Deflation and Debt Destruction

Good Morning Folks!

This will be my last post of the year. I hope everyone has fun celebrating tonight. Be safe and have a Happy New Year! I am sure many of you are glad 2008 is over from an investment standpoint! Lets hope 2009 isn't as painful.

The markets are up mildly this morning. Jobless claims for the shortened holiday week were still close to 500,000. A startlingly bad number but what else is new right?

I want to highlight an excellent interview around deflation that I caught on the Market Oracle last night. This is one of those interviews that sends chills down your spine and keeps you up at night. The interview is between the famed economist Martin Weiss and his currency expert Jack Crooks.

I will put up the charts from the interview followed by a few comments and highlights from the interview. In my opinion, these two have it 100% totally right. This has been my thesis for about 2 years. The deflation we are seeing is breathtaking and getting worse, and the Fed is powerless to stop it.

Here are the charts followed by a few comments below:

First of all we have seen a massive destruction in wealth that totals $7.7 trillion:

Mortgage debt is completely collapsing as the the number of new mortgages in total dollars is being dwarfed by the number of mortgage dollars that are defaulting:

The Fed and the TARP are powerless to overcome this massive loss of wealth:

My Take:

I want to highlight a few critical exchanges in this interview. I love how they put the economic stimulus in perspective. Ben Bernanke and Bubblevision are constantly touting that this isn't Japan or the Depression all over again because we are flooding the system with money. As you can see by this exchange, this is flat out wrong and it will not work:

"Jack: But many people believe the 1930s Depression was caused by the failure of the federal government to fight the decline. This time, they say, the government is doing precisely the opposite.

Martin: In reality, America's First Great Depression wasn't caused by what the government failed to do to stop it. Rather, it was largely caused by all the wild things the government did do to create the superboom in the Roaring '20s that preceded it. They dished out money to banks like candy. They let banks loan money to brokers without restraint. And they encouraged brokers to hand it off to stock market speculators with 10% margin.

But if you want to see what happens when a government intervenes aggressively after a bust, just look at Japan since 1990. Japan lowered interest rates to zero, just like the Fed is doing today. Japan bailed out banks, brokerage firms and insurance companies, much like the Fed is doing here. Japan embarked on massive public works projects, much like President-elect Obama is proposing now.

But it did not end the deflation. And it did not prevent their stock market from making brand-new lows this year."

This is an absolute perfect answer as to why this is a bunch of bullshit.

Critical Point #2!

Here is another highlighted exchange about how the $ 8.5 trillion dollars in bailouts promised by the government is a bunch of smoke and mirrors:

"Jack: Still, most people think the government can just print more money at will. They're now talking about a total bill of $8.5 trillion. Your numbers don't seem to account for that.

Martin: Because those bigger numbers are almost entirely guarantees and swaps — not net new money added to the economy. Plus, please bear in mind one more thing: The wealth destruction we've been discussing today does not include the losses by financial institutions, corporations and governments."

100% right again. These are guarantees and do nothing to help the economy.

Bottom Line:

I would advise everyone to read this article in full. Their advice on getting through this debacle? Raise cash. Dollars will become much more valuable as this debt destruction continues. Your dollars will allow you to buy more and more as deflation destroys the value of all assets. Look at how much more gas you can get now versus a year ago with a dollar!

I could have written 5 pages on this because its the best piece of research I have seen to date. Things are going to get real tough, and this interview really helped put things in perspective. This is all falling apart at a much faster pace than I anticipated folks.

2009 looks pretty hopless in my view. We continue to party on for now in the markets. Up 1% as I speak. Play the tape!

Have a great holiday and safe New Years Eve!

GMAC Bailout Saves the Day!

Ben Bernanke's bailout binge(how do you like that tongue twister?) continued today as the Treasury committed $6 billion to GMAC which will enable them to reorganize into a bank holding company.

Here is the how the deal was done:

"Dec. 30 (Bloomberg) -- The U.S. Treasury committed $6 billion to support GMAC LLC, the financing arm of General Motors Corp., widening the government’s effort to keep the largest U.S. automaker out of bankruptcy.
The Treasury will purchase a $5 billion stake in GMAC and lend $1 billion to GM so the automaker can contribute to the lender’s reorganization as a bank holding company, according to a statement issued yesterday. The loan is in addition to $13.4 billion the Treasury agreed earlier this month to lend to GM and Chrysler LLC
.
The fresh capital will enable GMAC to expand lending to car buyers and help save GM. The automaker’s U.S. sales plunged 22 percent this year through November after GMAC ran short on cash and limited loans to people with only the best credit. The Treasury stepped in after Congress failed to pass an auto- industry bailout earlier this month.

“The relationship with GM is probably a key reason it’s being bailed out,” said Thomas Atteberry, who helps manage $3.5 billion in fixed-income assets at First Pacific Advisors in Los Angeles. “Philosophically, I’m not very happy about the fact that the government has to save an auto-finance company because management ran it into the ground.”

In a statement, GMAC said it “intends to act quickly to resume automotive lending to a broader spectrum of customers to support the availability of credit to consumers and businesses for the purchase of automobiles.” The lender financed about 35 percent of GM’s retail customers last year.

GMAC will modify its credit criteria for auto loans to include customers with a credit bureau score of 621 or above, relaxing a 700 minimum score put in place two months ago, the company said in a statement today. GMAC said it still doesn’t plan to finance higher risk transactions for buyers with credit scores of 620 or less."

My Take:

This bailout shouldn't be a surprise. God forbid anyone is allowed to fail!

What angers me here is how GMAC reacted after getting the money. They immediately announced that they will be lowering their loan qualification standards and start lending to borrowers with credit scores of 620.

Ughhh.......

Great idea guys! Lets make more bad loans! That's exactly what we need right now!

Perhaps we can now start a car bubble. Maybe I will go out and buy 10 cars and start trying to flip them for a profit. I can become a car speculator! Buy now at zero rates or be priced out forever!

I think the governments new goal should be to increase car ownership to 100% in this country!

Ok.... Sarcasm off.

Seriously though, the loose money/easy lending is what got us into this mess. Doing more of the same does not fix the problem. You don't give an addict another giant shot of heroine when you are trying to get him to stop. What really pisses me off here is they creating this lending sham with my taxpayer dollars.

I get so furious over this stuff. When are we going to put a stop to all of this? One day the credit markets are going to blow up because every country in the world is going to realize we are nothing but a bunch of debtors with an economy that doesn't have the ability to ever pay back the money.

This is all going to end very badly folks. Mark my words.

Bottom Line:

The stock market of course loved the news today. All of the major indices ended up around 2%.

Meanwhile, the economic news was horrendous.

Consumer confidence hit its lowest level ever:

"Dec. 30 (Bloomberg) -- Confidence among U.S. consumers unexpectedly dropped in December to a record on growing anxiety over the lack of jobs, raising the risk that spending will keep weakening into the new year.

The Conference Board’s index of consumer confidence fell to 38, the lowest level since records began in 1967, from 44.7 in November, the New York-based private research group said today. Another report showed declines in property values accelerated."

The Case Shiller Housing Index also came out today and was hideous:

"Dec. 30 (Bloomberg) -- Home prices in 20 major U.S. cities declined at the fastest rate on record, depressed by mounting foreclosures and slumping sales.

The S&P/Case-Shiller index declined 18 percent in the 12 months to October, more than forecast, after dropping 17.4 percent in the year through September. The gauge has fallen every month since January 2007. Year-over-year records began in 2001."

Alright, so let me get this straight:

- Confidence is at an all time low.

- Housing is now down 18% and dropping at the fastest rate in history.

Isn't it amazing how the bubbleheads can take stocks higher after hearing such news? The new spin by these ass clowns is this: "Investors will be forced out of treasuries and into the market because they won't accept a zero return on their money".

Funny, if this is the case bubbleheads, why were treasuries were selling like hotcakes again today? We had another auction today that was immediately gobbled up at practically no yield. Perhaps the smart money would prefer to preserve capital at zero yield versus losing another 20-30% by putting it into equities that are filled with companies with earnings that are plummeting. The stock market isn't going anywhere long term until we can get a better idea of how bad this downturn will be. The "bubbleheads" stupidity is beyond belief.

That being said, trading at this point is very dangerous. The market is once again ignoring the news. I am worried we could rally for a little while here.

I always get very nervous on the short side when the market ignores bad news. Here are a few reasons why I think we could see a rally:

- The risk of additional blowups in the near future(within a few weeks) seems very low.

- The Fed in the short term simply refuses to let anyone fail.

- We have a president who will do everything in his power to get out of the White House without any major blowups.

- The S&P closed at 890 which is a break above the 50 day moving average. This is bullish from a TA perspective. If the S&P holds above 890 tomorrow morning look out. Stocks could move higher.

This makes the short side risky. I sold my QID PUTS at a nice profit today. I bought some (SSO) calls today to hedge out my shorts. I may hang on to these for awhile. I am also playing fairly small and keeping a lot of cash on the sidelines.

The next major market mover is Obama. The market wants to know what his agenda is for the country going forward. We will see a little volatility in between as we start hearing about how dismal the 4th quarter was. I am guessing that this is pretty much a "given" in the eyes of the market so it might be somewhat ignored unless the data is way worse than expected which is possible.

Be careful here folks. Its going to be all about Obama over the next few weeks.

Once we get past the inauguration, hold on tight because its going to get ugly.

Yawn! Retail News Continues to Worsen

Good Afternoon Folks!

Just a quick entry tonight. Today was a quiet day in the markets as bad news from the Middle East and retail sales took its toll on stocks. The DOW rallied toward the end of the day to close down about .3% while the NASDAQ closed down 1.3% for the session.

The REITS took a pounding today as the retail story continues to worsen:

"Dec. 29 (Bloomberg) -- U.S. retailers face a wave of store closings, bankruptcies and takeovers starting next month as holiday sales are shaping up to be the worst in 40 years.

Retailers may close 73,000 stores in the first half of 2009, according to the International Council of Shopping Centers. Talbots Inc. and Sears Holdings Corp. are among chains shuttering underperforming locations.

More than a dozen retailers, including Circuit City Stores Inc., Linens ‘n Things Inc., Sharper Image Corp. and Steve & Barry’s LLC, have sought bankruptcy protection this year as the credit squeeze and recession drained sales. Investors will start seeing a wide variety of chains seeking bankruptcy protection in February when they file financial reports, said Burt Flickinger.

“You’ll see department stores, specialty stores, discount stores, grocery stores, drugstores, major chains either multi- regionally or nationally go out,” Flickinger, managing director of Strategic Resource Group, a retail-industry consulting firm in New York, said today in a Bloomberg Radio interview. “There are a number that are real causes for concern.

Sales at stores open at least a year probably dropped as much as 2 percent in November and December, the ICSC said last week, more than the previously projected 1 percent decline. That would be the largest drop since at least 1969, when the New York-based trade group started tracking data. Gap Inc. and Macy’s Inc. are among retailers that will report December results on Jan. 8."

My Take:

Pretty bleak isn't it? The prediction of 73,000 store closings was a shocker to me. I also didn't realize that total retail sales for existing stores was twice as bad as expected with sales dropping 2% versus the 1% that was expected. That's a huge miss.

This is pretty pathetic considering that many stores were practically giving things away at 60-70% discounts.

SRS had a nice day today rising about 10%. Congrats to the longs out there!

Treasury Auctions

There appears to be no end in sight for the demand of treasuries:

"WASHINGTON (AP) -- The interest rate on six-month U.S. Treasury bills dropped to its lowest level on record at the weekly Treasury auction, the government said Monday.The Treasury Department said it auctioned $27 billion in six-month bills at a yield of 0.25 percent, an all-time low. That's down from a rate of 0.285 percent last week.

Treasury rates have fallen to historic lows as the worst financial crisis in 70 years has triggered a rush by investors to the safety of government securities. Higher demand for such securities pushes their yield, or interest rate, down.

The lower rates make it cheaper for the government to borrow money, just as the federal deficit is set to balloon due to the rising cost of aid to banks, increased spending on unemployment insurance and lower tax revenues.

The department also auctioned $26 billion in three-month bills at a yield of 0.05 percent, up slightly from last week's 0.04 percent. That matches the rate from two weeks ago and is the highest since three-month bills averaged 0.15 percent on Nov. 24."

Quick Take:

The treasury bubble continues to blow up. I spoke to a banker over the weekend and the story is simple here folks. There is capital out there, but the big private equity boys that hold it have no desire to put it to work right now because this crisis isn't anywhere close to being over.

Assets are still too overvalued in the eyes of the distressed debt buyers. Keep an eye on these auctions because there will be a point in which this treasury bubble will burst. I

What could cause it? A bond market dislocation would do the trick. So would a dumping of treasuries by the major buyers of our treasuries like China or Russia as they continue to worry about our economy and the ability for us to pay back our debts.

I my eyes, an emerging risk to treasuries are hard assets like homes and commodities that have been flattened by price deflation.

Home prices still need to drop more, but the early "bubble" markets are starting to get appealing. Perhaps the smart money will decide that owning homes at .30 on the dollar is a more appealing option than owning paper treasury IOU's that our government can't afford to payback.

The treasury market will burst just like every other bubble. Its a matter of when not if.

Bottom Line:

I am still short FAZ, BEARX, and SRS(at $85 ouch!). I see no reason to cover. The holiday trading is light so you can't read too much into the moves this week. I believe things should stay fairly flat unless the Middle East spirals out of control.

In fact, at the lows of the session today I bought some QID $60 Jan PUTS to hedge out my shorts. They will most likely be gone by tomorrow. They are already green, and I do not hesitate to take profits in this volatile market. Tech seems a little overdone here in the very short term IMO. I am hoping to exit on an early bounce before the consumer confidence number comes out tomorrow at 10 AM.

Keep an eye on oil. (DXO) which is 2x long oil will be a great trade in the near future. It was up 14% today. The problem is the price action was really piss poor in reaction to the Middle East saga until a few minutes before the close. Oil pulled back after the news and was actually almost back to even at one point. I didn't like that at all. I think oil still goes lower for a little while due to demand destruction. Longer term, oil will be a nice long play. If DXO dips back to $2 I plan on jumping in.

Stay Tuned!

Harry Dent: Depression and Demographics

Hey Folks

I thought everyone would enjoy these videos from Harry Dent of HS Dent. Harry is a Harvard business graduate who has developed an interesting economic model that emphasizes demographics.

Harry predicts that we will see a depression and a possible low of 3800 on the DOW as the great bull run comes to an end. I thought his insights on how the demographics of the baby boomers will impact our economy as they head into retirement was very interesting. Not sure about his $200 oil call though!

Enjoy:

PART 1



PART 2

SRS Warning: Commercial Bailout is Next!

Good Evening Folks!

Its pretty quiet on the news front this weekend.

The one development was further noise around a potential government bailout of commercial real estate. This was one their headline economic stories today. The heats on the Fed's to get this one done IMO. Here is the article from the New York Times:

"Commercial real estate groups have been meeting with members of Congress, the Federal Reserve, the Treasury, the Federal Deposit Insurance Corporation as well as Mr. Obama’s transition team, to press their case. And they say they have a compelling one. Commercial real estate is a significant industry, accounting for $549 billion in construction-related spending and nearly five million full-time jobs in 2007, according to the National Association of Industrial and Office Properties. It also contributes to state and local coffers.
Although commercial real estate remains in better shaper than some other industries — there is a good balance between supply and demand, vacancy rates are modest and loan default rates have so far hovered at a rock-bottom 1 percent, according to trade groups — industry leaders warn that the sector faces significant problems. In particular, tighter credit policies are making it harder for real estate companies to refinance. An estimated $400 billion in loans are expected to come due in 2009 alone, and more than $1 trillion over the next three years, according to industry estimates based on Federal Reserve data.

“We have profound risk on our hands at the moment,” said Bruce Mosler, the president and chief executive of Cushman & Wakefield, a commercial brokerage firm.

Jeffrey DeBoer, the president and chief executive of the Real Estate Roundtable, an industry group based in Washington, agreed. “Commercial real estate debt will be the next major problem that policy makers need to address,” he said
.
The commercial real estate industry relies on a steady stream of relatively short-term financing; loans are refinanced every several years or so. With the two main sources of commercial funding — bank lending and commercial mortgage-backed securities — effectively shut down, hundreds of billions of dollars worth of loans are in jeopardy of defaulting.

The bulk of the loans coming due, industry executives say, were originated two or more years ago to help finance a rash of deals in office towers, hotels and industrial buildings, many of which are generating healthy cash flow today. “We’re talking about performing loans — that’s the rub,” said Thomas J. Bisacquino, the president of the National Association of Industrial and Office Properties.

Of course, there were also speculative, highly leveraged deals at the height of the economic bubble, when rents and property values looked as if they would rise indefinitely. As vacancy rates climb and values drop, many of these loans will need to be restructured.
Existing properties are only half the problem. New development has also ground almost to a halt because of a lack of financing.

Real estate executives say Treasury officials the transition team to a new Obama administration have been listening. “There’s an openness to serious consideration of all of these things,” said Steven A. Wechsler, the president and chief executive of the National Association of Real Estate Investment Trusts.

The Obama team will have a lot on its plate, but executives were hopeful that measures will be taken early next year."

My Take:

Now that the automotive bailout has been completed its time for the TARP to move on to its next bailout. It appears commercial real estate is next.

This is getting disgusting isn't it?

It looks like the commercial industry is going to follow the automotive playbook: Scare the hell out of Congress by screaming Fire! Fire! Fire! It appears the commercial industry is going to try and one up the automotive industry by warning that 5 million jobs would be lost versus the paltry 3 million in automotive if they don't get their piece of TARP PIE.

Bottom Line:

I think this bailout is going to happen folks. It will be done because the banks can't afford another $1 trillion hit. There are $400 billion dollars of loans that must be rolled over in 2009 alone

Another reason this will be done is because commercial now has zero ways to get financing right now. This is a different lending game folks. You don't get 30 year fixed loans in the commercial market. You refinance and roll over your debt every 3,4, or 5 years. If the banks no longer want to lend to them, and the CDO securitization market is no longer available, these REIT's have zero options for funding. There will be financial chaos if something isn't done here.

The problem here is many of the loans done in 2004-2006 were done using terrible lending standards. This is another mess ladies and gentleman.

The Fed must find a way to allow these loans to get refinanced or there will be no retail in this country. We all know that's not going to happen. Expect the Treasury to extend some type of lending program to the commercial that allows them to roll over their good debt.

It will be interesting to see wha they do with the bad loans. Do the taxpayers once again take the hit so that these REIT'S that made poor decisions don't go under? My guess is of course! Why would their bailout mentality stop now? God forbid anyone's allowed to fail anymore in this country.

The possible bailout here makes SRS unplayable right now in my book. Its too risky. If the REIT's get a sweet deal, SRS is going to get pummeled. If the government decides to send a message of "no more bailouts" or severely damages them via warrants, SRS could soar.

The only trade I see here is to buy SRS on any dip if a bailout is announced.

Enter this sucker at your own risk.

Bah! Humbug!

I hope everyone had a wonderful holiday! Just a quick note today.

It appears the holiday retail season was a complete bust(what a surprise). Some of the early numbers are starting to come out:

Quick Take:

It appears that big ticket items were practically ignored this year as the consumer continued to pull back. This shouldn't be a surprise given the credit situation in this country.

Speaking of credit, I am starting to ask myself something: Is there such a thing as "credit" in this country right now? I am starting to wonder! Ask any automaker their thoughts on this and they will respond with a resounding NO!

It appears we have just ended our 25 year spending binge folks.

The numbers tell you that our country now finally realizes its time to pay the piper. Expect the consumer to concentrate on paying off debt and hoarding cash in 2009 versus spending it. This is a frightening scenario considering that 70% of our economy is consumer driven.

This will do nothing but accelerate the massive deflation that we are now witnessing.

Isn't it amazing how quickly things have changed in a span of less than a year?

Everyone feared inflation and another lost decade like the 70's when oil spiked up to $147 earlier this year.

Today, we sit here with oil under $40 a barrel as the Fed attempts to prevent a lost decade from a deflationary debt spiral similiar to Japan in the 1990's by flooding the system with credit.

Hello Washington! Its not going to work! The consumer can no longer afford to borrow anymore! We have enough debt for now! Thanks anyway!

The numbers say it all folks, and the early signs as seen above tell you that deflation is clearly defeating the Fed's attempt to re inflate.

The sad conclusion that I am slowly coming to is that either scenario(inflation/deflation) is going to result in a lost decade or more for our countries economy.

Deflation will rule in 2009 in my opinion. However, down the road, inflation will rear its ugly head which will then trigger another downturn in the economy.

More on that later.

A Little Holiday Cheer From Dr. Doom

Good Afternoon Everyone!

First of all:

Happy Holidays! Please travel safe if you are on the road today.

I thought everyone would enjoy listening to a little Dr. Doom on Christmas Eve. Take a seat in front of the fire and listen to some gloom and doom from Marc. The fire includes a few Christmas tunes if you are looking to get into the Christmas spirit.

Marc Faber has been one of the few economists that has been right during this downturn. His thoughts on 2009 are once again bearish but interesting.

I will be out of town over the next few days to spend the holidays with my family. I should be back over the weekend.

Enjoy Dr. Doom!

The Housing Collapse Continues!

Good Evening Folks!

I gotta admit: Sometimes its hard to write this blog everyday as I watch our economy implode. The news just keeps getting worse folks. Stocks fell another 1% today as worries around the economy continue to intensify.

The main culprit for the drop was the absolutely horrific housing numbers that were released today. Median resale prices in November dropped 13% which was most likely the largest drop since The Great Depression.

"Dec. 23 (Bloomberg) -- Sales of single-family houses in the U.S. dropped in November by the most in two decades and resale prices collapsed at a pace reminiscent of the Great Depression, dashing speculation the market was close to a bottom.

Purchases of both new and existing houses dropped 7.6 percent from the prior month, the biggest decline since January 1989, to an annual rate of 4.43 million, government and industry figures showed today. A 13 percent drop in the median resale price from a year earlier was the most since records began in 1968 and was likely the largest since the 1930s, the National Association of Realtors said.

“Housing is still in a freefall,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts.

The figures were worse than economists had forecast and signal that the battered housing market that led the economy into a recession may be taking another lurch down. Sliding property values mean more Americans will be under water on their mortgages, destroying household wealth and undermining consumers’ purchasing power.

The average rate on a 30-year fixed-rate loan fell to 5.18 percent in the week ended Dec. 12, the lowest in more than five years, according to the Mortgage Bankers Association.
Ara Hovnanian, chief executive officer of Hovnanian Enterprises Inc., New Jersey’s biggest homebuilder, called on the government to provide an economic stimulus for the housing industry.

“If government wants to get to the root of the problem they need to fix housing first,” Hovnanian said in a conference call on Dec. 17. Hovnanian, whose company reported a fiscal fourth quarter loss, didn’t specify what type of government intervention he wants in the housing market."

My Take:

What can I say, I'm speechless. This number was way worse than anticipated. Housing prices in every region of the country fell significantly. I have often said on here that our economy hinges on housing prices. The second section of this article that I highlighted says it all as to why the consumer is in such trouble. We have lost a lot of our ability to consume.

Falling housing prices also exacerbate Wall St's problems because their balance sheets are filled with bloated over priced McMansions.

Rates have dropped dramatically and yet its done nothing to stimulate housing demand. Refi's have increased but the demand for new or exisiting housing has vanished.

What really pisses me off is that the government continues to try and fix the problem by constantly attempting to prop up housing prices by pouring liquidity into the banks in an attempt to re inflate the housing bubble with more cheap money and low interest rates. When are they going to realize that this isn't going to work?

In my eyes, prices must fall dramatically before anyone goes near a house. Confidence has been totally destroyed. Americans see nothing but corruption and a constant changing of the rules in the housing market. They no longer TRUST the system. They don't even understand it. I constantly have friends and family coming to me totally confused by whats going, and asking me if they should refinance since rates have dropped into the 4's. All of this confusion has done nothing but paralyze the consumer. No one wants to make a mistake or get "screwed" by a greedy lender. Trust is gone. Once this happens its over folks.

In my eyes, its gotten to the point where no one wants anything to do with a loan or a bank until TRANSPARENCY comes back into the financial system. They won't come back until they have faith that they aren't getting screwed and they understand what they are getting into. I think the Fed lost the public when the loan modifications and quantitative easing started. Its simply got too complicated to buy a house now. This is the biggest purchase anyone will ever make in their lifetime. Its a 30 year commitment. How can you ask them to buy when Wall St has totally GAMED the system???

I feel like screaming "Stop the Insanity!" like that women from the 1990's who did the exercise infomercials.

So what ends up happening when housing prices continue to free fall as the confused buyer attempts to understand whats going on in the housing market?

BUYERS STRIKE!

This is how deflation spirals are created folks. Deflation scares the living daylights out of the Fed: It creates a death spiral where no one buys and prices continue to drop. As prices continue to drop, the buyers continue to stay on the sidelines waiting for even more drops. Its a viscous circle. The pros call this is called a negative feedback loop, and its a hard loop to stop once it gets started!

This is why you saw the Fed use every trick in the book last week in an attempt to stop this deflation.

In my opinion, there is no way that the Fed can stop housing from completely imploding at this point. They need to drop the playbook, step to the sidelines, and let free market capitalism take its course. If this destroys the banks that did the bad loans than so be it. We can always create new banks that have healthy balance sheets will actually allow them to lend!

Bottom Line:

Enough is enough Mr Bernanke: Its time to walk away and let nature run its course. If you don't start to walk, your homeowners will.

20% of current home loans are already underwater and you are playing a dangerous game of chicken. What are you going to do if they decide to walk as you continue to modify loans and change the rules? Stop providing liquidity to a bunch of banks who won't lend. Stop wasting our taxpayer money. You have thrown $8 trillion at this problem and prices continue to plummet!

Save whats left of your balance sheet for the depression that we are about to head into as a result of your bailouts.

Trading:

I have been trying to go long on a few names thinking we might see a Santa Clause rally over the holidays. Each day I refuse to pull the trigger as the news continues to worsen. I am still short FAZ, SRS, and BEARX. I saw no reason to take any of them off going into the close.

There is absolutely no enthusiasm on the long side folks. Buyers continue to sit on their hands. How can anyone buy after reading these type of headlines everyday? I refuse to try and front run the long side with some longs because i really believe the bottom could completely fall out of this market at any time.

2009 is going to be a long chaotic year.

Save your pennies. You will need them.

Commercial Loans: The Next Potential Bailout?

Good Evening Folks!

Well, a lot of news hit the wires today in the commercial area. Since we like discussing SRS, I thought I would focus on the commercial area today. It looks like a commercial bailout is on the way folks. I don't think the banks can afford a huge commercial hit right now, and it will be interesting to see how Wall St trades commercial in the oncoming weeks.

Many bond traders have been saying for weeks that the best trading strategy is to attempt and front run the Fed before they arrive with their deep pockets. This is why you saw a buying binge of MBS's by Pimco and others in the last month when the Fed hinted they may be a buyer of these assets.

A similiar game is played by traders in the equity markets with the bailouts. Once one bailout gets done, the first question traders then ask themselves is whose next? Now that the automotive deal is done, commercial is the next area to focus on in my opinion. Things are a disaster in the commercial lending area. Take a look at this graph I picked up today on commercial lending:

Here is some more commoercial research from Deutsche Bank. I want to thank John for sharing this in the comments section. This is an excellent research report by Deutsche.

I advise everyone to read this. It is extensive and very informative. As you can see by the graph above, lenders are literally running away from commercial refi's this year. If you were a bank why wouldn't you? Commercial rents will be dropping like a rock as the consumer dies.

I want to repeat the details of a conversation I had with a friend who was involved in securitizing commercial CDO's before the market blew up in '06.

He told me the lending standards used on commercial loans were terrible. He should know because he was the guy that was involved in pooling the loans together to form the commercial securitizations!

I asked him: "what was wrong with the lending?"

He explained to me that the REITS were allowed to lend money on the basis that rents would rise 5% a year. This allowed them to borrow much larger sums of money. He told me this was a recipe for disaster. He also explained that banks are usually very tough when it comes lending to the commercial side. Commercial lending is usually extremely conservative, and usually involves down payments of 30%. I guess the banks decided to look the other way this time as they dropped money out of helicopters.

These REIT's are now screwed because rents have stopped rising. In fact, they are actually falling as the consumer continues to pull back on dining out and shopping. On top of that, vacancies are about to soar due to BK's following the Christmas season as the recession deepens. This is a nightmare combo folks! Its obvious that many of the commercial REITS are no longer generating enough revenue to pay back the loans that were done based on lending standards that assumed the glory days would rock on and rents would continue to rise. Leverage strikes again! Its great on the way up but it sure sucks on the way down!

Bloomberg had an interesting article today on commercial:

Bloomberg reported that commercial drfaults could triple if rents drop 5%:

"Dec. 22 (Bloomberg) -- U.S. commercial properties at risk of default could triple if rental income from office, retail and apartment buildings drops by even 5 percent, a likely possibility given the recession, according to research by New York-based real estate analysts at Reis Inc.

Lenders that used optimistic rent estimates to grant mortgages beginning in 2005 stand to lose as much as $23.1 billion, or 7.02 percent, of total unpaid balances if landlords lose 5 percent of net operating income, according to Reis. Analysts examined data on 22,890 properties that together may account for unpaid loans of about $329 billion in 2009, said Victor Calanog, director of research.

Banks are at risk as office vacancies are forecast to rise to 15.6 percent next year from an estimated 14.6 percent at the end of 2008. Lenders who sold commercial mortgage-backed securities to pension funds, investment banks and foreign governments have been hit by more than $1 trillion in losses and asset writedowns connected to bad residential loans. "

Quick Take:

Ha! They will be lucky if rents only drop 5%. I also think the vacancy expectations in this article are a pipedream.

Bottom Line:

So the question becomes how do you trade commercial if a bailout looks likely? The Fed has already hinted that they may throw a lifeline to the commercial area. The banks want nothing to do with commercial, and companies like GGP are about to go under. Something needs to be done or commercial is going to blow up! This could be a potential death blow to the banks, and it would force the Treasury to cough up more money from the TARP in the form of capital injections to the banks in order to keep them solvent.

My guess is many of these REITS are about to explode. I don't think the Fed has no desire to see hundreds of malls get liquidated when no one wants to buy these bloated assets unless they are priced at pennies on the dollar. Circuit City is a prime example. They put together an auction in order to selloff the 150 stores that they are closing down as they reorganize. CC ended up cancelling the auction due to a lack of bidders. Can you imagine how tall the weeds are in those parking lots by now?

The banks will take massive losses if they are forced to sell such large assets in this economy.

Add all of this up and it spells TARP BAILOUT if you ask me folks. We all know the Fed doesn't know how to say no!

IMO you can trade this two ways. If you have a brass set of balls, you can jump in and by a couple of beaten down REITS and bet on the Fed coming to the rescue. These could be 3 baggers if the bailout arrives. Obviously you play small when you place a trade like this and you sell on the news. This is highly speculative. Consider this to be a bit of a lotto ticket.

The other way to play it is to wait for news of a bailout and buy SRS on the dip after the announcement.

As for myself, I plan to buy SRS on the dip if we get a Fed bailout. I already have some at 85 so I am in no rush to buy more if I think the Fed is on its way.

My REIT lotto long bailout bet will be on GGP. Its down 22% on the negative commercial news today to around $1.40. I know they look dead, but if the Fed comes through with the bailout, this thing could easily be a double or more. This could also be a zero folks so make this trade knowing that you could lose all of it, and make it small if you pull the trigger.

I thought this was crazy at first until I asked myself this question: Why was SRS up only $2 on a day where we learned that commercial is on the brink of a meltdown? The WSJ, Bloomberg, and Deutsche Bank news should have pushed SRS up $20 today. That fact that it didn't budge tells me somethings coming. Just a hunch.

Another trade I am going to make this week is on (CHK). Its getting chilly out there folks and natural gas is down to $5 bucks. The call option here were extremely high today. The stock has pulled back to $15 from $20 recently and I like the play. I will look for some Feb. $18 calls tomorrow. I didn't get home in time to put this in.

That's it for today folks. I like to pass on my trades to you. By no means am I recommending that you should play them.

Credit Card Debt Defaults Expected to Soar in 2009

Good Afternoon Folks

Things are pretty quiet news wise today so I will be brief. I wanted to pass along some research that I found on projected credit card debt defaults in 2009:

Final Take:

As you can see, credit card defaults are expected to soar next year. This will create a nice shorting opportunity down the road on financials who are extremely reliant on credit debt in terms of revenue.

Based on the data above, Capital One(COF), Discovery(DFS) and Amex(AXP) all look very juicy on the short side as the recession deepens because they all heavily rely on credit card revenue.

However, now is not the time to put the shorts on because you are fighting the Fed and its balance sheet. I expect many of these stocks to rise in the near term based on the hopes of a credit card bailout combined with the "bubbleheads" who believe the recession is almost over.

This will create an excellent shorting opportunity in 2009 as the credit card defaults worsen throughout the year. I will be buying PUTS on these early next year. The VIX is rapidly dropping close to levels where PUTS are worth buying again.

Some food for thought.

I hope everyone has a great Sunday!

The Fed's Bailout Bonanza!

My Gosh

I go out for the evening to a holiday party and I comeback and see that the Fed has lost its mind.

We wow how the TARP and an new version of the TALF. I think the next bailout should be called BARF because that is what I feel like doing as I watch the taxpayer being forced to bailout America. Below are the two articles on the Fed's recent endeavors. I will have some thoughts below.

It appears that Congress has agreed to release the second $350 billion to the FED from the TARP.

"Dec. 19 (Bloomberg) -- U.S. House Financial Services Committee Chairman Barney Frank said Congress will release $350 billion from the bank-rescue package after lawmakers, President- elect Barack Obama and Treasury Secretary Henry Paulson agree to provide foreclosure relief and aid to automakers.

Frank, a Massachusetts Democrat, said he plans to introduce legislation with Senate Banking Committee Chairman Christopher Dodd to release remaining funds in the $700 billion package next month. The bill will include homeowner help and short-term loans for General Motors Corp. and Chrysler LLC, Frank said in a telephone interview today.

“We should have an agreement among Obama, Paulson and the congressional leadership to release the $350 billion with conditions on how it’s spent,” Frank said. “We need the second $350 billion, but it can only be done if there’s an agreement as to how to do it.”

Here is the announcement of the new TALF:

"Hedge funds will be allowed to borrow from the Federal Reserve for the first time under a landmark $200bn programme intended to support consumer credit.

The Fed said on Friday it would offer low-cost three-year funding to any US company investing in securitised consumer loans under the Term Asset-backed Securities Loan Facility (TALF). This includes hedge funds, which have never been able to borrow from the US central bank before, although the Fed may not permit hedge funds to use offshore vehicles to conduct the transactions.

The asset-backed securities to be funded under the programme are pools of credit card receivables, automobile loans and student loans.

The idea is to increase the supply of these loans and reduce borrowing rates by ensuring that the companies that make the loans can sell them on to investors who have guaranteed access to low-cost funding from the Fed.

The TALF is a key plank of the unorthodox strategy set out by the Fed last week as it cut interest rates virtually to zero. Washington insiders expect the programme will be dramatically expanded next year with further capital support from Treasury once the Obama administration takes office.

A senior official in the outgoing Bush administration told the Financial Times it could also be broadened to include new commercial and residential mortgage-backed securities."

Final Take:

I think my head is going to explode after reading these two articles! The Fed is going to turn me into a frickin mental patient. Is there anything that the Fed isn't going to bailout? The last line that I highlighted explains the move in SRS this week.

Is it just me or did did the Fed just hit the PANIC button this week? Its obvous things are spiraling out of control here folks as the debt bubble continues to spring leaks everywhere. The first $350 billion in the TARP lasted all of 3 months. Paulson had said previously that he wasn't going to request the second half of the TARP before the Obama administration took over. I guess that idea just flew out the window!

Bottom Line:

Things are falling apart at lightning speed again. In just one week the Fed and Treasury have dropped rates to zero and released the second half of the TARP. They also created a new bailout that allows hedge funds and any other US company to borrow from the Fed in an attempt to support consumer credit and potentially commercial lending. This is desperation folks, pure and simple.

Let me repeat: This is insane and again does not fix the problem! There is no demand to borrow. Americans are up to their eyeballs in debt and are struggling to payoff what they have already borrowed. They are also losing their jobs at an alarming rate as they attemot to pay it all off.

When is the Fed going to realize that WE DO NOT WANT TO BORROW ANYMORE! Stop wasting the taxpayers money in an attempt to re inflate a debt bubble that you cannot prevent from bursting.

At some point helicopter Ben must be stopped. It appears that the press has had enough of this crap as well. Naked Capitalism is reporting that Fox News is now suing the Treasury in an attempt to gain more information around the TARP and the AIG bailout.

Hooray for Fox. Bloomberg has also done the same. God I hope they succeed This must be stopped before they destroy this country force us to drown in our own debt.

In the meantime be very careful trading here. Fighting the Fed's balance sheet can be a costly game. "Don't fight the Fed" no matter how crazy they are in the short term. Some longs are going up on Monday. I will discuss them tomorrow. This is all going setup up the shorting opportunity of a lifetime down the road but we are not quite there yet.

It appears the bursting of the debt bubble is going to happen in the near future. When it does, find a strong steel table to hide under.

Auto Bailout Fails to Ignite Stocks

Good Afternoon Folks!

I am going to be a little brief today due to some holiday plans. The bulls charged this morning taking stocks up 200 points as they cheered the auto bailout. Unfortunately, stocks couldn't hold onto the gains as continued worries around the recession took the DOW into negative territory by the close.

I thought the price action was interesting today. There is a huge tug of war going on between the bulls and the bears right now. Rallies are almost always sold into as traders take profits. On red days, we seem to see a lot fewer sellers. The volatility has really dropped off this week. The VIX dropped down to 45 today.

I think the lack of direction in the markets combined with horrific economic data has made many traders afraid to hit the buy button. The economic numbers really are frightening folks. Oil plummeted yet again today down into the $33 range! Staggering isn't it. Those $4/gallon gas days are becoming a distant memory aren't they?

This dramatic drop in oil is a big concern from an economic standpoint. Its a great barometer to measure how things are doing in the economy. I say this because oil is used everywhere folks: Auto's, manufacturing, airlines, transports. When there is absolutely no demand for oil it tells you something: Nothing is being made, driven or moved!

Auto Bailout

Here is the auto bailout story for those of you who missed it.

"Dec. 19 (Bloomberg) -- General Motors Corp. and Chrysler LLC will get $13.4 billion in emergency government loans in exchange for substantially restructuring their businesses, President George W. Bush announced.

Another $4 billion will be available to GM in February provided Congress releases the second half of the $700 billion Troubled Asset Relief Program fund originally set up to bail out financial institutions. The automakers have until March 31 to meet the conditions of the loans, including demonstrating they have a plan to become profitable, or be forced to repay."

Quick Take:

I am sure many of you are shocked that our government would bailout an industry. HA! YEAH RIGHT! It seems to be the only governmental response to any failure in the economy. Who needs bankruptcy's when you have Uncle Sam's wallet in your back pocket?

The one piece of language that I thought was interesting in the bailout was the fact that they need to have a plan for profitability by March of next year. HA! Good Luck With That! There is no demand or credit to buy auto's right now. Even if someone wanted to buy a car, it would be very difficult to get financing for it. The only business plan for profitability for these clowns that I see would be to shut down the BIG THREE for 5 years until the credit markets come back!

Gary Shilling's Prediction: 600 on the S&P 500 in 2009

I strongly advise that everyone takes a look at Gary Shilling's thoughts for next year. There is also a video interview with Gary on the page in the upper left hand corner.

Mr. Shilling has been spot on throughout this downturn and I think his call for next year is spot on. Make sure you listen to his thoughts on China at the end of the video. Folks, China scares the daylights out of me. Without us consuming I don't see how they can keep their economy together.

The potential for political instability and risk for an uprising that takes down their government is very high in my opinion. The export numbers out of China have fallen off a cliff, and the factories over there are closing up faster than investment banks on Wall St. If this occurs, they will lose the rising middle class that has fueled a lot of their growth.

Keep an eye on the Far East.

Bottom Line:

It was a surprisingly quiet day. I have done no trading the past couple days. I am content to stay mildly short. I may put on a few small speculative long trades on next week. The volumes should be low due to the holiday, and the bias tends to be bullish.

The bulls also got the auto bailout, so there are really no big shoes that could drop over the short term(Watch, now that I said that we will end up with a panic next week:))

If things are calm like they ended today, I think we might see some green days as Christmas approaches.

Stay Tuned!

The Debt Bubble is Getting Really Heavy!

Good Afternoon Folks

Well that was interesting. Stocks were down about 2% as fears continue to mount around how severe this recession will be.

The GE news was really pressured the markets this afternoon:

"Dec. 18 (Bloomberg) -- General Electric Co., the biggest issuer of corporate bonds, has a one-in-three chance of losing its AAA credit rating in the next two years as earnings deteriorate, Standard & Poor’s said.

S&P cut the outlook on the company and that of its GE Capital finance arm to negative from stable. While the AAA ratings were left intact, S&P said in a statement today that it was concerned about cash flow and funding for the finance unit as global conditions worsen. GE Capital’s stand-alone rating, without parent support, would be A+, it said."

Quick Take:

This one was a shock to me. GE is supposed to be the "Taj Mahal" of corporate America. It was built into a corporate powerhouse by icon CEO Jack Welch. To see them face a 1 in 3 chance of losing their AAA rating is astonishing. The problem GE has is almost half of the companies revenues were generated by GE capital. As Wall St started to melt down, GE went down with the ship.

Folks, I am beginning to realize that almost everyone in the world got completely addicted to "cheap" money. It wasn't only Wall St. Everyone got into the game: Pension funds, college endowements, automotive finance, money markets. Our recent GDP growth in the last 10 years was almost solely based on creating debt. Once everyone filled themselves to the gills with it, the game was over.

Debts must be serviced via payments. When it can no longer be serviced it must be defaulted on. I will bring this chart up again folks. Look how out of hand borrowing got compared to GDP:


Quick Take:

The amount of debt we have created vs. GDP is unsustainable because we use GDP to pay back debt! Our debt load is now 300%+ of GDP. Our current "crack cocaine" debt party makes 1929's debt party look like more like a soda and pizza party for a bunch of 3rd graders!

This is unsustainable folks! The Fed is going to try and continue blowing up this bubble by selling homes at 4% interest rates. If you buy a home based on this new Ponzi scam you are crazy! Buying a home using this mortgage plan is too big a risk on such a large investment. I say this because the rules constantly change. You can rest assured that rates cannot stay this low for a sustainable period of time. Inflation could rear its ugly head at anytime which would force the Fed to raise rates. What if mortgage rates rise to 6% 5 years from now? The price of your home will go down the toilet!

Another risk you run is low interest rates do not guarantee that home prices will stop sliding. What if they continue to plummet as the economy continues to fall apart? Home prices continued to drop when Japan attempted the same thing. Buying at these levels with such risk is simply too dangerous. We still haven't seen the "unintended consequences" of what the Fed has just done. Maybe today's drop was the start of something. I guess we will know soon enough.

GEAB

I got the new GEAB report courtesy of Alex who is one of our readers. Thanks Alex! They are out with some more dire predictions. They have a great chart that shows you how insanely out of whack the stock market is versus its historical average:

More from the GEAB:

"LEAP/E2020 anticipates than the unfolding global systemic crisis will experience in March 2009 a new tipping point of similar magnitude to the September 2008 one. According to our team, at that period of the year, the general public will become aware of three major destabilizing processes at work in the global economy, i.e.:

• the length of the crisis

• the explosion of unemployment worldwide

• the risk of sudden collapse of all capital-based pension systems

A whole range of psychological factors will contribute to this tipping point: general awareness in Europe, America and Asia that the crisis has escaped from the control of every public authority, whether national or international; that it is severely affecting all regions of the world, even if some are more affected than others (see GEAB N°28); that it is directly hitting hundreds of millions of people in the “developed” world; and that it is only worsening as its consequences reveal throughout the real economy. National governments and international institutions only have three months left to prepare themselves to the next blow, one that could go along severe risks of social chaos. The countries which are not properly equipped to cope with a surge in unemployment and major risks on pensions will be seriously destabilized by this new public awareness.

Moreover no one should imagine that the improvement at the end of 2010 will correspond to a return of high growth. The recovery will take long. For instance, stock markets will take a decade to return to levels comparable to 2007, if they ever return to that. Remember that it took twenty years before Wall Street resumed its 1920 levels. Well, according to LEAP/E2020, the present crisis is deeper and longer than in the 1930s. The general public will gradually become aware of the long-term aspect of this crisis in the coming three months and this situation will immediately trigger two tendencies carrying with them socio-economic instability: fear of the future and enhanced criticism towards leaders.

Finally, among the various consequences of the crisis for dozens of millions of people in the US, Canada, UK, Japan, Netherlands and Denmark in particular (3), there is the fact that, from the end of the year 2008 onward, news about major losses on the part of the organizations in charge of managing the financial assets supposed to finance pensions will multiply. The OECD anticipates that pension funds will lose 4,000 billion USD in 2008 only (4). In the Netherlands (5) as well as in the United Kingdom (6), monitoring organizations recently blew the whistle asking for an emergency contribution reappraisal and a State intervention. In the United States, growing numbers of announcements call for contribution increases and benefit reductions (7).

All the trends described above are already at work. Their combination and the public becoming aware of the consequences they could entail, will result in the great collective psychological trauma of Spring 2009, when everyone will realize that we are all trapped into a crisis worse than in the 1930s and that there is no possible way out in the short-term. The impact on the world’s collective mentalities of people and policy-makers will be decisive and modify significantly the course of the crisis in its next stage. Based on greater disillusion and fewer beliefs, social and political instability will settle down worldwide."

Bottom Line:

Quite a startling report isn't it? The bottom line here folks is be prepared. Raise cash, pay off debt, and pullback on non discretionary spending. You are going to need the money later.

Everything I am now reading now suggests that 2009 will be a sight to behold. I am convinced its going to take a decade or more to get out of this. The Fed is out of bullets. They have taken rates to zero, and their balance sheet is starting to look as bloated as Rosie O'donnell stomach after Thanksgiving dinner.

O'bama will come out with a stimulus in January but it will be nothing but a short term fix. Building infrastructure is great, but when its done we are left with a bad economy with nice highways.

Watching the Fed delay the bursting of the bubble is excruciating to me. Its like watching a doctor holding a needle one inch from your arm and freeze. Give me the dam shot and lets move on from this! Do the math above folks.

The debt game is history and so in our economy.

Crisis of Confidence/The Last Bubble

Good evening Folks!

Stocks were down around 1% today after rising sharply yesterday after the Fed shocker. Ahhh....I don't even know where to begin.

Lets start with SRS since many are confused with the price action here. Here is whats going on. There are a few reason why SRS has dropped. I have two articles posted below that I would like all of you to read. The key trigger was a new tax law that was announced last week that basically allows REITS to pay dividends in stock versus cash. The government is trying to create liquidity out there folks and this was a nice win for the REITS that are now bleeding red and are short on cash.

Keep in mind folks, the Fed will pull whatever trigger they can in order to create this liquidity including even changing tax codes. Yesterday's Fed statement pretty much told you that they plan on doing whatever it takes to create liquidity and stimulate borrowing. HA! Like thats gonna work!

Here is the tax code story on the REITS:

"A real estate investment trust can pay its dividends with stock, says a new ruling released last week.

Robert Willens - CFO.com US
December 15, 2008

While cash hoarding may not be a conventional reaction to the holiday spirit of giving, it is likely a prudent move for some cash-strapped companies. That is especially true of real estate investment trusts, which may be better off paying out dividends in stock, rather than cash.
The National Association of Real Estate Investment Trusts (NAREIT) thought so too, and in response to the current liquidity crisis, was looking for ways to provide incentives to REIT shareholders to nudge them to take stock, rather than cash, out of the trusts. One incentive was to provide shareholders with a tax deduction. However, a tax code threshold — specifically having to do with a cash cap related to a dividend election option — would have to be reduced to sweeten the incentive.

As a result, NAREIT implored the Internal Revenue Service to lower the cash cap associated with the aggregate shareholder distribution to 5 percent. Last week, the IRS budged a little — albeit not as much as the trade association would have liked. In IRS Revenue Procedure 2008-68, the government delivered a cash preservation incentive to REITS that was in line with recent private letter rulings, and dropped the cap needed to qualify for the deduction from 20 percent to 10 percent."

Here is article #2 regarding SRS and the REITS

"15:07 Fitch reports liquidity of U.S. equity REITs weakening Fitch reports the liquidity of U.S. equity real estate investment trusts (REITs) is showing signs of drying up. With U.S. equity REITs situated at the nexus of a recessionary economy, weakening property fundamentals, near-frozen debt capital markets and weakened stock prices, the implications for liquidity are broad. While most REITs maintain liquidity surpluses, the number of REITs with liquidity shortfalls has increased. "We are more concerned about the refinancing and funding risks for companies with liquidity shortfalls, and such companies face potential ratings downgrades should funding markets not reopen." Moreover, with commercial real estate debt markets stressed and asset sale opportunities limited, REITs are now largely reliant on bank revolving lines of credit to fund near term maturities, which concerns Fitch as the banking system is significantly strained. While Fitch found that health care and self-storage REITs have improved their liquidity positions in recent months, each other sector has weaker liquidity on average. That being said, REITs' capital structures have not changed fundamentally during the current economic downturn, according to Fitch. Going forward into 2009, "management team focus on cash preservation and access to multiple sources of liquidity will remain an important aspect of Fitch's REIT ratings."


My Take:

Article one was a big reason why SRS has been flushed this week. Who knew a tax code change was coming on their divi payouts? The reality here is paying dividends in shares of stock versus dollars does nothing but dilute the share price of the stock. This is not a game that will end well.

My story hasn't changed regarding the oncoming disaster in commercial real estate. Article #2 pretty much tells you why there was a tax code change. These companies are barely keeping their heads above water and are on the verge of imploding. There survival is purely based on continuing access to credit, and we all know how bad the credit markets are right now.

Adding to SRS's problems is the perception that the Fed will provide the liquidity necessary to keep the credit game going in all real estate. This is why you also saw the financials hold up fairly well again today. Credit is back! The problem is nobody wants it!

There is a big problem here folks. THIS IS ALL AN ILLUSION. The Fed cannot continue to supply infinite credit to everyone. Its trying to create the illusion that they can because they are desperately attempting to restore confidence. Folks, confidence is DEAD. The Madoff $50 billion Ponzi scheme may have been the last nail in the coffin.

The mortgage aplication story says it all. Mortgage rates have been free falling as treasuries drop. So what did this do for mortgage applications? They rose a whopping 2.9% from already patheticly low levels.:

"Dec. 17 (Bloomberg) -- Mortgage applications in the U.S. increased 2.9 percent last week as more homeowners refinanced to take advantage of lower interest rates.

The Mortgage Bankers Association’s index of applications to buy a home or refinance a loan rose to 841.4 from a revised 817.7 a week earlier. The group’s refinancing index increased 6.5 percent, while the purchase gauge dropped 4.5 percent.

Declining mortgage rates, brought on by Federal Reserve actions to purchase mortgage-backed debt, are making it more attractive for existing loan holders to refinance. Even so, the faltering economy continues to discourage home purchases."

Final Take:

Why was there no substantial increase in mortgage applications despite historically low rates? BECAUSE THE ECONOMY IS IN SHAMBLES AND NO ONE TRUSTS THE SYSTEM. There is absolutely zero confidence out there folks. Nada...None..Zilch.

Imagine if rates had dropped to these levels during the housing bubble. There would have been a bing fest in refi's as the flippers and speculators ran wild! No one wants to buy a house now because you don't know what its worth because they keep changing the rules. What if you buy at 4% and the Fed is unable to continue to keep rates this low and rates move to 8%? You are asking to get screwed until the rules stop changing. Adding to the problem here is unemployment is rising as the economy falters. Who wants to make a 30 year commitment when they don't know if they will have a job next week!

The Fed continues to ignore the fact that no one wants credit right now and the FED CANNOT FORCE THEM TO. The fact that they dropped the FF rate to zero and promised to buy up MBS and treasuries in an attempt to re inflate the housing bubble is frightening. I feel like I am watching a train wreck in slow motion!

How could they be so stupid? Cheap money is what got us into this mess. How does creating even cheaper money fix it?

When a heroine addict loses control you don't fix the problem by giving him an even higher dose of HEROINE! My god the idiocy here is beyond belief.

Bottom Line:

SRS and treasuries are now ticking time bombs in my opinion. The price action on anything financial related could be positive short term as the Fed floods the financial system with money. How long does this BUBBLEFEST continue? I wish I knew.

What I do know is it cannot be sustained and the response by the Fed does not fix the problem around the economy. The actions taken here does nothing but kick the can down the road, and put us even deeper in the hole from a debt perspective.

This game can't go on forever because the Fed is essentially using our tax money to buy treasuries in order to fund itself. Its also highly dependent on the world demand for treasuries. There will be a point where the world says NO MAS and demand for treasuries will drop dramatically.

The Fed has a little problem in terms of creating demand for our debt: TREASURIES ARE NOW PAYING ZERO PERCENT! Whose to say there isn't a "run on the treasuries" akin to a "run on the bank"? Furthermore: Perhaps everyone that's in money markets will decide to put their money in a safe at home or underneath a mattress.

Why wouldn't you if you are losing money every month. Treasury based MM's funds will be forced to pay you nothing plus hit you with their normal fees. This means you will lose money every month on your nest egg! How long will investors put up with this? I know I won't! I am very close to telling the banks to go pound sand and take my money out of my CD's and sleep on top of them at night. Luckily I have a roomy mattress!

I can assure you I am not alone. The "unintended consequences" to these Fedactions are numerous, and I don't even think the Fed totally understands how the markets and investors are going to react to this.

I don't feel safe putting my money anywhere anymore. Making matters worse, nothing makes any fiscal sense because I get zero returns on anything thats considered to be safe. What starting to anger me now is I let the banks hold onto my money which then allows them to use it as capital to lend off of and make money.

Why in the hell should I allow them to make money off of my capital if they are paying me zero percent in return?

The safe is looking more and more like the safest option. The banks can go screw themselves as far as I am concerned.

Trading:

Real quick. I sold my Goldman calls this morning for a tidy profit. I plan on continuing to scale into SRS. I see this as a great buying opportunity. It took an extraordinary combination of tax changes and historic Fed moves in order to get us down to these levels.

This ponzi debt game cannot be sustained and the Fitch article tells you that the REITS are hanging on by a thread.

That being said you need to respect the Fed's balance sheet. They will throw everything they can at this real estate problem. Buying into any financial or real estate shares should be done in increments versus all at once.

There is a lot I didn't get to tonight. 1873 will have to wait until later this week.

Stay tuned!

1873 all over agin?

I will have more tomorrow.

The Nikkei didn't buy this move by the Fed one bit. Their market is up a whopping 33 points as I speak.

Japan knows the deflation game all to well and this move today by the Fed was a desperate attempt to re inflate the economy. Japan attempted the same thing and failed miserably so why would they think things would play out any different here?

This is no longer 1929 folks. Its 1873 in the US all over again. Japan was the most recent version of the deflation game we are now witnessing here in the US. The last time it happened here was shortly after the Civil War.

Do not be fooled by the price action today. I have been doing a ton of research tonight, and I don't like what I see.

Unfortunately I see no safe place to put your money in this current economy. The treasury market has now become the land of "zero returns".

The Fed is not manipulating the treasury markets here folks. The smart money in the bond market is front running the Fed announcements in a desperate attempt to find safety. Earlier on I believed it was the Fed that was causing the huge drops in treasury yields.

I was wrong. Rick Santelli nailed it today when he asked his buddy the Wolfman who is a trader in Chicago this question: "What do you do when the 800lb gorilla(the Fed) in the room announces its going to make a move?"

Answer from the Wolfman: "You front run the gorilla."

So when the Fed announced they may do a quantitative easing or buy MBS, the smart money all flocks there before the Fed and waits to get paid.

Bill Gross who is one of the smartest guy on Wall St and the king of bonds now has 80% of the assets in his largest fund(total return) in MBS(mortgage backed securities). When asked why he explained they are paying 4-1/2%. The Fed announced last week that they planned on doing whatever it takes to get credit flowing agian and that included buying MBS. So if you are Bill Gross and you know the money is going to flow there, why not take 4-1/2% with a government guarantee when treasuries are now paying you nothing?

This front running is the story folks, and treasuries are eventually going to lose their luster in the eyes of foreign central bankers as this unfolds. When this happens(and I don't have a timeline here) its going to be ugly.

I will have much more tomorrow. We are in uncharted territory here everyone and I had to go back to 1873 in order to find anything close to what we are seeing in our markets today.

What I read during these times was frightening.

Stay tuned!

Its Awfully Quiet Out There!

Good Evening Folks

For the first time in months there is not a lot of news to discuss. I don't have much to say! Tomorrow will be a huge day as we hear Goldman Sachs earnings before the bell followed by Morgan Stanley. There is a lot of buzz around how large Goldman's loss will be.

It will be interesting to see how the market reacts to the results. Many bottom callers are out there screaming that stocks are now way undervalued after the 40%+ decline equities have taken this year. I of course think they are full of crap. Expect things to quiet down after tomorrows huge news day as the holidays arrive. Beware of the bulls during this quiet time!

FAZ and SRS worked well today.

I plan on being nimble with FAZ tomorrow. I will be closely watching how the futures react to the Goldman earnings. Either way, I will most likely get out of FAZ at the open. The reason I say this is if Goldman reports a disasterous quarter and we get a big drop at the open it will be time to take some profits. I am up nicely on the position and there is no sense in trying to be a pig whith the financials being as beaten down as they are. If Goldman beats, I am outta FAZ because the financials are going to take a moonshot.

I expect them to try and throw out the kitchen sink tomorrow. My guess is their losses will be a disasterous and the stock will get clobbered. IMO, this clobbering could create a nice entry point on the long side on Goldman. We will be heading into the holidays where trading volumes tend to get light. Rallies often occur is these situations, and many traders may attempt to take advantage of this and pick up Goldman if the stock gets clobbered at the open. Thanksgiving ring a bell anyone?

I can hear the "bubble buys" spinning the bad Goldman quarter already. "Its a kitchen sink quarter!..blah blah blah". If for some reason Goldman pulls a shocker and pulls of a miracle good quarter my FAZ shares will be renamed FIZ and I will get taken to the cleaners. Its a risk I am willing to take.

I plan on still holding SRS despite what happens tomorrow. I still think SRS will move much higher from here.

Gold continues to move as the dollar is beginning to show some weakness. I also think gold is moving higher because treasuries are paying squat right now.

Investors are desperate to find safe havens that actually pay returns better than the zero % seen in treasuries!

As a result, gold and commodities are starting to look much more attractive. If the dollar and treasury yields continue to drop I believe this is where the smart money will start flowing.

Here are the stocks on my radar on the long side as a result of the above trends:

DIG, gold, GDX, NUE, AA

Still short the financials and commercial real estate. Apple is on the radar but I am not ready to pull the trigger.

I will have a much more extensive update tomorrow or Wed. I may have to travel tomorrow on business so I might not get it up until Wed. Also, Don't forget we also have the Fed announcement tomorrow as well. ZERO RATES HERE WE COME!

Stay Tuned!