Property Grunt

Saturday, December 29, 2007

Roll call: Still sick but trying to blog edition

The Sun Tzu of Finance.

I just want to thank Curbed and everyone else for their shoutouts. Yes. I am still ill. Not as bad as before but this f**king flu still won't leave my respiratory system and I am still coughing up phlegm but not as much.

A friend of mine has invited me to watch the UFC which I am dying to see since it has a pretty exciting card consisting of Liddell vs. Silva and Hughes vs. St. Pierre. I am going to take a nap and hopefully it will give this flu the heave ho.

Yesterday, I was watching the tail end of a discussion on Power Lunch on CNBC and apparently Bank of America has been getting hammered so badly by the subprime meltdown that they are cutting costs by getting rid of soap and soup. I am not sure what the exact details are and I am not sure how soup comes into the equation. But if BOA is going as far as cutting down on soap to lower their overhead then things are really bad.

Another item I saw on CNBC was Warren Buffet's new venture which is called Berkshire Hathaway Assurance Corp. The NYP provides more details.

Here's the rundown.

Municipalities and towns need cash to finance and expand operations and besides tax revenue they issue bonds. Of course investors are not going to buy any old bond and want assurances that they will get their return on their investments. This is where bond insurance comes in.

This is masterful move on Buffet's part because of the current status of the market.

As the New York Times article This Is the Sound of a Bubble Bursting has stated.

AT the state level, Florida’s sales tax receipts have slipped by nearly one-tenth this year, and by 14 percent in Lee County. That is a clear sign of a broad economic slowdown, said Ray T. Kest, a business professor at Hodges University in Fort Myers.

“It started with housing, the loss of construction jobs, mortgage companies, title companies, but now it’s spread through the entire economy,” Mr. Kest says as he walks a strip of mostly empty condo towers on the riverside in downtown Fort Myers. “It now has permeated everything.”

In recent years, Bishop Verot Catholic High School in Fort Myers had raised as much as $200,000 by selling goods at a dinner auction. Michael Pfaff, a Cape Coral mortgage broker, used to donate a weekend cruise on his 40-foot catamaran. But Mr. Pfaff’s business has all but disappeared, and he recently sold the boat. This year, the school canceled the auction and is deferring building maintenance.

The county school district’s decision to cancel construction of new public schools reflects a broader diminishing of resources. Developers have to pay so-called impact fees to the district to help fund new facilities. Two years ago, the district took in $56 million in such fees. Next year, it expects only $25 million.

New schools are no longer needed anyway, says the schools superintendent, James W. Browder. Many families connected to construction and real estate have moved away, so school enrollments are growing more slowly than expected. This could generate a snowball effect all its own: the new schools were to cost as much as $60 million each to build, so canceling them could mean further job cuts for the already reeling building industry.

Mr. Browder points out an upside of the housing downturn: Hiring people has become easy. In recent years, the school system struggled to find bus drivers, given the abundance of jobs at twice the pay driving dump trucks in home construction. “Now, we get 14 applicants for every job,” he says.

The county government depends on property taxes for a third of its general funding. Since taxes are assessed based on the previous year’s real estate values, it has yet to feel a dent. But agencies are under significant pressure to pare back in anticipation of a dip in next year’s funds.

Tax-cutting advocates cheer this prospect. Governments have gotten fat on the boom, they say. A constitutional amendment facing Florida voters in January would expand tax caps for many residences statewide.

“All the local governments were drunk with money,” says Mr. Kest, the finance professor. “Now, they’re going to have to cut back and learn how to manage.”

But local officials counter that they are already being forced to contemplate significant changes that could affect everyday life. The county’s public safety division, which operates ambulance services, says it could be obliged to cut staff. The county’s Natural Resources Department recently delayed a $2.1 million project to filter polluted runoff spilling into the Lakes Regional Park — a former quarry turned into a waterway dotted by islands and frequented by native waterfowl

This is where Buffet comes in. With his reputation and triple A rating he can provide the insurance backing for those bonds and with his reputation will allow him to easily borrow more money from investors.

I can't believe how brilliant yet simple this move was on Buffet's part and it is example of being aware of your terrain. With the subprime mess and the rate of foreclosures skyrocketing, Buffet probably realized that regardless of these problems municipalities still need to run and grow. Yet their core source of revenue, which is property taxes, has been reduced considerably due to the real estate market therefore they are more likely to go the bond route.

Now Buffet gets to play White Knight and comes in with his triple AAA rating in providing insurance for those bonds. And as he stated in an interview with CNBC, he doesn't have any trouble sleeping at night because he would never do a deal that would give him trouble sleeping at night. One of the advantages that Buffet has is that he can make a deal as big and as small as he wants. But if he does not get the rate he wants, it is not going to happen.

The crazy thing is that Buffet is pretty much the only game in town. As the Post states.

Many major bond insurers that traditionally dominated the $2.5 trillion municipal borrowing world are on the ropes, wracked by their own credit problems and cash-flow troubles, causing cash sources from investors to dry up for many municipal and state governments

The launch of Buffett's well-timed venture shook up the industry, and sent shares tumbling for two major municipal bond insurers - MBIA, which fell 17 percent, and Ambac Financial, down 15 percent

These firms are still trying to get their heads above water and who knows if any of them will be still be around in the next couple of years which clears the playing field for Buffet.

One of the attributes I admire of Buffet is his ability to stay behind the pack instead of following it and there is a huge difference between the two. When you are following the pack, you are basically taking the same path they are taking which usually leads to the same results. When you are staying behind the pack, you are simply observing their movements but you are not duplicating their actions but studying them. Then when the time is right you jump in.

What Buffet has done isn't complicated, all he did was time himself to extend his brand.

What I also find interesting is that I have not heard of Buffet jumping into the Tax Lien game which is undergoing turmoil of its own. My opinion is that he does not want to deal with the physical transactions of liquidating real estate which is already messy enough.

In the world of stupidity and desperation, the New York Times presents an article about card counting crews who are invading who are invading our nation's gambling establishments.

WHEN he hits the blackjack tables at the Foxwoods casino in eastern Connecticut, Mr. S is no longer a construction worker in his 20s laboring for a weekly paycheck. Dressed casually and acting as if he couldn’t care less what anyone thinks, he plays the part of a pushy rich kid who has no problem making bets that often exceed $1,000 a hand.

His act is observed knowingly by friends — his teammates, really, who hover incognito around the blackjack table. With time, Mr. S’s rich-boy persona may earn them all lots of money.

For the last seven months, the five friends — including a paralegal, a beer distributor and a pool cleaner — have been hitting the casinos in Atlantic City and Connecticut, risking their $50,000 stake in hope of winning hundreds of thousands of dollars by a strategy known as card counting.

Each team member knows how to count cards on his own, meaning he recognizes when the odds have shifted from the casino’s favor to the player’s. It’s then — when there are still a disproportionate number of picture cards and tens left to be played — that a card counter dramatically raises his bets.

Inspired by Ben Mezrich’s best seller, “Bringing Down the House,” a 2002 chronicle of a group of M.I.T. math whizzes who collectively won millions in Las Vegas in the 1990s, the team began visiting casinos in June, joining many others who came to card counting through the same route. The card-counters’ ranks will likely swell even more this spring with the release of “21,” a film based on Mr. Mezrich’s book.

First of all the movie is going to be a complete joke because the real M.I.T math whizzes are all Asian. Yes, they fulfill a stereotype, but Hollywood in its infinite wisdom made the majority of the cast all white. As far as I am concerned, it is akin to casting Pat Boone as the lead in a Malcom X biopic.

The only parties that will be rolling in the dough are Mr. Aponte because there will a ton of losers beating down his doors of his Blackjack Institute and these gambling institutions. Remember. THE HOUSE ALWAYS WINS.

I realize why these crews come together because they are looking for an instant tax free pay day because their winnings will be in cash. But for the amount of effort and time they are putting into this, I think they would be better off investing in a business or bettering their financial portfolio. Unfortunately with the way the economy is running, I foresee more people getting involved in these types of unorthodox projects to earn money.

These crews aren't cheating per se, but they are not only risking what little money they have but casinos usually frown on this type of behavior and they have their ways repelling these elements.

I am sure it would never come to this point. But why risk it?