Nokia: back in or still out?

Pretty downbeat article on Nokia from the NYTimes. One analyst even questions whether Nokia can maintain its dividend! Ouch. I think a big problem with Nokia is its aging Symbian platform.

As far as I know (correct me if I'm wrong), RIM also has an out-of-date platform, with every e-mail message going through RIM's servers (see wikipedia entry). While RIM's technology does allow caching of messages on the client, RIM (or the customer) has to pay for the costs of the service. I don't see why someone couldn't write an iPhone app that does the same for internet-based mail, including outlook internet mail.

Bought KRE put - exp june 2010, strike 20$, $2.05

KRE is the symbol for the SPDR KBW regional banking ETF. These are banks that are not too big to fail and are indeed failing, and will continue to fail due to their over exposure to commercial real estate. More on that later.

The Carry Trade

The carry trade involves borrowing at a low interest rate and investing (or lending) at a higher return. Lately, big money investors have been engaged in the carry trade by borrowing US$ at very low rates and investing in Australian bonds, emerging markets, and commodities, as well as plain old stocks and bonds. Traders are essentially betting on a falling US dollar, and they've been right so far.

The problem with this type of carry trade is that it is creating a bubble. A bubble occurs when investors borrow against an overpriced asset to buy more of that asset. (See Galbraith's A Short History of Financial Euphoria in the amazon panel on the right for an interesting treatise on bubbles). When interest rates or the US dollar go up, or the market price of the asset starts to fall, investors have to sell what they can to avoid defaulting on their loans. This leads to panic selling and falling asset prices.

So you can expect a fall in emerging markets, Oz bonds, and commodities, and probably everything else. This could happen as soon as mid to late 2010 if the Fed raises rates then. It could happen earlier if the US dollar rises.

Interestingly a big doom and gloomer based on the carry trade is Roubini, who predicted the securitized debt meltdown (see here).

Citron Research

Anther great resource is Citron Research. Citron exposes the seamy side of companies. For example, I was all set to buy LPHI until I read Citron's post on it.

Bought Canadian Utilities @ $38.55

It you believe that slow and steady wins the race, then you'll like Canadian Utilities (CU.TO, CDUAF.PK). Most of its operations in Alberta. About a year ago, I calculated that about 70% of its revenues were either regulated or under long-term power generation contracts. Its current dividend is $1.41 CDN, and its TTM earnings are $3.18 CDN, for a coverage ratio of 2.25. So, the dividend is safe. Also, its revenues don't depend much on consumer discretionary spending, of which I expect there to be less and less.

• Unlike Fortis, or Brookfield Asset Management, CU doesn't have any commercial real estate holdings.
• the expected yield based on this price is 3.65%
• the present value of a $100 investment is $149.38, with a discount rate of 3.5%. (Still, you have to take this with a grain of salt. I think general economic growth will be a lot lower in the future.)
• Its valuation is pretty good, as shown below in this graph from TD Waterhouse.

Over the last 10 years...

• CU's ROE has hovered around 15%, despite being a utility
  
• Its balance sheet has been conservative
• Leverage around 3 (good for a utility) (and currently 2.4)
  
• a current ratio between 2 and 3 (and currently 3.4!)
  
• It has not had a negative cash flow year
• It's a Canadian dividend aristocrat
• A real widows and orphans stock
  

Wait a few days before buying because the ex-dividend date is November 5.

PIMCO Commentaries - Another Great Resource

You can read commentaries from the PIMCO team, including the famous Bill Gross, here. Bill Gross' commentaries are not only highly informative, they're often a bit weird. He must be an interesting guy. You can also read previous commentaries in the archive.

Is Gold Overpriced? II

As a follow on to my earlier post, I should have noted that the gold standard was in effect in the US until 1971, with some breaks during the war periods and some odd happenings from WWI to Bretton Woods in 1946. However, the figure in the report I mentioned is not about the price of gold, but its purchasing power. For example, it may have cost an ounce of gold to buy a really good suit in 1880. If so, then it also cost an ounce of gold to buy a really good suit in 1950. That just seems weird to me, gold standard or no.

The purchasing power of gold started to deviate significantly from its historical range only after 1971, when the US currency was no longer pegged to gold. Perhaps the loss of confidence in the currency (and the hyperinflation of the 70s) led people to gold.

Following the end of the inflationary period in the early 80s, investor turned to the US dollar in times of financial crisis, as well as to gold.

With the US' increasing debt load, the luster seems to be off the US dollar as the currency of reserve, tipping the balance to gold (and the Canadian and Australian dollars.) These shifts can readily bee seen by examining the world gold council's graphs of the price of gold in various currencies. Since fall 2008, the price of gold is up 40% in USD, but pretty much flat in A$ and CDN$.

The price of gold (in USD) may go higher still, but it won't have anything to do with its historical purchasing power. It will have to do with a loss of confidence in the US dollar. Betting on confidence is a bit too speculative for me. I do own a bit of gold in the diversified part of my portfolio. If my investment in gold exceeds the proportion I've assigned to it, then I'll rebalance (i.e. sell).

Dividends

Even so, the old farmer said to his son:

A cow for her milk,
A hen for her eggs,
And a stock, by heck,
For its dividends.

An orchard for fruit
Bees for their honey,
And stocks, besides,
For their dividends.

John Burr Williams

Is Gold Overpriced?

There's gold in them thar hills! Gold I tells ya! Gooooold!

Now, in 1971, the purchasing power of gold was about equal to what it had been going all the way back to 1796, yessiree (see Figure 1.1 of this report from the World Gold Council). Back in '71 gold was about 40$/oz (see graph). Since then why, the purchasing power of gold has gone up. Indeed it has. But if'n we take 1971's gold value to be fair an' square, then the fair value of gold in 2009 should be $213.17 (according to the bls inflation calculator).

Now, of course there be some fussin' about how Uncle Sam calculates inflation (I'll leave you to figure that one), so $213 may be a might shy of gold's true worth. Still though, $213 is a long long way from $1000.

Bought CSF.TO at $8.95

Cash Store Financial is a growth stock that stopped growing its earnings and then became a value stock. It's in the payday loan business in Canada. However, rather than backing the loans, it acts as a broker between lenders and borrowers. With credit tightening everywhere, more people will need to avail themselves of payday loan services like CSF's, even in a continuing recession. Maybe especially in a continuing recession.

Another point in CSF's favour is an increase in payday loan regulations. In most cases, the new provincial regulations allow the existing payday loan operations to still make a nice profit, but perhaps not nice enough if you're a small operator. CSF believes, and I agree, that the smaller players will be looking to exit the market. CSF sees this as a buying opportunity.

Another interesting feature of CSF is that upper management really pays close attention to operations. In my opinion this should be upper management's primary function. In too many companies however, operations is all but ignored in favour of strategizing, writing mission statements, backdating options, and creating golden parachutes. In contrast, CSF's upper management tours the country and meets each branch manager. Management examines the performance of each branch and creates a plan to bring the laggards up to speed or closes them.

This is also a good time in the consumer credit marketplace because other lenders are tightening their credit (see for example, Jim Jubak's blog post). This is just part of the continuing global deleveraging. This will drive more business to CSF.

Another couple of interesting points about CSF.TO.

1. Its expansion is funded by cash flows.
2. It has no long term debt
3. It scored 100% on my piotroski screen (but ignoring p/b).
4. It has a good dividend yield of 2.8% at $9.25/share.
5. A low payout ratio of 32%
6. It's making money. Pretty good these days.
   

A couple of disturbing things about CSF.TO

1. As a broker CSF isn't directly exposed to credit risk. However, CSF pays retention fees to its lenders to compensate them for losses due to defaults. So, indirectly, CSF does take on credit risk. If the economy goes south, defaults and retention fees will go up. Ouch.
   
2. In a company that grows by opening new branches, there is always the possibility that EPS growth comes purely from new branches opening. Consequently, you want to be sure that same store sales are up too. While CSF's same store revenue has been rising, this rise is a function of the age of the store: the older the store, the lower the same store revenue increase (see page 24 of the 2008 AR). That's worrisome. CSF is in the process of developing of new products to increase revenues. Gotta keep an eye on that.
   

My suggestion to management is to also try to diversify its portfolio of lenders in an effort to reduce retention payments.

CSF earnings were a bit hard to analyse because it spun off its rent to own division on March 31 2008, and in Q3 2005 it eliminated "rollovers" which had a big negative impact on eps. I was able to eliminate the effects of the spin off by looking at segmented earnings in the annual reports. There were a lot of non-recurring charges as well, a few for the spinoff, another for a lawsuit that was just settled. However, I couldn't figure out anything comparable for to rollover fees. See below for eps for the last few years.



In the AR, management attributes the drop in earnings from 2006 to 2007 to the end of the rollovers. It seems to me that there is too long a time interval between the end of the rollovers and 2007 for that explanation to be completely believable.

Nonetheless, based on these data, I calculate that a 10 year investment in CSF has a discounted present value of 20.40$ (CDN)/share, where 3.5% is the discount rate. The problem with this estimate is that there's not much data to go on, and it's likely to be a bumpy ride.

Jim Jubak

Jim Jubak is back! He has access to info that I sure don't. He has a very good stock picking record. I highly recommend his blog.

BCE update

In a recent post, I noted that BCE's payout ratio was high. The ratio I used was expected 2009 dividends over 2008 eps. TTM eps from 2009 Q2 are $2.096. Expected 2009 dividends per share are $1.305, and probably $1.40 thereafter because 2009 dividends have gone up twice and are now at $0.35/share/quarter. So, the payout ratio, given by $1.40 over TTM eps is 67%. That's not too bad. Another thing to consider is a non-operating charge in Q4 2008 of $267 million (which businessweek has listed as a loss on sale of investments), or $0.33/share. If you add that back to TTM eps, you get a payout ratio of 57.7%. There have also been on-going restructuring charges for the last TTM of about $0.40/share. At some point these will disappear, reducing the payout ratio even further.

A note of caution. Over the TTM, revenues are down. Eps are flat-ish because of a reduction in costs. I guess they fired people.

sources: retuers.com and businessweek.com

Power Corp

Below you will find a link to a very interesting article on the power behind power corp: the Desmarais family. Here's a quote:

After Sarkozy was elected president in May 2007, he awarded Desmarais the Grand Croix de la Legion d’Honneur, an order of merit established by Napoleon in 1802. “If I am the president of France today, it is thanks in part to the advice, the friendship and the loyalty of Paul Desmarais,” Sarkozy remarked.

Talk about connections!

The article also talks about some of Power Corp's many and varied investments.

http://hotrodatquincy.blogspot.com/2009/08/buffett-loses-to-desmarais-as-power.html

Bought preferred shares from BNS, POW

I recently bought some more preferred shares. I bought shares from the bank of nova scotia (BNS.PR.M) at $20.45, and power corp (POW.PR.B) at $21.90 and $21.92, including commission.

Preferred shares are similar to bonds in that they usually pay a fixed dividend and can be redeemed (called) by the issuer at a specified price. There is often a schedule, such that during different periods of time, the shares can be redeemed for different amounts. Usually, the amount will start off high, and drop as time goes on. Typically the final amount is $25.00/share, and sometimes $50.00/share. The final redemption price for both POW.PR.B and BNS.PR.M is $25.00. Consequently, you usually don't want to buy a preferred shared trading at more than the redemption price. I like to buy them at around $20 to $23 to give myself the chance of some capital appreciation if the shares are redeemed.

The risks of my preferred share investments are the same as those for bonds, except that bondholders are ahead of preferred shareholders in the creditor queue during bankruptcy. Fixed-rate preferred shares (such as those mentioned here) have interest rate risk, and preferred shares in general have creditor risk. The issuer could also suspend the dividend payment on the preferred. If it's a cumulative preferred, the issuer will owe the dividends that were not paid. I think you're more likely to see a cut in the dividend on the common if the issuer gets into trouble.

The interest rate risk is that interest rates will go up, and the value of the preferred shares will go down (so the yield goes up), just like bonds. I'm not too worried about that, but you never know about interest rates. There could be a run on government bonds because of the massive debt that governments have racked up, and that could lower the price of all securities.

The credit risk is that the issuer will go belly up. Not to be taken lightly these days. However, I don't think BNS will go bankrupt. Except for CIBC, the Canadian banks are pretty solid. Moreover, BNS doesn't have large US holdings (unlike RY and TD which have been forced to take writedowns on their US holdings). The bigger risk is that BNS cuts the dividend. To assess that we need to look at the financials.

Canada Life (CL.PR.B) which I bought earlier is also pretty safe I think. Power corp is harder to assess. It's a financial conglomerate with holdings in life insurance companies and mutual fund companies (e.g. Putnam). I can't assess all the portfolios of its subsidiaries like I did with Canada Life. So instead, I look at the ratio of total dividends paid on the common to total dividends paid on the preferreds. My reasoning is that they'll cut the common before they cut the preferred. I also look at the payout ratio.

Here's an image of my spreadsheet containing recent data on a bunch of preferreds I looked at.

Click on the image to see a bigger version.

CU, and CIU are issues from Canadian Utilities and TCA is TransCanada Pipelines. Power Financial is a subsidiary of Power Corp. (Not too much imagination there).

Anyway, you can see that BNS.PR.M, CIU.PR.A, POW.PR.B, and PWF.PR.F are all still in the right price range, and the yields are pretty good too. The DBRS ratings are pretty good, but how much do you trust DBRS these days? The payout ratios on the common are also pretty good, especially for Power Corp, but not for Power Financial. All the firms pay out much much more in dividends on the common than on the preferreds (that's calculated over all preferred series for each issuer, not just the ones shown in the table). Consequently, if there were dividends to be cut, you might see it on the common only. Another factor in determining credit risk is the extend of debt in the capital structure. However, financial companies and regulated utilities will typically show a lot of liabilities in their cap structure, and that's what we see here.

Note that the payout ratio on the common shares for BCE is quite high (80%) and that makes me uncomfortable (I still own some BCE.PR.A), but the yield is not much higher than the other issues. It's even worse for Power Financial. At least Power Corp has money coming in from somewhere else than Power Financial. Overall, you might consider BNS.PR.M, CIU.PR.A, and POW.PR.B, with POW.PR.B being the riskiest.

Global Water ETFs

I'm interested in the water sector (utilities, engineering, pipes, etc.) so I'm looking into water sector ETFs. There are two that are pretty similar in terms of geographical diversification and sector diversification. They even have more than a few stocks in common, though there are a lot that are not, which seems odd. These two ETFs are PowerShares Global Water (PIO) and Claymore's S&P Global Water Index ETF (CGW).

What really seems odd however is that CGW yields almost 8%, while PIO only paid out a single dividend in the last two yeas of $0.008 in mid-june 2009, according to Yahoo finance. What gives? If they're so similar, why the big difference in yield? Some info can be obtained by looking at the ETFs annual and semi-annual reports. Claymore's is here: http://www.claymore.com/etf/fund/cgw. I got PowerShares' through morningstar: http://quicktake.morningstar.com/fundnet/secfiling.aspx?symbol=PIO&country=USA.

On page 21 of Claymore's annual report, you can see that CGW received a bit over $15M in dividends from August 2007 to 2008. But CGW only distributed 1/10th of that to shareholders (page 22). With 15M shares outstanding that's about 10 cents/share, which is close to the dividend shareholders received in December 2007 ($0.108). In December 2008, CGW distributed almost $12M (page 28), or $1.24/share, for a yield of 8% based on the recent price/share 0f $16.33.

But what can we expect in the future? From August 2008 to February 2009, CGW collected $1.2M in dividends, so perhaps we can expect $2.4M in dividends for the 2009 fiscal year. Still, a lot of European companies don't provide quarterly dividends, they may do it semi annually, or just annually. Also, they are more likely to keep their payout ratio fixed and let the dividends fluctuate with earnings. Nonetheless, you can see that that's a lot less than the $15M collected in FY 2008. So, if we do the math we get: $15M-$1M-$12M+$2.4M=$4.4M, or $0.45/share (there are only 9.64M shares now; see page 28), or at the current $16.33/share, an expected 2.8% yield for 2009. Realistically, we're talking somewhere in the 1% to 3.5% range. If we just consider our estimate of $2.4M for 2009 (ignoring leftovers from previous years), the yield falls to 1.5%. Nowhere near the 8% quoted by Yahoo. Of course, Yahoo calculates this stuff automatically. Just goes to show you that you have to be careful.

PowerShares had a different approach. On page 138 of the semi-annual report, you can see that for FY 2008, which ends in October, they received $0.32/share in dividends (investment income) but did not make any distribution to shareholders in FY 2008. At some point between October 2008 and April 2009, they distributed $0.16/share, while making $0.07/share in dividends. So perhaps we can expect the fund to make $0.14/share for 2009. That's a lot lower than last year's $0.32. Still, a lot of European companies don't provide quarterly dividends, they may do it semi annually, or just annually. Also, they are more likely to keep their payout ratio fixed and let the dividends fluctuate with earnings. Consequently, $0.14 is just a rough estimate. If those dividends were distributed, they would provide a 0.9% yield for 2009, based on today's price of $15.33/share. That's not too far off the yield of 1.5% quoted above for CGW based on 2009 dividend income.

Well, so there you are. Gotta check under the hood.

Bought Canada Life Preferred (B) @ 23.39

On May 11, 2009, I bought a preferred share issue from Canada Life insurance for 23.39/share (cl.pr.b). At that price, the yield is 6.7%. I am not hedging this purchase. This preferred share is redeemable at 25$.

I was looking for a solid company with a high yielding preferred share issue. Canada Life also has common shares, but they have all been bought by great west lifeco. Canada Life has the following characteristics.

• The payout ratio on the common shares for last FY was 49%
• It paid out 521.56M in dividends on the common shares, but only 14.46M on the preferred shares.
• These two preceding bullet points are important because Canada Life would have to stop paying dividends on the common shares before it decreased payments on the preferred shares. These preceding points show how safe the preferred dividend is.
• It made money in 2008, in terms of net income, comprehensive income, and cash flow. At lot of Canadian insurance companies did not.
• Its assets/liabilities is 1.1, which is pretty much the same as several other Canadian insurers I looked at. (Reuters and GlobeInvestor were showing very low debt/equity ratios which I don't know how they calculated. I guess they excluded insurance policy liabilities, but I'm not sure. Consequently, I made up my own simple measure of assets/liabilities.)
• Its ROE was above 15% for the last four years, which is pretty good for a life insurer according to Pat Dorsey (2004; The Five Rules for Successful Stock Investing)
• Unlike Berkshire Hathaway and Fairfax Financial, Canada Life has most of its investments (67.5%) in A rated bonds.
• Unrealized losses represent 5% of its investment portfolio.

Pretty solid, it seems to me.

Why Invest at All?

My last post was all doom and gloom. So the question arises as to why invest at all? Why not just stay in cash? There are two answers:

1- Because the stock market is a leading indicator. In the past, it has gone up before economic recoveries. Indeed, both the TSX and s&P500 are up a bit more than 30% since their March low. If it sticks, the markets would have again risen before the recovery.

2- By buying stocks with a good yield, I benefit from that yield even though I'm hedging. For example, if I buy XYZ at 100, yielding 5%, and it goes up to 150, my hedge will wipe out that capital appreciation. But I'm still getting 5%. Had I waited until the stock was at 150 before buying, the yield would only be 3%. If my hedge works perfectly, I'm ahead by buying early and hedging.

HXD.TO (TSX hedge) bought @ $27.66

I haven't blogged for several months 'cause I've been busy. On the other hand, I haven't invested in anything since the last time I blogged except for HDX.TO, the Horizon Beta Pro S&P/TSX double inverse ETF. If the S&P/TSX goes down by x% on a given day, HXD.TO will go up about 2x%.

HXD.TO, like other inverse ETFs, works as a hedge, but only if the index really drops. If the index goes sideways, you lose money. That's because you need even bigger gains to get back to even after you've lost money. For example, if you invest 100$, and lose 10% on day 1, you're down to 90$. To get back to 100$, you need to make 10$, or 11.1% of your current 90$ balance. (Hence Warren Buffet's two first rules of investing.) So if the index goes sideways (up 10%, down 10%, up 5%, down 5%) you'll lose money.

I bought HXD.TO on October 31st, at $27.66/share. It's now at $24.60/share.

Buying a hedge like this is not very Benjamin Graham-esque (because I'm worrying too much about that nutty Mr. Market). However, I still see a lot of downside in the current market:

1- The firings are just getting going.

Remember that this crisis arose in the credit markets. The firings began about april or may 2008 and have kept going up since then. Until unemployment drops, spending will be anemic and corporate earnings will continue to slide.(http://data.bls.gov/PDQ/servlet/SurveyOutputServlet). Note however, that the stock market often recovers before earnings do! Makes things a bit tougher to predict.

2- Alt-A and Option mortgage rate resets.

Sub prime mortgage resets resulted in a big increase in mortgage defaults, which resulted in asset write-downs, thus impairing the credit markets. A big spike in Alt-A and option mortgage resets is due for the 2010 to 2012 period. (See here for the ubiquitous credit swisse graph (http://economist.mrwhipper.com/?p=603), and here to get the credit suisse report http://www.imf.org/external/pubs/ft/gfsr/2007/02/pdf/chap1.pdf). Alt-As are designed for people who can't provide sufficient documentation to get lower interest rates. Because mortgage originators didn't hold the Alt-As (they were securitized), the originators would not incur any of the credit (default) risk. This incentive structure encourages some creativity in Alt-A mortgage documentation. Consequently, rating Alt-A mortgages as AAA is a joke, but they did it anyway. We're going to see a high default rate in Alt-As (though perhaps not as bad as with the subprimes), and its going to cause more problems in the credit markets.

Option mortgages are not much better. These include interest only mortgages and negative amortization mortgages, in which you don;t ay down the principle. Think these people can handle higher interest rates?

Moreover, with dropping housing prices, a lot of these mortgages are going to be upside down, even more so with the rate reset. Consequently, the value of the collateral (the house) and therefore the value of the mortgage is a lot lower than it would have been pre-recession.

The rate reset will also have a domino effect on other consumer debt (car loans and credit card debt), increasing their default rates. Think about it: if you have to choose between paying your mortgage and your credit crd debt, which do you think you would choose?

Default rates will go up, the value of the assets used as collateral (houses, used cars, and the junk people put on their credit cards) will drop even more, so the value of holding this securitized debt is going to fall some more too. This is going to freeze up the credit markets again.

3-Delevering

Is it deleveraging or delevering? Whichever it is, it's happening big time and is likely to continue, especially given what I've said above.

Consumer debt securitization allowed non-banking investors (like investment banks, hedge funds, mutual funds, etc.), often refereed to as the shadow banking system (see bill gross' columns here (http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+January+2008.htm)), to "invest" in consumer debt. This resulted in an expansion of available credit and lower rates. The problem is that the shadow banking system was also levered, maybe even 40 to 1 (http://articles.moneycentral.msn.com/Investing/JubaksJournal/fluke-credit-crisis-was-a-heist.aspx?page=2). So when the value of the shadow banks' consumer debt assets dropped, and they had to meet their margin requirements, and/or pay back some of their loans, they had to liquidate whatever they could liquidate: stocks and bonds.

Similarly, delevering might have resulted in an increase in the US dollar. Investors (shadow bankers and individuals) were borrowing US dollars and buying foreign stocks and other assets. When these investors had to pay back their loans or meet their margin requirements, or shore up their assets, they had to trade their foreign assets for US dollars, sending the US dollar up. (http://seekingalpha.com/article/108305-deleveraging-pushes-the-dollar-up)

One way to see delevering in action is to look at margin debt on the NYSE (http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition.asp?mode=table&key=278&category=8). Margin debt peaked in July 2007, and has been falling ever since. When that stops falling, it'll be an indication that delevering is petering out. However, bill gross (http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2009/Investment+Outlook+April+2009+Evolution+or+Revolution+Bill+Gross.htm) (of pimco bond fame) thinks that delevering is a long term trend.

4- Junk

And then we have junk bonds. Defaults rates are going up for those as well, leading to a drop in junk bond values, and more delevering.

5- CDS

Because securitized debt and junk bonds are risky, investors decided to buy credit default swaps to decrease their credit default risk. The problem is that the CDS is only worth what's in the "insurer's" portfolio. If the "insurer" holds toxic debt too and a lot of defaults occur at the same time, the insurer becomes overwhelmed and can't pay. AIG is a case in point. In my opinion, once the default rates increase, CDSs won't end up being worth much, leading to even more write downs.

Jim Jubak recently stated that the net CDS obligations in case of default total 2.8 trillion. (You have to figure out the net because a lot of CDSs are offsetting.) That's a 50% drop from the peak, but it's still a lot.

In comparison, Geithner's most recent bailout plan is to buy up to $2 trillion in toxic debt ( http://www.nytimes.com/2009/03/24/business/economy/24bailout.html?_r=1). In the case of defaults, the CDSs would still have to pay out. They would just pay whoever is administering the Geithner money. This gives an indication of the size of the CDS problem.


Soooo, that's why I hedge.