A short blog here.
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i've been doing some more reading and sentiment sampling on HIG over at yahoo boards. man, those folks really hate shorters! but that doesn't bother me and, btw, i am still holding HIG puts... from my examination over several hours (i don't usually hang out on yahoo), it seems that, besides the conspiracy theories i mentioned in the previous blog, folks in particular just don't understand why HIG tanked so hard this past week.
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so let me explain- my version anyway. for HIG, it's all about retail. their overweight investment in commercial mortgage backed securities, whether directly as cmbs or as cds (credit default swaps), makes them HIGhly sensitive to retail sector weakness because so much of their paper is tied to whether or not retailers will or will not default. (hope you liked my little play on words- "HIGhly").
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so, very simply, what happened was, when the December retail sales numbers came out, the big institutional traders saw catastrophe on the horizon and began shedding HIG shares at warp speed... since then, of course, cooler heads have prevailed, but only for the time being and probably only under considerable duress from those who fear a HIG meltdown could take down the whole market. i'm speculating about the "duress" thing, but it seems likely to me that the so-called "plunge protection team" (PPT) must have collared a couple big institutional players and promised to backstop them if they played along. and so they did. for now.
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up next, this thursday 1/22/09, is the housing starts report for December. actually, that's not expected to be too bad. but if worse than expected, HIG will take another hit because this implies that people still aren't buying new houses, and they aren't buying new houses because they haven't got any money, and if they still haven't got any money they'll spend even less in the retail sector this month than last, and, well... connect the dots.
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adding fat to this fire is the Circuit City (CC) debacle, with them announcing friday just five minutes after the closing bell that they're totally closing up shop and will be liquidating about $1.8 billion in inventory over the next few months.
http://biz.yahoo.com/ap/090116/circuit_city_bankruptcy.html
adding yet more fat to this fire was this week's BK announcements from Goody's and Gottschalk's. in each of these cases, there are two very serious consequences for CMBS and CDS holders.
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first, it means these chains will by definition default on their leases, and in turn the property owners will increasingly default on their mortgage notes, triggering massive demands against the CDS holders, and greatly reducing (or largely even eliminating) cash flow for CMBS holders. second- and to look at Best Buy's (BBY) 8.11% gain friday you might doubt this-- it will mean heavy liquidity pressure on competing stores. why? because as places like CC, Goody's, and Gottschalk's begin unloading existing inventory at fire-sale prices, their former competitors will have to cut prices too or suffer a long sales drought. so competitors' earnings will go down. BBY's friday gain was just an emotional reaction to CC going under. the market will soon wake up. and, as competitors' liquidity dries up, they will begin to be late on their lease payments, and some will out and out default, and that kind of stuff hits HIG hard again.
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so i'm hanging onto my HIG puts, and when they expire, i'll get more. actually, though, this coming week kinda scares me because i think the market makers have set up a massive fakeout on HIG, running it up to kill the shorts and puts before dropping it like a rock the following week.
Saturday, January 17, 2009
Friday, January 16, 2009
The Hartford: The Truth About HIG
i don't want to make the people who've lately lost money in HIG feel bad. in fact, i'm hoping this will make them feel better by understanding what's really happening with HIG.
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tonight i was on yahoo message boards and that's what's sparked this latest blog. i saw people screaming and complaining about daytraders and shorters and how they're killing HIG. like it was all some dark conspiracy... gimme a break! you can't down a company this size with some lightweight pinksheet-style attack. yes, once blood is in the water, the sharks do come out-- but first, blood has to be in the water!
.....
so here's the deal. HIG was not brought down by a conspiracy of daytraders and shorters. HIG was not brought down by lifting the one-tick rule. HIG was brought down by some very bad bets its management made. they not only insured against a ton of defaults on commercial mortgages, but they did this with terrific leverage, which on one hand meant it could make a lot more profit with a lot less cash reserve, but on the other hand meant that if those bets went wrong, it could wipe HIG out in a hurry. and now, those bets have gone very, very bad indeed. an example is helpful....
.....
once upon a time, there was a savvy entrepreneur named janie. janie noticed that stores and factories near her sometimes couldn't make the payments on their lands and buildings, and sometimes they even went out of business. she learned that this is called a "credit default". janie began to wonder how the banks could stand it! it didn't happen that often and this gave janie an idea.
.....
so she went to a couple banks and said, "i will insure you against these defaults and you just pay me a premium for doing so." and the banks agreed. and janie started making money because she had calculated carefully how often defaults happen. her business grew and grew. but not fast enough for janie! janie noticed that there was soooo much market and she had soooo little cash to back her bets.
.....
so janie went to the state and feds and said, "hey, you can see my risk is very low in this business and these people really need the insurance, so how about you allow me to sell 'way more insurance than i've got cash to cover?" and the state and feds said, "okay." and thus began the leveraging. pretty soon, janie was making money hand over fist, and she went back and got permission for more and more leveraging. and she prospered mightily and even issued stock and bonds.
.....
then one day, people stopped shopping so much, and the malls and stores and factories began to default pretty fast. at last, one morning, janie woke up and found all these bankers and bondholders at her door with their hands out. "alas!" she cried, "i'm almost out of money--- i'm down to my last $500 million in reserves!" and right about this time the Big People who knew her company's condition began selling off janie's stock. and then there was great blood in the water, and pretty soon the sharks came along and made matters even worse.... and that's the basic story of HIG. not dark and conspiratorial, just plain bad judgement.
....
disclosure: yep, i'm deep into HIG puts.
.....
tonight i was on yahoo message boards and that's what's sparked this latest blog. i saw people screaming and complaining about daytraders and shorters and how they're killing HIG. like it was all some dark conspiracy... gimme a break! you can't down a company this size with some lightweight pinksheet-style attack. yes, once blood is in the water, the sharks do come out-- but first, blood has to be in the water!
.....
so here's the deal. HIG was not brought down by a conspiracy of daytraders and shorters. HIG was not brought down by lifting the one-tick rule. HIG was brought down by some very bad bets its management made. they not only insured against a ton of defaults on commercial mortgages, but they did this with terrific leverage, which on one hand meant it could make a lot more profit with a lot less cash reserve, but on the other hand meant that if those bets went wrong, it could wipe HIG out in a hurry. and now, those bets have gone very, very bad indeed. an example is helpful....
.....
once upon a time, there was a savvy entrepreneur named janie. janie noticed that stores and factories near her sometimes couldn't make the payments on their lands and buildings, and sometimes they even went out of business. she learned that this is called a "credit default". janie began to wonder how the banks could stand it! it didn't happen that often and this gave janie an idea.
.....
so she went to a couple banks and said, "i will insure you against these defaults and you just pay me a premium for doing so." and the banks agreed. and janie started making money because she had calculated carefully how often defaults happen. her business grew and grew. but not fast enough for janie! janie noticed that there was soooo much market and she had soooo little cash to back her bets.
.....
so janie went to the state and feds and said, "hey, you can see my risk is very low in this business and these people really need the insurance, so how about you allow me to sell 'way more insurance than i've got cash to cover?" and the state and feds said, "okay." and thus began the leveraging. pretty soon, janie was making money hand over fist, and she went back and got permission for more and more leveraging. and she prospered mightily and even issued stock and bonds.
.....
then one day, people stopped shopping so much, and the malls and stores and factories began to default pretty fast. at last, one morning, janie woke up and found all these bankers and bondholders at her door with their hands out. "alas!" she cried, "i'm almost out of money--- i'm down to my last $500 million in reserves!" and right about this time the Big People who knew her company's condition began selling off janie's stock. and then there was great blood in the water, and pretty soon the sharks came along and made matters even worse.... and that's the basic story of HIG. not dark and conspiratorial, just plain bad judgement.
....
disclosure: yep, i'm deep into HIG puts.
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