"One cannot and must not try to erase the past merely because it does not fit the present"
Golda Meir

I've been taking a short vacation on the West Coast and thus fell back slightly on my blogging- it's time to catch up... I'll start tonight with some important headlines and quotes from various sources that I think might be pointing to a slightly different tilt in my portfolio over the next few weeks.

First, key developments in the overall economy- as I pointed out before- values of both commercial and residential real estate securities have recovered dramatically since the Bear Sterns fiasco. They (values) held up quite well even after a steady flow of negative news on the real economic front in the last several days. And while this should theoretically be considered very good news for large banks, I believe that one of the threats, that seem to have been largely ignored during the past several weeks, could easily become a source of headline troubles again- I am talking about the potential downgrade of ABK and even may be of MBI...On one hand despite the bigger that expected headline loss of $1.66B, S&P said that it won't downgrade ABK's debt. On the other hand - shares hit a new all time low and so did its actual credit default swaps.

"Credit default swaps on Ambac Assurance Corp started trading for the first time at an upfront cost of 11 percent, in addition to annual premiums of 500 basis points, according to data provider CMA DataVision... This means it would cost $1.1 million as an upfront payment to insure $10 million in debt for five years, in addition to annual payments of $500,000"

I think that both S&P and Moody's are definitely smoking something if they believe ABK really deserves AAA rating? AAA means probability of losses on the secure debt is close to zero- do you think that if GE reported negative earnings for 9 months they would still be AAA? Both debt and equity markets definitely disagree with jokers at S&P and Moody's... The more I look at the most recent actions of debt rating agencies, the more I begin to agree with many critics- they really have no clue about what's really going on out there. And while the potential downgrade probably won't have a severe impact on large players who already raised lots of fresh capital, it could very well force some of the smaller banks out of business...

And if the bond insures woes weren't' enough- quick mention of some other potential sources of trouble-First, the leveraged buyout related bust seems to be only starting, and thus the 80-90 cents on the dollar price for LBO related debt is not quite a bargain...

"

April 23 (Bloomberg) -- The looming wave of bankruptcies is unlikely to be kind to bondholders. And they have only themselves to blame... Rather than receiving the historical average recovery of 42 cents on the dollar in a default, owners of a third of high- yield, high-risk bonds rated B+ or lower may get no more than 10 cents, according to New York-based Fitch Ratings. About 22 percent are likely to get 11 cents to 30 cents."

How about another few potential sources of joy for banks :)?- Credit cards and home equity lines...

"Standard & Poor's said delinquencies on home-equity lines of credit issued in 2005 and 2006 shot up in March, underscoring continued trouble in the U.S. economy...S&P said that 9.19% of lines issued in 2005 and 11.45% of loans issued in 2006 are delinquent, up 6.49% and 6.51% from February. Serious delinquencies, where lines are 90-days plus overdue or in foreclosure, shot up 8.83% and 8.75% for 2005 and 2006, respectively, representing 5.3% and 6.34% of the years' total issuance"

"April 22 (Bloomberg) -- Target Corp., the second-largest U.S. discount chain, said it wrote off an annualized 8.1 percent of its credit-card loans in March as consumers grappled with job losses and the biggest housing slump in a quarter century. Defaults during the month totaled $55.5 million, the Minneapolis-based retailer said in a regulatory filing today. The annualized charge-off rate was 6.8 percent in February"

And to finish it off, how about a quote from a bellwether of US economy- UPS... Things seem to have gotten a bit worse in March...

"UPS's first quarter results illustrate the dramatic slowing in the U.S. economy. At our investor conference on March 12th, we told you that volume growth in January had been up 3%. But in the six weeks prior to the conference, it had been negative... We also said if these trends persisted through March, we would not achieve the earnings guidance we had provided for the quarter. [The] trends did continue. Many have become sharply more negative in the last two months. ... The great unknowns are the severity and the duration of the current economic slowdown. Many of our customers have tightened their belts resulting in a shift away from our premium air products to ground shipments"

But it's not all doom and gloom- most of the tech sector seems to be holding up quite well and earnings are still growing handsomely there year over year... There are also some indications that most industrials could whether the recession "ok" driven by lower dollar...More on that tomorrow...

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