Made it to Omaha. BRK 2009 here we go.

When sorrows come, they come not as single spies, but in battalions. This was a hell of a trip.

For whatever reason there were no direct flights to be had this year. Connecting in Houston, I noticed a startlingly high number of people wearing breathing masks. Eventually I figured out that the gate next to mine was headed to Mexico City.

My flight to Omaha was filled with people who had just come in on that flight. Why so many people were going from Mexico City to Omaha I do not know, but some inconsiderate fool of a Mexican in a "viva Mexico" hat sat in the seat next to me coughing and sneezing into his air mask -- but only when he wasn't lifting it up to eat his pretzels. I was so livid that someone would behave this way I got a headache. I was able to move to the one empty seat in the plane but we're all in the same pressurized cabin (as our Vice President so helpfully pointed out) so it probably doesn't make much difference.

Now I question my own responsibilities. Nothing like going to a stadium filled with 35,000 people to shelter one's self from a global pandemic. That's all I need is to give my annual hello to Warren and accidentally kill him through his weakened immune system.

Fortunately my own immune system is extremely strong, and I remember talking with a brilliant student one time who had been studying communicable diseases who once said that he estimates nearly 90% of airborne infections could be prevented if people simply washed their hands before touching their nose or mouth.

I guess I'm going to be washing my hands compulsively and I'll see how I feel by Saturday.

Headed back to Austin

We caught a great deal on The Intercontinental downtown...recession still going strong here and hotels - i would estimate - are operating somewhere around 40-50% capacity on the weekends.


We had time to wonder around Chinatown and get dim sum for brunch and now its time to hop on the plane.

San Francisco!

Today was a great day. I wasn't ready to leave Napa, but for the first time since the trip began I didn't have to get up before 5am. I still didn't get a full eight hours of sleep, but I'm doing better.

We headed out to Muir Woods to do some hiking today. The weather was perfect:


On the way into town, we drove down world-famous Lombard Street, which I believe still holds the record for the world's curviest road.
But the big news for those who know me is that I finally got out to Alcatraz for a night tour!
I was last in S.F. a year or so ago and was most looking forward to this tour...but on the last day the boats had filled and I couldn't go. The rest of my group was staying an extra day and got to go the next morning. They've been rubbing it in my face ever since.

Sarah doesn't look particularly happy to be in jail:
I suspect the jail seems a bit creepier at night than it otherwise would, and that wasn't helped when some tour staff member started slamming cages shut just to give us a little intimidation.
Outside was a little less creepy. You go from a hostile environment to sunset views of the golden gate bridge. Very bizarre.

I always thought I could handle jail if I were afforded a 24 hour per day internet connection in my cell (which is clearly not allowed). If I were to be incarcerated though, I suppose Alcatraz would actually be my top chocie.
Well, perhaps not:
That's it for S.F. We have a little time tomorrow to walk the hilly streets, and then we need to head out so I can start preparing for the Berkshire shareholders' meeting.

A 22 hour day.

You have to hand it to us. When we decide to relax, we relax hard.

Today it was up at 4:30am (again) to try and catch the hot air balloon express over the vineyards. I'm happy to report we caught some good luck with the weather and we finally took our first ever balloon ride (and what a ride it was).

The day started out quite chili but that stopped rather abruptly as soon as the propane jets were lit.
If you've ever wondered what sort of sensation you'd have if your face were burning off, standing in the right spot in this overgrown wicker basket will satisfy that curiosity.


About 10 seconds into takeoff I helped the pilot with "oh lord...okay that's high enough." Everyone else laughed nervously because they were thinking the same thing.

The views, of course, were fantastic. I'm sorry I don't have time to edit these pictures to do them justice as they deserve, but here is a shot of several vineyards leading up into the hill country.
Here's our sister balloon following us over the valley.
I was curious as to whether flying a balloon is more of an art or a science...and it turns out it is neither. You pretty much just sit there and let the weather take you where it wants to. There are a few things you can do - like go up or down a tad to try to hit different air streams - but for all intents and purposes you're at the mercy of the gods. In our case, the gods wanted to take us into a ditch.
Landing, it turns out, is even less of an art or science than flying. We sat in the ditch for a very long time, and we kept having to fire the jets to make sure we didn't fall over into a tree. None of use could get out of course because the pilot would never be seen again.

The free time was kind of fun, and I had time to twitter my predicament along with these pictures and my GPS coordinates (sometimes I think iPhones were God's personal gift to me). It was an interesting mash up between the latest technology of today and the latest of 200 years ago, coming together for the bemusement of my friends. I had responses within 20 seconds. People were looking for my ditch on Google Maps Street View.

Eventually a rescue crew showed up.

After this we took a 26 mile bike ride through the wine country -- which quickly got shortened to about eight miles. I'd like to chalk up the experience as a noblesse oblige field trip for the purposes of environmental/economic research, but in reality it was pretty much an excuse to get drunk and ride bikes.

When Sarah bought her favorite t-shirt (pictured) I told her someday I'd take her to Napa and recreate the scene. So by golly, that's just what we did.I'm sorry I don't have more pictures of the bike ride, but with our friends we stayed up until two am (according to my time stamps) and I'm exhausted. I hope my comments on the balloon ride aren't taken the wrong way as I'm just trying to get a few laughs...I had a fantastic time, and the landing was (roughly) in one of the potential predesignated drop zones (a very nice multi-million dollar estate).

Tomorrow it's on to San Francisco!

Welcome to Napa.

We made it in late last night. We were exhausted, but got up at 4:30am today anyway to try to catch a hot air balloon over the vineyards. Unfortunately, it was cloudy and windy this morning so the trip was canceled! I was really wishing there was a way to know this before making our way out to the rendezvous point (I love tactical terms) but I appreciate the effort to get us out there in case a window of opportunity opened up. Luckily, there is space on tomorrows flight, so we've decided to give it another go tomorrow morning (which is at once thrilling and disappointing because it means no sleeping in tomorrow).

I had a feeling the clouds would burn off by afternoon, and indeed they did. After trying to catch an hour or two of sleep, we headed out with some friends for an all day vineyard/wine tasting tour.
These are grapes. They are a tad smaller than you're probably used to, but they will some day soon be in liquid form filling some estrogen-filled happy hour somewhere. ;)

Our tour was fantastic and was put on by Platypus Tours, which came highly recommended via Trip Advisor. With over 350 wineries in the area, "Driver Dave" was able to tailor our tour to our tastes and take us to the smaller, lesser-known places.


I ended up buying a bottle or two from every place we visited today, and I don't think I was the only one who does that. In Napa, it seems everyone loves wine:

I don't have much else to say today because I'm exhausted and have another 4:30 wakeup tomorrow morning, but stay tuned to see if we make it up!

Robert Reich hands out report cards

Robert Reich gave his 100-day report card on the Obama Administration two days ago, and I have to say I couldn't agree more. He gave an A on the budget, a B on the stimulus package, and an F on the financial bailouts. He read my mind exactly.

So far, one of the better administrations, but when it comes to dealing with the financial system it has been one of the worst. It is still far better than the opposition would have been, though. Not to go overboard broadcasting my politics, but from an economic perspective I believe McCain/Pailn would have implemented a 20% tax cut and then tried to cut $10 million of pork barrel spending and called it a day. There would be no stimulus spending, only tax cuts for businesses which aren't making profits to pay taxes on anyway. The financial system would have frozen in its tracks. When Lehman collapsed, we came within 4-24 hours of systemic collapse (according to people far smarter than me whom I trust a great deal). This would have easily happened again. So I'm pleased we prevented McCain/Palin from running the bailout, but I'm not at all pleased with how the Obama Administration has conducted itself here.

They still have time to save themselves here by responding to the banks tress tests in the proper way. They could be building the case for a few nationalizations/liquidations, but I won't hold my breath.

Meredith Whitney points out the pending bank run on credit.

Meredith Whitney is kind of like my hero Nouriel Roubini except a tad less knowledgeable but significantly more aesthetically pleasing.

I was reading an interview with her by - interestingly enough - Steve Forbes two weeks ago. That promised to be an awkward interview..."hey Steve, here is specifically how your nutcase libertarian free market fundamentalism brought systemic collapse to the United States of America..." Unfortunately Steve was too dense to understand that was what was happening, but there were other interesting points made.

Specifically, Meredith points out how credit card companies cutting their lines is bad. It's kind of an interesting exercise, actually. We're essentially watching a $10 trillion real-world application of the prisoner's dilemma.

"So, banks are cutting lines for a couple of reasons. No. 1, risk aversion. No. 2, they don't want to hold regulatory capital against unused lines when they are so capital-dependent. And No. 3, which is also risk dependent is, where I have a monogamous relationship with you as a mortgage borrower, I have multiple relationships with my credit cards.

So, when, you know, cameraman A cuts my credit card line, I have more exposure to you and cameraman B. So, you don't want to be the last one holding the hot potato. So, you pull your line. And I'm stuck with fewer lines. And my borrower's, my lender's stuck with more exposure to my line. That's the last place he wants to be.

So, the credit card version of a run on the bank?"

Meredith goes on to predict 50% of outstanding lines to be cut -- totaling $2.7 trillion. That's more than the budget of the United States of America (well...it used to be).

Headed to Napa Valley tonight

Sarah and I are about to hop on a plane to Napa with a few friends. The rigorous schedule includes a sunrise hot air balloon ride with champagne (I suppose we should call it sparkling wine in Napa) with winery tours and a bike ride through the vineyards. This is followed by a night tour of Alcatraz and night of house music with two DJ friends.

Not the best time to be going on trips given I'm heavily short the markets and we're at the peak of the largest sucker's rally since 1933, but prices are low and the time is right. I'll probably just put it all on my cashback credit card and sell the assets to pay it off next month. Being leveraged short the S&P 500 will probably pay more than the 0.7% or so I'd have to pay on a card (and we're not talking a lot of money here) so this is one of those rare instances where I think it is worth it to carry an unsecured balance. I'll carry secured balances all day long, borrowing as much as I possibly can on student loans, car loans, or mortgages because the rates are lower than what I can earn by investing over many years. Unsecured loans are usually a different story because the rates are sky high and you're not looking at a long-term time horizon (like 5 to 30 years).

LOL @ CR LOANS

I read an article on Bloomberg the other day where a Goldman analyst said that Citi, Bank of America, and JP Morgan are all carrying their commercial paper at 100% of face value. Meaning they have yet to write down a single dollar of these loans, since, you know, commercial real estate is safe.

Fun fact: If the banks would write down all of their "assets" to their true value, I could retire. I'm not holding my breath.

Ticker correction.

In an earlier post, I mentioned shorting the Dow, and I accidentally mentioned shorting DXD. It should have read "shorting DDM." DXD is the ultra short fund, and DDM is the ultra long fund. We of course want to short the ultra-long fund!

I'm still watching the Dow vs. the S&P, and it may indeed be better to short the S&P 500 (by shorting SSO) than shorting the Dow anyway.

Remember, I feel it is much better to short these ultra long funds than it is to buy one of the ultra short funds. Volatility eats away at these funds, and we're in an extrememly volatile environment. An extreme example of this would be the 3X financial sector funds. FAZ is a 3x ultra short. FAS is a 3x ultra long. You'd think that if you want to short the market, you can either buy FAZ (since it is an ultra short) or short FAS. They should do the same thing. And indeed, if you look at a five-day chart comparing both, you'll see that they are pretty close to being a mirrior image of each other.

But if you pull back and look at a six month chart of both of these funds, you'll see that they've both crashed! The ultra long fund is down 61%, as you'd expect. But the ultra short fund is down even more at -90%! Imagine correctly predicting the collapse of the financial system, levering up 3:1 because you're so sure you're right, and then losing 95% of your wealth. I'd rather be short the long index than long the short. They are not the same thing.

This is why I've advocated putting your play money into shorting FAS rather than buying FAZ.

Miss North Carolina won.

Hah. Score one more for populism.

Going to be watching both indices over the next two days

I may take back my comments on liking a Dow short better than an S&P short. The S&P was down significantly more than the Dow today even with BAC and C both down heavily. I was thinking the companies were weighted by market cap (as is often the case with stock indices), and even with smaller market caps I was liking how Bank of America + Citigroup + GM was $100 billion that could potentially go to $0. But apparently the Dow is indexed by share price. This is a bizarre, ney ludicrous way to organize things. I guess something entirely artificial like a 10:1 stock split in Citi could crush the Dow? Sticking with the S&P 500 shorts (like shorting SSO) may be the way to stay.

Miss North Carolina says you're doing it wrong.

I swear I only turned on the Miss USA pageant because I had just read on Engadget that it was being broadcast in 1080i, and from a technical perspective I was curious what a Miss USA would look like life-sized in my living room at ultra high definition (and yes there were other people present -- this is not something I do alone in my spare time). Anyway, I caught the last few minutes -- just in time to listen to the panel ask Miss North Carolina if we should be using taxpayer dollars to "bailout companies." What kind of question is that? I'm sure Miss North Carolina is acutely aware of the systemic risks presented by unregulated collateralized debt obligations. Perhaps they could have followed up on that question by asking her to explain how tripping the securitization trigger affects an overcollateralization release on the step down date. Or would that answer not fit in a sound bite?

She answered the question correctly though by saying "no," which brought predictably loud applause from the audience.

Score one (more) for populism.

P.S. I put two to one odds that some municipality bails out the Miss USA pageant in the next three years. ;)

Have to say it again...here comes commercial real estate

The real estate bubble is about to burst all over again. Go back and read all the old news articles covering the collapse, but this time scratch the word "commercial" in front of everything.

There is a fortune to be made shorting regional banks. Too small to have powerful lobbyists, too small to be a systemic risk to the United States of America, but loaded up with commercial real estate because it is "safer." They will all burn, and we will just sit there and watch them.

I wanted to point out again that I absolutely do not wish this to happen. I am not cheering these banks to failure. I'm merely pointing out that it will happen, that nothing can stop it, and there is money to be made from it.

I like shorting the Dow better than the S&P 500

In the past, I had advocated shorting the S&P500. I found this preferable to shorting individual, large financial companies who have lobbyist in Washington because of bailout risk, and preferable to shorting the Dow because Wal-Mart, McDonald's, and GM (which I always assumed would get massive bailouts) make up 30% of the companies in the Dow.

Today, I actually like shorting the Dow (by shorting DDM) better. Today, 30% of the companies in the Dow are finally at serious risk of bankruptcy. Specifically, Citigroup, Bank of America, and General Motors could all very well wipeout out shareholders. That is, of course, the right thing to do since those investors took the risk and got to keep the profits, but the Treasury is still in the pockets of large financial firms so I am not holding my breath. My predicition is that Citi does end up being seized as a lesson and took look like the Administration is on the right side of history. Bank of America will probably be in some sort of pathetic half-seizure on less onerous terms, and GM probably wipes out the bondholders and dumps their union debt on taxpayers but somehow makes the shares still worth money. Don't ask me how they do it, but watch.

It wouldn't surprise me at all to see all three receive endless bailouts, but Congress is getting bailout fatigue. In most circumstances this doesn't really matter much because the Fed and Treasury have grown so powerful that they can keep giving handouts without asking Congress for permission anymore. But Citi will prove to be such a massive black hole that even Larry Summers, Tim "too much regulation caused this mess" Geithner, and all of Goldman Sachs' other friends will say there is no point to feeding Citi.

This latest sucker's rally got way out of hand. Financials shot up well over 50% in just a few weeks. It will correct.

25 Coolest Pictures Ever

I'm getting a little worn out from sounding the tornado siren on the stock market, so I'll do what I did last summer at this time when...I was getting a little worn out from sounding the tornado siren on the stock market. I'll post pictures.

These aren't my pictures this time, though I wish they were. Please excuse the woolly mammoth as that is obviously fake, but to my knowledge the rest of them are real. I've noticed that a good photograph can have a startling impact when it is shown out of context, and that entire page is a good example of this concept. For example, a great photograph of the Grand Canyon can look pretty good amongst it's brothers, but can look stunning next to a picture of the Great Wall or the open ocean. When you skip from one amazing thing to the next in completely different subjects, I think you get more out of the photograph, and in this case you leave simply thinking the world is an amazing place.

GDP is going to be bad.

CR had a pretty good post about two weeks ago explaining his prognosis for a 6-8% decline in GDP (with much of that due to the long-awaited collapse of commercial real estate finally arriving).

I personally expect the low end of that range, roughly matching last quarter's number. For fun, My prediction is 6%, but let's not get caught up in false precision. The important thing here is to pull back and understand that the economy is still contracting in a massive, massive way.

Now is a pretty good time to short the regional bank index.

Forgive all the plagiarism lately, but I'm finally getting through a few weeks worth of notes I've backed up from the econo-blogosphere.

CR had a post a week or two ago linking to an article about how Washington State's banks are starting to find themselves in big trouble. In my opinion the article serves as a dire warning for optimists, and CR does a great job making the point that while regional banks were not as hurt by residential mortgages, they were huge players in commercial real estate, which is only now starting to fall.

Yesterday's histeria over Wells Fargo's earnings guidance provides you with a pretty good opportunity to take lofty short positions. The regional banking index was up an astonishing 11% yesterday. If you think that is justified, consider CR's closing remark; "And unlike the 'too big to fail' banks, these community banks will just be seized by the FDIC."

The market didn't see mortgages coming in 2007 and it doesn't see commerical leases in early 2009.

Marlborough, Massachussetts is kind of a depressing place.

It has the look and feel of really anywhere "The Office" has ever been filmed -- in the U.K. or the U.S. I keep thinking I'm in Slough, U.K. There's not a lot going on here, although I'm enjoying the outer-New England accents. I drove by Fenway on the way out here and it was lit up for a game (there was ice on the field).

I drove by Cambridge to get out here, and when I saw it my heart skipped a beat. It's a weird feeling.

I'm Back in Boston.

I'm in Boston for the week, with two days of that being business related and the rest of it visiting old friends in Cambridge. Apparently, school takes a long time. I'm in a hotel for now out in Marlborough, but tomorrow I'll be staying with a very good friend who was originally going to be my roommate when I was planning to come back to Cambridge after Europe. I'm going to get a little taste of what could have been. This all feels very "Back to the Future."

"I have nothing to add"

Anyone who's made a trip to any of the annual Berkshire Hathaway shareholder's meetings will recognize that phrase (it's how Charlie Munger answers half the questions after Warren).

It is apt for today's market movements, including the 11% gain in the regional banking index. This all happened because of earnings guidance. Wells Fargo didn't release earnings today, they just released revised guidance. This means that I can't see where they're getting their numbers and can't really offer much analysis. I'll say again that it is no surprise that banks would be showing operating profits. They are borrowing money from you (as a taxpayer) at extremely cheap rates, and then turning around and lending it to you (as a customer) at fairly high rates. There is no way to screw that up and not run a terrific profit. What is at issue is the write downs that accompany those profits. The write downs are largely subjective, and thus so too are the losses (or profits) a bank shows. FASB's latest move to allow mark-to-fantasy accounting will help banks hide losses (some banks that were prepared to enough or going to be allowed to use mark-to-fantasy on their quarter one data althoug most will have to wait until next quarter).

I recently watched Meredith Whitney telling folks that they should short banks, but should do so after earnings come out and right before the stress test results are released, with the idea that banks will all show enormous improvements and then the stress test will give the real state of things. This is probably pretty good advice but it is a long way from making investments based on fundamentals and waiting. I personally don't like to play short term games because I have no idea where stocks will go short term, so I am choosing to keep my short positions. I operate under the model that I know stocks will be much lower in the future, so I will short them now. What they do in the mean time merely gives me opportunities or does not.

The only thing I'm really worried about right now is the stress tests themselves. There are a lot of murmurings from people I trust that the stress tests are a sham from the beginning. Consider this post from Naked Capitalism. If you don't want to read the whole thing, the gist is that it has already been decided that every bank will be shown to pass because the whole point of the exercise is to try to restore confidence. However, it won't look credible to pass everything with flying colors, so a couple of the really bad banks will be shown to be in a little bit of trouble. They still won't be shown to be insolvent, just that they need just a little bit more of your money and then they will be find (justification for yet another massive bailout). I think this is absolutely a realistic expectation for the stress test results. The government is absolutely in the pocket of the banking industry (with Tim "too much regulation caused this problem" Geithner leading the way).

Wells Fargo trades at an astonishing 28 times trailing earnings. Earnings all over the economy that aren't tied to subjective writedowns will be down. Eventually, stocks will be too. We still have a lot more people who have yet to lose their jobs, and a lot of spending to be curtailed.

I don't wish bad things to happen to my country, but I know them to be true and I act on what I know. I don't wish to have an additional 6,000,000 people lose their jobs so that I can make money. I would like to be wrong because long-term I will be fine anyway. But I know an additional 6,000,000 people (2% of the populace) will indeed lose their jobs, and the value of everything will go down.

Now is a pretty good time to short stocks.

We're doing that thing again. You know, that thing where we ignore all the bad news coming out and only focus on how the recovery is here. As Professor Roubini has been saying, the bull market rallies have predicted six of the last zero recoveries. I'd also like to point out that the market isn't responding to news that things are getting better, only that things are getting worse at a slower rate than before. But even that news is temporary.

For the most part, all of the good news is now out. We've suspended mark-to-market accounting and replaced it with mark-to-fantasy, and we've come up with version 10 of the same plan the Obama Administration has been leaking for two quarters now, which is that the U.S. Government is going to purposely overpay for toxic assets in a giant gift to the banks. In this latest rendition, we are injecting a middle man so that "Joe the Plumber" types don't get angry. With this new plan, we can make it sound like private firms are buying the toxic assets, when in reality it is the taxpayer (you'll see what I mean when those assets start having ever higher default rates).

There are two important things for you to know going forward. The first is that Alcoa reports results tomorrow, which kicks off earnings season for the major companies. As I've written numerous times - including before the last big crash - earnings season tends to slap optimists in the face. We have this cycle where a lack of earnings reports allows people to think the recession is over, and then earnings season hits and panic sets in. The second is that at the end of April we will have the results of the bank stress tests. The government is going to try to hide the results (by now their proclivities are entirely predictable), but they are going to leak out anyway. The results are going to show that the largest banks (specifically Citibank and Bank of America) are insolvent even after the bailouts and after mark-to-fantasy accounting. It is important to understand that the latest bailout package absolutely does not preclude nationalizing Citibank.

There are only so many ways the Fed and FDIC can keep "gifting" such large chunks of money to banks. When the Administration has to go to Congress, they're going to find that lawmakers have bailout fatigue (a polite way of saying the constiuents are really getting pissed).

So we now have a bad earnings season starting (the YoY changes in quarterly earnings are really going to screw up those P/E ratios people pull up in Yahoo Finance!), bad stress test results, and the possible nationalization of Citi and/or BAC and/or GM. It is good time to short stocks.

Oh yeah, one more thing. Housing prices are only a little past half way finished falling. Perhaps I should change my WBuffettJr handle to DrDoomJr.