 6.9% from 5.2 percent a year earlier. We're talking here about federal loans, not private student loans.

Sallie Mae, one of the biggest private student loan providers, is reporting that private student loan defaults are up to 3.37% in 2008 from 1.47% in 2006.

The job market is pretty bad – its unlikely these student loan numbers are going to improve any time soon.

The FHA program is being overrun with defaults and the inspector general of HUD says they’re completely unprepared.

The FHA may not have the systems and infrastructure to "adequately perform" its duties, or take on new functions imposed by Congress, including insuring jumbo loans of as much as $729,750, Donohue said. The FHA accounted for about 70 percent of the market in the first quarter of this year, up from 21 percent a year earlier, according to Donohue.


Credit card defaults are at 20 year highs and lenders are slashing available credit to existing customers.  While the government is trying to provide more liquidity, financial institutions are taking it away.

The US Pension Benefit Guarantee Corporation, in an effort to eliminate their deficit, allocated more money to stocks last year and is now a sitting duck for insolvency if there’s a big corporate default.

Mortgage rates are at record lows.  It’s not helping.  This is what happens when policies simulate the economy and not stimulate it.  We are still in freefall.  The bailouts are helping the headlines but the struggling continue to struggle.

You’ll notice I have included many South Park videos.  If my intent is successful, you will have laughed, cried and then laughed again.  Now that’s entertainment.

Roundup – April 3, 2009

Google NOT in talks to acquire Twitter

…though maybe they should, according to several.

FDIC considering issuing notes and equity stakes in PPIPs to banks for toxic assets

Bank sells asset to massively leveraged PPIP and buys stake in same massively leveraged PPIP.  Leveraged risk transferred to taxpayer, leveraged reward transferred back to bank.  Takes leverage in the system to a whole new level.  I tried to draw a flowchart of it and got dizzy.  NYT link also.

Omnivision lands iPhone camera orders

At some significant price discount, to be sure… but there’s a lot of shorts in it.  Micron camera sensor sales missed estimates by 50%.  Might get a chance to buy OVTI on weakness today.

Head of Federal Home Loan Bank System (FHLB) quits over bank marks

The FHLB has some 1.2 trillion in outstanding debt and their books are very overstated.  Not comforting.

Micron conference call transcript

Let me summarize:  gee, we didn’t make as much as we should have when prices rallied.  Fortunately we’ve taken some inventory writedowns so we can inflate gross margins in future quarters.  The industry supply cutbacks will drive prices higher in the second half.

Poly prices fall below $100/kg

I think this is the fourth or fifth article I’ve read about poly prices falling below this mystical $100 level.  It doesn’t seem new.

Altera and Xilinx orders to foundries to increase 10% in 2Q09

Altera orders stronger than Xilinx.  China 3G ramp is likely front-end loaded and unsustainable.

Calling Dick Tracy…

Watch phone.  Dorky.  And cool.  Both really.

Though revenues are better...

Prices of monitors are falling...

As are prices of TVs...

So panel makers still can’t make money

Costs above selling prices will do that despite utilization rising significantly.

Netbooks – all the growth, none of the ASP

Intel’s +$200 ASP on Centrino notebook processors is in some serious danger from these $20-30 Atom chips.

DRAM and NAND prices drift lower on distributor dumping

Distributor dumping is supply chain speak for lack of anticipated demand.  These guys typically load up thinking they can flip chips at higher prices.  Guess it’s not working this time.

Thursday, April 2, 2009

Office space

Portfolio manager seeks office space within active hedge fund.  Will freely share information, resources and opinions.

If interested, please contact

FASB setting the near-term top?

Do shareholders feel elated by this rule change or does it make gaming the value of the companies harder?  Banks have shown no ability to accurately assess their risk and now they’ve been given creative freedom to value their assets.  How exactly are these guys smarter than the market in determining the value of these assets?  “Fire sale” prices are the prices here, fellas – changing the rules just destroys confidence, it doesn’t restore those assets to face value.

You’re playing with investor perceptions when you change the standards.  People buying stocks on this are desperate for an alternate reality where things go back to the way they were.  That seems like a highly unlikely scenario as the only thing that changed was an accounting rule.  The assets are still worth what the market will bear and no more.

The fix for the banks is in and it seems more like a break of trust than a fix.  Probably time to buy gold again.

Bank of America (BAC) CEO Lewis changing his tune?

Lewis reiterated his desire to return the TARP money as soon as possible but says it may take several quarters before they can do so.

Bank of America won’t need to raise additional capital “under any standard we’ve seen before,” Lewis said.

This statement bears further scrutiny.  “Under any standard we’ve seen before” is a new qualifier for Lewis.  I believe it implies Bank of America will need to raise capital due to the new stress test standard.

One-liners – April 2, 2009


TSMC recent equipment purchases contribute one-tenth to capex estimate for 2009

The Skew:  $145 million equates to a 1.45 bil budget and spending 10% of it as of the end of Q1 suggests a ramp for the year – they’re underspent as of Q1.


What if IBM doesn’t buy Sun?

The Skew:  Quite an apocalyptic view that suggests Sun will be seen as having seen no other way out, management will be forced out and the company will die – and one wonders if IBM hasn’t planned to publicly examine and reject Sun all along.


Taiwan Memory not focusing on capacity, says economics minister

The Skew:  This sounds pointless and addresses none of the problems facing the industry – it seems it will only take away any kind of margin edge individual companies get from selling intellectual property to competitors.


RIM Earnings Preview: Have Blackberry Margins Bottomed? (RIMM)

The Skew:  Thank you for saving me the trouble of writing an earnings preview for RIMM’s report tonight.  Now if you had only written one on Micron, too…


Manhattan Co-Op Prices Fall Most Since 1995 as Demand Plummets

Housing bust hits Manhattan

The Skew:  The New York metropolitan area has a huge skew to the financial industry.  Of course pricing is falling.


Hartford, Protective Left Hanging as Treasury Stalls on TARP

Love the bit about Lincoln National buying a $7.3 million dollar bank with 3 employees to meet qualification requirements.  Isn’t there something wrong with a system that enables a company to spend 7 million dollars to potentially borrow billions?


OmniVision adopts aggressive pricing for 1.3-megapixel CMOS image sensors

These guys stink -- the stock trades at a big discount to book.  More importantly another Taiwan Semi (TSM) customer is reducing inventory and placing re-orders.


A-Data March sales slide on continued weak demand

Better memory prices, less sales, weak demand.  That sounds like prices are too high, doesn’t it?

Wednesday, April 1, 2009

WSJ on the conflict between FASB changes and Treasury plan

FASB is under intense pressure to change mark to market rules.  Since the powers that be can’t change the market, they’ll have to change the marks.  Instead of marking assets at market prices, assets will be marked to where the holder believes it will sell it.  Any pricing system contingent on the beliefs of the holder is terminally flawed and subject to question.  Furthermore, the banking industry is widely perceived to have been under-regulated and overly risky.  We’re going to allow them to use more judgment?  When did we start trusting their judgment again?  Changing standards does not inspire confidence, it turns every balance sheet into a minefield and reduces market participants’ ability to game their counterparties.

This is a giant mistake.

-- WSJ(4/1) UPDATE: Easing 'Mark' Rule May Subvert Treasury Plan --

   By Heidi N. Moore

  A new accounting rule set to be approved this week will relax mark-to-market
rules for banks sitting on billions of dollars in toxic assets, making it more
attractive to keep the assets on their books. Yet those changes may undermine a
larger U.S. Treasury plan to rid the banks of those same assets, bankers and
accounting experts say.

  The Financial Accounting Standards Board is proposing significant changes to
its mark-to-market rules, allowing banks to set their own values for certain
hard-to-value troubled mortgages, corporate loans and consumer loans. The new
proposal, called FAS 157-e, is scheduled for a vote this Thursday.

  The change was meant to assist U.S. banks after bankers complained current
mark-to-market accounting rules forced them to undervalue their assets, by
setting prices at deeply discounted, fire-sale values.

  Once the new accounting rule takes effect, banks will have new incentive to
keep the assets directly on their books, say bankers. That is because the rule
states that banks can use their own judgment on asset values as long as there
are no willing bidders to set a market price.

  "There is no clear definition of what a toxic asset is," said Christopher
Hoeffel, president of the Commercial Mortgage Securities Association. "Some
bankers are saying, 'I don't want to sell these assets, because the loan might
still be good -- and if I hold it to maturity, I might get my money back.'"

  That seems to run counter to the Treasury plan, which could spend up to $1
trillion to remove impaired assets from banks' balance sheets. There is strong
Wall Street support for Treasury's program, with some investors advocating a
complete cleanup of assets via the Treasury program.

  "There is a disconnect there between the two plans," said analyst Robert
Willens, who follows tax and accounting issues for the Willens Report.
"Arguably, this new FASB rule will actually inhibit people from doing what the
Treasury secretary would like them to do, which is sell the toxic assets. There
is a little bit of the lack of coordination between the two concepts."

  If approved, FAS 157-e will give banks more leeway to determine what
constitutes a "market."

   (END) Dow Jones Newswires

  03-31-09 2241ET

  Copyright (c) 2009 Dow Jones & Company, Inc.- - 10 41 PM EDT 03-31-09

Source DJ     - Dow Jones                                         

Rackable buying Silicon Graphics

In related news, Silicon Graphics files for bankruptcy.

Details are sparse and conference call isn’t till 5pm.

How bad is business that Silicon Graphics looks good to you, Rackable?  Yikes.

DRAM Diatribe

Taiwan Memory Corporation, the state bad DRAM bank, has chosen Elpida as their primary technology partner.  The release suggests Micron is still in the running to be included in the conglomerate, yet Micron’s technology is based on different architecture so this seems unlikely.  Besides Elpida, it is unclear which vendors will wind up part of Taiwan Memory.  Nonetheless, DRAM shares shot higher around the world with Elpida, Hynix, Powerchip and others closing up limit.  Spot prices apparently moved down.

DRAMexchange put out a forecast suggesting DRAM supply will grow 3% (down from prior estimate of 17.82%) and demand will grow 13.84% (down from prior 19.82%).  As a result, they predict shortages in the second half of 2009, though they say at present OEMs seem to be loaded with over a month of low-cost inventory, which must be eaten through first.  They speculate prices will rise to $1.20-$1.50 if the inventory reduction goes well.

NAND is expected to see a ramp of production in 2Q in anticipation of the second half consumer electronics build.  They don’t hazard a guess at supply/demand dynamics here.

The Skew:  Resolution of Taiwan Memory would lead to some visibility as it will have some kind of budget.  The counter argument is that even if they do, there’s so much idle capacity that can be brought back online that it won’t matter.  In the meanwhile, capital spending is on hold as players await a clearer picture of the competitive landscape.  Many semiconductor capital equipment companies are seeing levels of business that indicate a total freeze in the market place.  Taiwan Semi (TSM) is seeing utilization as high as 90% according to some press reports.  Without demand forecast increases by PC and cellphone manufacturers its unlikely these rates of recovery will be sustained.  If demand stays constant for another quarter, though, the foundries could be forced to actually buy some equipment.

Analysts and semicap equipment companies have been guiding for several quarters of dragging along the bottom.  The stocks trade mostly at under 2* book, having troughed close to book.  I generally favor buying semicaps on weakness as companies are aggressively cutting costs.  They’re telling you business will suck for the next year and a half.  I’ll tell you what sucks – semiconductor capital equipment vendor ability to predict the future – they’re the worst.  The longer their forecast gets, the better off you are betting against it.  They say several quarters of bottom dragging and that probably means you should buy the stocks.

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