Dear CIGAs,

"FORTUNE FAVORS THE BRAVE"
-Virgil

DO NOT FALTER IN YOUR COURAGE.  LIFE IS ABOUT CYCLES…UP AND DOWN. 

Those who have the wisdom to be prepared during the down phase, and have the courage to act when the cycle is close to its nadir, will end up the winners in the next up phase.

TO PRESERVE CAPITAL (AND COURAGE) WE ARE HOLDING MOSTLY CONSERVATIVE CASH TYPE INVESTMENTS AND GOLD SHARES IN THE PORTFOLIOS.  FOR THOSE WHO CAN SELL SHORT, WE ARE SELLING SHORT.

IT IS A DIFFICULT TIME.  MAY WE SUGGEST THAT YOU STAY BRAVE, BECAUSE OPPORTUNITIES WILL ARISE. 

In this letter, we are including a few recent articles that we would like to share with our readers.

HOUSING: GUESS WHO’S PLAYING WATCHDOG NOW

Appraisal Management Companies (AMCs) are supposed to be the new watchdogs with respect to keeping lenders and brokers from influencing or exaggerating appraisals.   According to a recent BusinessWeek article, some AMC’s are being run by "the same subprime players that helped inflate the real estate bubble in the first place."

Here is a link to the article by Chad Terhune:
Housing Appraisals: Still Blowing Bubbles?

CHINA IS LOOKING FOR ASSURANCES THAT THEIR U.S. TREASURY PORTFOLIO WON’T DEPRECIATE.

Below is a great article about the Chinese demanding guarantees from the U.S. that the value of China’s huge portfolio of U.S. Treasuries won’t be eroded by "reckless policies".  We guess that the Chinese don’t trust the bond rating geniuses at Standard and Poors and Moody’s.

Also, perhaps now is not the time to complain to the Chinese about their currency being undervalued versus the dollar.  Here is a link to the article.
China Needs U.S. Guarantees for Treasuries, Yu Says

DERIVATIVES, WORTHLESS? YOU DON’T SAY.

Many of the "investments" that were constructed by investment banks and then sold to investors, banks, insurance companies, etc. in recent years are merely side bets on the bill paying performance of borrowers who…have demonstrated poor bill paying performance.  It is hardly surprising to us that so many of them are worthless.

Financial Times
Half of all CDOs of ABS failed
By Paul J Davies
Published: February 10, 2009

Almost half of all the complex credit products ever built out of slices of other securitised bonds have now defaulted, according to analysts, and the proportion rises to more than two-thirds among deals created at the peak of the cycle.

The defaults have affected more than $300bn worth of these collateralised debt obligations, which were built from bits of other asset backed securities (ABS) such as mortgage bonds, other CDOs and structured bonds, or derivatives of any of these, according to analysts at Wachovia and Morgan Stanley.

So-called CDOs of ABS caused huge losses to banks such as Merrill Lynch, UBS and Citigroup, which held large amounts of the supposedly safest, top-rated chunks of them. They have since been damned by bodies such as the Bank for International Settlements as being too complex to risk manage effectively.

CDOs of ABS were used increasingly at the peak of the credit bubble to keep the securitisation machine moving by recycling hard to sell bits of subprime mortgage bonds and other risky tranches into new structures with top-notch credit ratings.

However, the ratings of these deals proved unsustainable, as evidenced by the fact they have accounted for 92.9 per cent of all 16,587 ratings downgrades globally from all rating agencies since the beginning of last year, according to Morgan Stanley.

The way these complex and risky transactions were exploited at the peak of the bubble can be seen in data from analysts at Wachovia, who reckon that 47.6 per cent of all CDOs of ABS by volume issued since the market substantively began in 2002 have now hit an event of default.

By their records, the first three years of the market saw less than 100 deals sold per year and less than 10 per cent of those have defaulted. The number of deals done rose to 133 in 2005, less than 20 per cent of which defaulted, and 89 in just the first half of 2006, about one-third of which have defaulted.

However, the real peak of the market saw 147 deals done in the second half of 2006 and 172 done in the first half of 2007 – of which 68 per cent and 76.2 per cent, respectively, have now defaulted.

The way these CDOs have performed has especially hurt the new wave of specialist credit hedge funds, which sprang up in recent years and became heavily dependent from creating and managing such deals. They were drawn to such business by a belief in the sustainability and predictability of the fees it would generate.

However, about one-third of the CDOs of ABS that have defaulted, or almost $105bn worth, have been or are being liquidated – often ¬leading to losses for investors and putting further pressure on market prices of the bits of mortgage bonds and other CDOs they are selling.

REMINDER

For no charge, as a service to our readers, we will be happy to examine your current investment portfolio, and explain how we might restructure it to meet your needs for income and capital appreciation in the current environment.  Please give us a call if we can help you in this regard.

Thanks for listening.

Monty Guild and Tony Danaher
www.GuildInvestment.com