The Ticker

It was only a matter of time before the big homebuilders started a much-needed wave of consolidation. Now, the big publicly traded companies are finally agreeing to pair off in hopes they'll be able to wait out the time it takes to reduce the huge glut of homes built during the real estate boom.

Today, Centex and Pulte join forces to raise enough capital to ride out the rest of the bust. They may have it, with some $3.4 billion in the newly combined company plus expectations of annual costs savings in the $350 million range. The all-stock deal looks like this: Pulte pays 0.975 of a share for each share of Centex, which values Centex at a 38 percent premium to yesterday's close, the companies said. The $1.3 billion deal comes with $1.8 billion in net debt, and creates the largest homebuilder in the country by market cap.

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Federal Reserve Governor Kevin Warsh has a reputation as one of the central bank's more assertive literary stylists, and today he's earning that distinction. In his speech today (worth a thorough read), he sees an upside to The Panic of 2008, saying, "the encouraging news, I should note, is that panics end. And this panic is showing meaningful signs of abating."

That's the good news, but he's also "decidedly uncomfortable forecasting a sharp and determined resumption of growth in the coming quarters," saying he suspects "the process of an efficient reallocation of capital and labor will prove slower and more difficult than is typical after recessions."

Interestingly, Warsh also seems to be indirectly criticizing the former occupant of the job he didn't get (that would be Treasury Secretary Tim Geithner and the job would be running the New York Fed, which went to long-time Fed veteran William Dudley). Warsh doesn't mention names of course but he's very specific on the importance of clear communication in stopping the current panic, which is the main complaint against Geithner right now. In the conclusion he writes:

Financial stability demands policy stability. The official sector's policy preferences must be communicated clearly, credibly, and consistently and backed by concrete action.

To accelerate the formation of a new financial architecture, the official sector should outline and defend a positive vision for financial firms and welcome private capital's return. The nature and terms of the relationship between financial firms and the official sector should not be left in limbo.

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The Dow finally topped 8,000 this morning for the first time since February. Good news for investors, especially owners of bank shares worried over whether hobbled institutions would survive under the weight of all those bad mortgage assets sitting on their books.

Bank shares are up because rule-setters just made it easier for banks to obscure the value of their toxic assets. The Financial Accounting Standards Board revised its rules to allow companies more leeway in determining "fair value" for assets on their books and reduced the threat of taking big charges against earnings on investment losses. That kicks in this quarter and can be applied to the first quarter as well. Banks will be allowed to largely define their own "orderly" strategy for winding up those bad assets, which likely means fewer writedowns on losses like those required under current mark-to-market standards. Ultimately, it equals breathing room for the big banks, higher share prices in the near-term, and not much else. Today's rally aside, bank solvency is still a question (OK, THE question).

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Good post today from the always insightful Roger Nusbaum regarding Mr. Black Swan's advice for diversification (namely very little goes a long way).

Specifically, he outlines Taleb's “don’t trust the market with what you cannot afford to lose" strategy -- that's 85-90 percent of your portfolio in cash, with the rest in hyper-risk mode. Nusbaum outlines how that sort of portfolio might look:

For a properly diversified $100,000 portfolio an average return might be $10,000 for a year. If the portfolio can make the same $10,000 by only risking $2000 it would be taking almost no risk. So expanding it a little to Taleb’s 90/10 idea putting 2% each into five stocks with the potential to double could yield 10% for the entire portfolio plus the t-bill interest. I am not saying picking five stocks that will double is easy, in fact I doubt I could do it but we do know where to look. Who would be shocked if the worst of the financial stocks doubled again with no fundamental justification? In the next bull market cycle there will be some tech stocks that double, some smaller mining stocks and so on. You know where to look for stocks with the potential to double and perhaps using options, which Taleb uses, give a better chance for success in a manner of speaking. In assembling a group of names with the potential to double perhaps the average return works out to 50%. That $5000 plus the t-bill interest could be close to a “normal” stock market result with much less risk taken.

Nusbaum doesn't recommend the strategy, but it's an interesting exercise. I've been talking with several managers lately who really are pushing for a re-think of the usual buy-and-hold index fund approach used by most retail investors in favor of a broader mix of assets with lower correlation to stocks, the promise of higher returns and, ultimately, more risk (i.e. gold, currencies, etc). This isn't that, exactly (Taleb's version is probably quite a bit safer given the limited risk profile) but, my question is this: Does a swinging-for-the-fences strategy make more sense if you believe (as more analysts do these days) that broad equity market returns are likely to be lower in the coming decade than they have in the past few? Basically, if a properly diversified $100,000 portfolio is returning $6,000 a year rather than $10,000, does it makes more sense to concentrate your risk?

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