Two people inside of Acme applied for the job that P. B. now holds–two people that I know of. As of today, neither of them works for the company any more. The second gave two weeks’ notice today and was asked to leave immediately. Lots of things are rumored, the most likely that he had Click Here to continue reading.
People in America just don’t want to have to deal with risk anymore. Nowadays every single asset under the sun is “hedged” in an effort to make sure there is no possibility of loss. Now a man has started up a company called Rex & Co to “hedge” people’s equity risk in their houses.
As best as I can figure out, Rex & Co does this by buying shares in a house. Only, these shares do not give Rex & Co any control over the house. All they give is the right to some money when the house is sold. This is way that the San Francisco Chronicle describes it…..
Bill and Elaine Nolan paid top dollar when they bought their Tiburon house a few years ago at the height of real estate frenzy. Now, of course, the market is cooling rapidly.
So Bill Nolan, who deals with money all day long as a partner in an investment management firm, wanted to diversify. He turned to a startup based on a new concept: Let homeowners tap their equity without taking on debt.
Nolan contracted with Rex & Co. to receive $100,000 cash in exchange for a 10 percent stake of the home’s future appreciation. When the Nolans sell their home, they’ll pay Rex the $100,000 plus 10 percent of their home’s appreciation above its current value of $2 million. For example, if the home sells for $2.5 million, the Nolans would pay Rex $150,000 — the original $100,000, plus 10 percent of the $500,000 gain in value, or $50,000. If the home were to depreciate, Rex would share in that loss as well
.
(The Nolan house is atypical because of its high value; more typically, a $100,000 Rex payment would be in exchange for a larger share of a house’s appreciation.)“It was an interesting opportunity to take some cash out of the house and hedge against any decline in home value,” said Bill Nolan, who plans to invest the money in his business. “It was a way to hedge against the (real estate) market being flat or not performing as well as the equity market; to pull money and put it into something else I felt had a reasonable chance of outperforming the real estate market.”
I can understand why Mr. Nolan might be feeling a little nervous about how the value of his house might hold up. What I can’t see is why Rex & Co would make this kind offer at this particular time.
Sure, Rex & Co are taking a hefty share of the valuation gains (on most houses it is about 50%) for taking only a small share of the house’s equity . But they have no control over when the house is sold, what kind of condition it is kept in, or anything like that. It seems to me that by taking a large portion of the valuation gains they are removing a lot of incentive from the owners to seek the best possible price. That don’t seem so smart to me.
Mr. Nolan seems to be perfectly awere of that fact. According to the San Francisco Chronicle story….
Nolan said he might consider ending his Rex deal if Tiburon houses go down in value, so that Rex would share in the loss on his home. “The beauty of it is that no one else can ‘call’ me on the option; I own the trigger point,” he said. “No one else decides, ‘This is an opportune time, home prices have risen, we’ll call Mr. Nolan on our option to give us our 10 percent.’ ”
To be sure, there are some safe guards in place. The main safe guard seems is that if you sell your home within 10 years after the deal is made you have to pay an early sale penalty of some kind. Rex seems to be relying on this to insulate itself from short term fluctuations in the real estate market. After all, the long term trend in the real estate market is always up right?
Well, in the past the long term trend was always up. But in the past the US population was growing at a far faster rate then it is projected to do in the future. If Rex is basing his plans around the idea that the historical trend will continue I think he will find that he is sadly mistaken.
That is not to say that Rex’s idea could never be made to work under any circumstance. If he had come up with his idea 10 years ago he would a very rich man by now. But as it stands right now, I would bet that you would be better off putting your money in short term T-bills then in investing with Rex.
Why start something like this at the height of a housing boom? These things can easily take a decade to wind themselves out? It is not unheard of for a real estate market to stagnate in real terms over a 10 year period.
In another words, Rex’s biggest problem is that he is coming late to the party.
According to Felix, Dell has been a very bad boy….
In the staredown between Dell and Nasdaq, it’s the stock exchange, not the computer company, which blinked first. Dell hasn’t filed any of its last three quarterly reports, nor its annual report for 2006, which means that, by rights, the Nasdaq should delist its sorry ass. And the Nasdaq surely would – if it wasn’t dealing with, you know, Dell. The legendary PC maker which trades tens of millions of shares a day, and which has a market capitalization of over $60 billion. Which means, basically, that Dell is too big to delist.
I vaguely remember hearing that Dell was having problems with their accounts awhile back. But I had not realized that it was this bad. Who would have thunk that Dell would fail to file a quarterly report, much less three quarterly reports and one annual report.
How the world does change.
People with money have a tendency to go insane. We all know this.
But sometimes I hear of deals being done that must have been done under the influence of illegal drugs. I don’t know how else to explain this story in Winter (Economic & Market) Watch…..
Like a bad Arnold Schwarzenegger movie, the LBO crowd is right back in the game with another very large takeover, this time Hilton Hotels by Blackstone. The total purchase including the balance sheet and debt looks to be about $29 billion. Typifying just how loonie these transactions have become, HLT has operating income of about $1.2 billion, or a mere 4.1% of the take out price. Assuming $25 billion in debt, that would place debt service at about $2 billion a year. Blackstone plans no divestitures, so the math is straightforward, and the presumption is as well, just borrow the balance. This is definitely the Terminator roulette school of business economics, with now alarming amounts of debt playing the same all or none formula.
For those that did not understand the above, Blackstone took on so much debt to buy Hilton Hotels that the interest payments exceed the income that Hilton Hotels is likely to bring in for the foreseeable future. Granted, Blackstone might have some kind of deal with China, but this is still nuts.
Lenders, in this situation, are essentially taking equity-like risk. They’re looking at Blackstone’s track record, which is stellar, and counting on Steve Schwarzman being able to raise the value of the Hilton brand so much that he can sell it off in five years’ time and repay the loans in full. This is dangerously close to the “greater fool” theory of investing: my loan might not make any sense on its own, but somewhere down the line someone with an even bigger credit line will take me out. As far as I can make out, no one has the slightest intention of actually paying down any of the principal.
Thankfully, not everyone is nuts. The bigger (smarter?) bond market participants are putting their foot down as this Bloomberg story shows….
The world’s biggest bondholders have had their fill of leveraged buyouts, convinced that increasing mortgage delinquencies will drag down the U.S. economy and drive debt-laden companies into default.
TIAA-CREF, which oversees $414 billion in retirement funds for teachers and college professors, is boycotting some debt offerings used to finance LBOs. Fidelity International, a unit of the world’s largest mutual fund company, and Lehman Brothers Asset Management LLC, the money-management arm of the third- biggest bond underwriter, say they’re avoiding debt from buyouts.
Investors are getting skittish just as private-equity firms led by Kohlberg Kravis Roberts & Co. and Blackstone Group Inc. prepare to sell $300 billion of bonds and loans to finance LBOs, according to Bear Stearns Cos. In the past two weeks alone, more than a dozen companies were forced to postpone or restructure debt sales.
The dollar has been dropping over the last couple of days and no one really knows why. You can see some news stories on the subject here and here.
Macro Man has a post on the subject here. He runs through a list of possible explanations but I would be willing to bet that this Click Here to continue reading.
We have been neglecting the unfolding hedge fund/CDO/subprime crisis lately. Not because it has not been interesting, but because nobody knows anything at the moment. Heck, Bear Sterns won’t even let its investors know how much money they have lost until mid July. So nobody will really know if the sky is falling until then.
So we ignored this rather alarmist Bloomberg article when it first came out. But over the weekend Macro Man did a post on it that was so funny we just had to point it out. Just to give you a taste of Macro Man’s commentary, the following is a passage from the Bloomberg article with a comment from Macro Man in bold at the end.
S&P abandoned seven-year-old criteria for determining a bond’s protection against default in February.
Under the old guidelines, S&P said a bond’s “credit support” must be twice the rolling 90-day average of the sum of value of mortgages delinquent by three months or in foreclosure plus real estate that has been seized by the lender.
Of the 300 bonds in ABX indexes, the benchmarks for the subprime mortgage debt market, 190 fail to meet the credit support standard, according to data released in May by trustees responsible for funneling interest payments to debt investors.
Most of those, representing about $200 billion, are rated below AAA. Some contain so many defaulted loans that the credit support is outweighed by potential losses. Fifty of the 60 A rated bonds fail the criteria, as do 22 of the 60 AA rated bonds and three of the 60 AAA bonds.
All but five of 120 securities in BBB or BBB- rated portions of the mortgage-backed securities would have failed S&P’s criteria, according to data compiled by Bloomberg.
None have been downgraded, though S&P and Moody’s have parts of three pools of securities linked to the index under review for a downgrade. Fitch has downgraded parts of three mortgage pools tied to the ABX and put four on watch for downgrade.
“Don’t misunderstand me: I’m not saying these others are performing great,” Robert Pollsen, a director in S&P’s residential mortgage surveillance in New York, said in an interview last month. “And they certainly might warrant our attention several months from now, which obviously we’re going to do.”
What can I say? To abandon a credit-standard test just as it starts to bite is the height of irresponsibility. And the comments from Mr. Pollsen are so lame, they need a cane.
Oil prices are falling today. But reason that they are falling is going to hurt your pocket book big time. This from a Bloomberg story….
Crude oil fell from a 10-month high in New York as a refinery shutdown in Kansas cut demand.
Coffeyville Resources LLC shut its refinery in Coffeyville, Kansas, yesterday because of flooding on the Verdigris River, according to as statement on its Web site. The 108,000-barrel-a- day refinery can produce about 2.1 million daily gallons of gasoline.
Crude demand should decline because of the shutdown, said Andy Lebow, a trader at Man Financial Inc. in New York. “That’s the motivating force in the market today,” Lebow said.
What do you think the price of gas is going to do now that 2.1 million gallons of production has been taken off of the market?
I am keeping my eye on R-Squared to see what Robert Rapier will have to say about the issue.
Edit: Mr. Rapier did respond in the comments section over at his blog. Apparently the refinery that was shut down is relatively small (who would have thunk that 2.1 million gallons of production per day was small?) and BP may be bringing some other refineries back on-line after having problems with them. So he does not seem to think that it is going to change the already tight gas situation much either way. He grants thought, that losses of any refinery capacity is small tragedy given that we want to get out of the supply hole we are in.
We are going to be hearing a lot about Michael Moore’s latest movie Sicko. This rant/review from MTV really says all that needs to be said about it.
There is a blog here in the Ethereal Land called Chickenman that I have not advertised much because I wanted to see if his blog would last. Now that the blog has something like a track record, I thought that I would give it little more exposure.
I think I can safely say that if you Click Here to continue reading.
In a post I that I wrote last week I said (speaking of Edward Hugh’s post on a recent article in The Economist called Suddenly, the old world looks younger)…..
But while I agree with most of what Mr. Hugh says, his post fails to relieve me of the need to write my own post. This Click Here to continue reading.