Wednesday, May 14, 2008

Level Three Assets - Estimate Your Own Net Worth!

I must say some nice beef tenderloin on an open flame is very good! I was hoping to buy some dry aged high quality steaks and I found some online sellers that seem pretty respectable. Can anyone here comment on meet products from:
Niman Ranch
Allen Brothers (not dry aged but seem popular)
Any help is appreciated.

Inflation Indeed Moderating Right on Schedule
The CPI came in pretty tame today at a measly 0.2 reading for April. Except for food prices which moved up a smallish 0.9%, which expanded across the year would mean 9% inflation in food prices! Gas prices fell, as long as you account for seasonal adjustment of the cost. What? Exactly, check out this snippet from the AP article on today's CPI number:

"For April, energy prices were unchanged and gasoline prices even fell by 2 percent, a decline that would strike motorists as strange, given that they have been watching the price of gasoline rise relentlessly in recent weeks.
However, since gasoline prices normally rise in April, the 5.6 percent increase in gasoline prices for the month was turned into a 2 percent drop after the government adjusted for normal seasonal variations -- little comfort to people now paying pump prices that hit a new national record of $3.758 per gallon on Thursday, up nearly 40 cents in the past month."

The lunacy of the inflation figures have been hammered for some time by some observers for some time, but now the tomfoolery is so blatant and incredible that even the MAINSTREAM media is doing some homework and trying to find out what gives. That should scare the powers that be. Even so, the market, which first was in rally mode on the idea that rising inflation was not denting the "real economy", rallied today on the idea that moderating inflation was a good thing. Have it both ways!

Deflation in the Face of Inflation - What Gives?
People that are much (and I mean much) smarter than me about things finance have been harping on the Deflation drum for a while. Well respected writers Mike Shedlock, and a bunch of the crew over at Minyanville are firmly entrenched in the deflation camp. I so strongly agree with their logic stream and evidence presentations that it makes it almost impossible to disagree with their final summation.

How can one reconcile the deflation argument with the stunning rise in energy, food, medical, education, etc prices? Kevin Depew in his splendid "5 Things You Need to Know" had a succinct, and to me, clear explanation of where this thing is right now in today's edition. Here is the relevant text from today's point number 3:

"3. So, What Do We Do Next?
So, the question before us is not, Are food and energy exhibiting symptoms of inflation? The question is what happens as a consequence of those symptoms. And here is where we see a massive disconnect emerging.
Today's "inflation" is illusory. It is the tail end of the Federal Reserve's mirage of economic production; credit creation. The mechanism of transfer between the Federal Reserve and the consumer are banks. (It should be noted that the rise of consumer lending units, and the dependence on them (at least until late last year) by companies in the original business of selling tangible products, companies ranging from General Electric (
GE) to General Motors (GM) and at one point even Target (TGT), are illustrative of the efficacy of the credit creation and transfer mechanism between the Federal Reserve and the people). And so the potential for this credit creation to fuel more inflationary symptoms is dependent entirely on the willingness both of banks to lend and consumers to borrow.
That is why this debt crisis is ultimately so deflationary. It chokes off credit at the nozzle while the hose (banks' balance sheets) itself is leaking.
Are you paying more for gas? Yes. Are you paying more for food? Certainly. The question is what are you going to do about it. Our bet is you are not going to borrow and spend more. The consequence of credit creation and a crisis of unproductive debt is deflation. This is not an event; it is a process. Step one is the process of banks unwinding debt. Meanwhile, today's symptomatic inflation in some high profile categories paves the way for tomorrow's unwinding of debt by consumers. If the unwinding of debt and tightening of credit for corporations is merely a whisper of deflation while symptoms of inflation persist, the unwinding of debt by consumers will be a roar."

I think the sentence "The question is what are you going to do about it" in the face of rising prices is most insightful. In the face of falling home prices and a closed home ATM, real world falling wages, and rising costs in things we need, even debt addicted US consumers are going to have to cut back. If banks ever want to make any money they are going to have to stop lending money that is not going to come back. This is deflationary. Kevin is correct yet again with the line "This is not an event; it is a process". This is what has most missing the point; Deflation will not happen next Tuesday in one fell swoop, but act like a slowly growing tumor of credit destruction.

So I guess I am a deflationist! Next step, how to make money in a macro deflation environment. As for that answer I am still clueless! Any help?

Level Three Assets - Estimate Your Own Net Worth!
Freddie Mac tried to add to the "worst is over" hysteria by reporting earnings that were not as loathsome as they could have been. All well and good an not really worthy of ink anymore. What was fun was the massive move to the fictitious LEVEL III asset class that FRE made to make the numbers work for them. From a Bloomberg article:

"Financial Accounting Standard 157 allows companies to estimate a value on holdings that aren't traded. Freddie Mac used FAS 157 to list $156.7 billion in so-called Level 3 assets, a category that indicates the holdings are so illiquid that they can only be priced using the firm's own valuation models.
The Level 3 holdings represent 23 percent of assets and are up from $31.9 billion as of December. "

So FRE goes from 32 Billion to 157 Billion (about 5X) in assets that they themselves can value as they see fit, and this earnings report was seen as strong? The early market action seemed to like it, but check out some quotes from the Bloomberg article:
  • "They put a lot of lipstick on this pig including several accounting changes that have given them a one time step-up,'' said Josh Rosner, an analyst at independent research firm Graham Fisher & Co. in New York.
  • Credit Suisse analyst Moshe Orenbuch, who has an underperform rating on Freddie Mac stock, said the accounting changes made the company's performance look better and was skeptical of the surge in stock price.
    ``Obviously people liked it,'' Orenbuch said. ``Management was selective as to how they applied certain accounting principles.''
  • Friedman, Billings, Ramsey & Co. analyst Paul Miller, who has an underperform on the stock, said investors should be concerned that the company hasn't set aside enough reserves, which pushes some credit losses to future quarters, Miller said.
    ``They're not provisioning in front of it so those losses are going to flow through their income statement for years,'' he said. ``Therefore we don't think that the earnings pickup over the next two or three years is going to be that meaningful.''

Full link here:

Wowza! Not too nice. What did FRE management think? They took a page from the good old play book of Level III accounting and now apply it to analysts as well! I am serious! If you do not like what some observers are saying, ignore them and focus on the good ones. This is called Level III Market Observation ( I will have the trademark!). Here it is in action, again from the Bloomberg article:

"Freddie Mac spokesman Michael Cosgrove said, ``clearly, based on the comments and reports this morning by the real, substantive analysts who follow this company, the Street is comfortable with our accounting and reporting, and encouraged by the results we presented today.''

So FRE only hears the real analysts that love them! Too funny. I love this stuff.

Vote in the new poll to Level III estimate your own personal worth. Considering my sword collection, some fishing equipment, my car, and a ton of books I will hazard a guess that I am worth about 3.2 Million Dollars. While the assets I have can be easily priced on eBay or at a garage sale, those sales are not MY PARTICULAR ASSETS and thus I will ignore them and instead rely on my own estimates of what my items are worth. What are you worth on a Level III basis? BE HONEST!

Have a good night.


GawainsGhost said...

Well, GYC, I'm never heard of Lobels or Niman Ranch, so I can't comment on them. I have heard of Allen Brothers though. I ordered from them once.

It was two Christmases ago. I wanted to do someting nice for my brother and his family, who live in Maine, so I ordered over $500 of premium steaks and sides and had them delivered. It's a Texas thing. The Dallas Cowboys were playing on Christmas Day, and I wanted my brother, who put the fan in fanatic, to have a nice barbeque and watch the game in style.

Well, the order didn't arrive until a week after Christmas, even though I paid extra for express shipping. And it really pissed me off.

In fact, I fired off an angry email to Rush Limbaugh for recommending Allen Brothers Steaks, and he apparently forwarded it to them, because soon I was getting apologetic phone calls and a gift certificate via Federal Express, which I declined.

I'll never order anything from them again, and I told them that on the phone in no uncertain terms. I made a gift order and paid extra for guaranteed express delivery, and they failed to deliver and ruined my brother's holiday. Period. Do you think I made an order so I could get a gift certificate that I'll never use? I asked.

I've never eaten their steaks, and frankly if someone served one to me, I'd let it rot on the plate. I'm highly confident their meat is not appreciably better than any other marketer, certainly not for the price they charge, not to mention the lack of service they charge extra for.

For what it's worth, I order exclusively from Omaha Steaks.

I've never had any problem with them, and they guarantee a 100% refund, not a cheap gift certificate, if you are not completely satisfied. And their steaks are delicious.

Anonymous said...

If you believe deflation is in the cards, buy bonds, as the Fed will once again lower rates. The bond market is no longer signaling deflation as rates have been trending higher the past few weeks.

The "process" might be towards deflation, but do you think the powers to be are just going to just let it happen. They will fight against it tooth and nail. The last time we had a deflationary scare, Greenspan lowered rates to one percent. Will they lower them to zero this time? The Fed has the power to buy all the debt the Treasury can issue.

Yes, the process might be leaning towards deflation, but the consequential results of fiscal and monetary policy will be inflationary.

Anonymous said...

Won't all of this Level 3 stuff just allow the largest companies to buy everything else up? I mean, you could lose trillions and just keep buying up every piece of land, private company, and mineral right in the world.

Keep jamming losses into Level 3, buy the world, and then we're nationalized anyway! Keep a few dozen companies trading to keep increasing the 00's and everyone except the grumpy shorts wins.

watchtower said...

Watchtower's Level III assets:

18 year old 10' Jon boat

Dad's old worn out hand me down Ambassador baitcasting reels

POS H&R 9 shot .22 pistol that I've had since I was 16 years old

Real life worth: maybe $300
Watchtowers "mark to nostalgic" worth: Priceless

Yeah, maybe that is what it is, these people are nostalgic for their "pre busted bubble" price.

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