Thursday, September 4, 2008

Ouch! That's Gonna Leave a Mark!

Good evening everybody!

I swear every time I travel we have a big sell off. I apologize for not getting anything up earlier today as the market rolled over.

I really don't know where to start. Lets take a look the the news. This blog would be 10 pages long if I listed all of the bad news that hit today, so lets just stick with the Bloomberg summary of the meltdown today:

"Sept. 4 (Bloomberg) -- U.S. stocks tumbled, sending the Standard & Poor's 500 Index to the longest stretch of losses since January, after rising jobless claims heightened concern the economic slump is worsening and a decline in oil pushed energy producers lower.

Caterpillar Inc., Boeing Co. and United Technologies Corp. retreated as much as 5.6 percent after higher unemployment spurred concern about tomorrow's monthly jobs report. Exxon Mobil Corp. dragged energy shares in the S&P 500 to the lowest level since February. Banks and brokerages fell 4.7 percent after bond investor Bill Gross warned of a ``financial tsunami.''

My Take:

Where are those bottom callers? Are we there yet? Today's free fall was not a surprise to me. However, the events that triggered it were. Bill Gross's comments really slammed the door on the bulls today. He essentially came out and said he is not buying any more Fannie/Freddie paper until the Treasury decides on how they are going to fix the GSE disaster.

Folks, this is baaaad. Bill Gross put 61% of his fund mainly into Fannie/Freddie debt. He's getting nervous because Mr. Paulson hasn't come out and announced he will backstop this paper and bailout Fannie/Freddie. As a result, Bill Gross is on strike until he hears from the Treasury.

This puts the spotlight on Paulson. He is now forced to make a decision that he doesn't want to make right now. If there are no buyers of Fannie/Freddie debt, there is no mortgage market thus no housing market.

The risk of losing all of his buyers is very real because Bill Gross has the reputation of being one of the smartest guys on Wall St. If he ain't buying, you can assume that China and Russia aren't either. You can be sure that this news raised an eyebrow or two in Moscow and Beijing.

If the big players start to bail on buying our housing debt than the game is over. Gross knows this, and he is basically pressuring the Fed to back his investment. He placed a calculated trade on this paper knowing that when push came to shove, the US Treasury would be forced to back stop the paper.

If the Fannie housing debt isn't backed, the government guarantee means nothing. If this is the case, then why would you trust our "guarantee" on treasuries?. Remember folks, its the foreigners that fund our ridiculous spending habits by gobbling up our treasury debt.

IMO, these risks are too great for the Fed and Bill Gross knows it.. As a result, expect to hear from the Treasury soon on how they plan to bail out Fannie/Freddie.

Now I must ask a question here: Is placing a big bet on mortgage paper and then hanging your country out to dry piggish behaviour by Bill Gross? Yes! This is why they are called pigmen! All Gross cares about is making money here, and if he has to grab the Treasury by the throat in order to do so then so be it.

Pretty disgusting isn't it? Its also pretty damn brilliant in a greedy sort of way. Gross will get his way in the end. If he doesn't, his fund is probably toast after betting more than half of its assets on mortgage debt.

Now lets think about that for a second: Would Bill Gross ever bet "the house" without knowing that the Treasury was going to most likely bail us out this mess? Uhhh NO! Hell, I bet the Treasury has come to him and asked for his opinion on how to fix it!

Its criminal when you think about how this is all going down. Talk about inside information on a trade! Nevertheless, betting against Gross here would just be plain stupid.

So what do we face after the bailout?

You think you saw selling today, wait until the Treasury bailout is announced. The bond market will hate the fact that we doubled our national debt to $10 trillion by back stopping the GSE's. Interest rates will go through the roof as a result. 14% mortgage rates anyone? Don't kid yourself, it will happen when this bailout goes down. It might not happen immediately, but it will down the road.

Equities will then tank as massive deflation follows the bailout. Why? Because the cost of borrowing will go through the roof as fear grips the bond market. Risk will be the new buzzword on Wall St.

As a result, assets will free fall in value because no one will be able to afford to borrow as much money at the new higher interest rates.

Bottom Line:

The bailout is coming folks. Like it or not. The bankers are all in bed with one another and Gross's announcement today is just part of the playbook on how we get out of this mess. Does Gross really know what the Fed will do? Probably not, but I bet he is about 95% sure what their next move is. You can be sure that they have had discussions with one another about what "might" happen.

You can't bet against a GSE bailout after today folks. Bill Gross gave you the answer on the bailout on a silver platter today.

Bailouts are disgusting and should have nothing to do with capitalism. No one ever learns any lessons from them and it increases the likely hood that the pigmen will repeat the same mistakes.

Regardless,you gotta invest based off of the tape on Wall St., and the tape says bailout . You play the hand you are given! My advice and thesis remains the same: Stay in treasuries/CD's because cash is slowly becoming king. Surging US dollar anyone?

If you decide to dabble in equities, keep your positions small, and at least hold some shorts if you decide to bottom feed here on the long side.

I am currently very short in my trading account. Let me reiterate what I have said in the past: My trading account is a very small portion of my investment portfolio. Most of it is in cash.

If the jobs number is really bad tomorrow, equities are extremely vulnerable to another sell off. There is nowhere to hide in the current market. In the past, investors could always run into commodities when equities tanked. This is no longer an option as gold and oil continue to free fall. Expect many a hedge fund to go belly up as a result. There is a big rumor that the $14 billion Atticus hedge fund is liquidating.

Warning! These liquidations can kill your portfolio, especially if they invested in the same stocks as you did. Strong hedge funds are now out there shorting stocks that weak hedge funds own, betting that they will be forced to liquidate and sell all of their shares which then destroys the stocks price.

You gotta love the brutal creativity of the pigmen. Wall St. is such a pleasant place isn't it?


Avl Guy said...

Ok Jeff, did u ever believe there was a pure market of capitalism at play in this nation? Yeah, it's been as pure as "New York Snow" (I always wanted to use that line since it appeared in that 1981 song, Bette Davis Eyes).

Bill Gross is being a typical head of a mega-billion $ global bond fund.

I think a GSE bailout adds to the volatility...but the pigmen are still wielding Lipsticks The Size of Bazookas!!! (wow, im on a roll tonite).
After more bailout-fueled spiking up & down this month, i'd not be shocked if the Dow was still around 11,000 thirty days from now. The pigs are getting bigger but so have the lipsticks. 'Bazooka Neon Pink' anyone?

Jeff said...



They metter get some more make up because the lipstick isn't enough to fix up this bloated pig!

I am actually started to get worried about this sell off. The futures are way down and the Nikkei is getting pummeled. Down 3%.

If the jobs number is over 100,000 and stocks go south, we could do some real damage tomorrow. The bulls look like they have seen a ghost.

Whats wierd about large sell offs is how they happen so unexpectedly. there was no real news that made stocks plunge today

If the jobs number is better tomorrow, we could get a retrace tomorrow.

Its going to be interesting to watch!

Avl Guy said...

Well there was no 'new' real news to drive yesterday's sell-off; just 'existing'news whose initial lip-stick had smeared off by yesterday's trading. That's when the Street realized, OMIGOD, THEY'RE ACTUALLY PIGS! And then the rush was on.

Quote from today's The Telegraph: "Some stock ramping Wall Street institutions and their pet in-house economists have suggested lately that the US "will avoid recession".
Ignore them.
In many cases, they're the same institutions that used to make hay ramping "mortgage-backed securities" - those toxic packages of sub-prime waste which caused this crisis in the first place."

Ouch! That's from:
World must brace itself as the US banking sector 'fesses up' to losses By Liam Halligan

Avl Guy said...

OOpps, actually that's 12 days old...from August 23rd's The Telegraph

Jeff said...


I love the Telegraph. Wall St. is being held prisoner by those garbage CDO's. They would love to see a nice bounce at which point they would try to dump this toxic waste.

Goldman Sachs downgrade of Merrill was interesting today.

My guess is they will all downgrade each other straight to the bottom!

Art said...

GSE will be bailed out, it was clear from the beginning that the bailout proposal was in place to put US further in debt and privatize any equity invested in GSEs.

Bill Gross didn't gamble, he knew who proposed bailout, he knew that it will happened and no one could do anything to stop it, the rest is just PR.

Jeff said...


I agree. they are all in this mess together.

It seemed as if Gross was reading from a scripted page yesterday.

I got the feeling this was page one from the playbook on how the Treasury plans on getting us to the bailout.

Cramer also was singing the same tune. I don't agree with his investing ideas but he is also one of the guys in the "know".

A PR campaign is a great way to put it Art!

Anonymous said...

Great article.

I however disagree that cash is king now. The dollar index is flying because the world's other currencies are starting to follow in the dollar's footsteps. This is really bad news for cash! Fiat money is losing its value all over the world.

We're also going to see price deflation in many commodities as consumerism crashes. I'm happy about holding gold because its demand has very little do with consumption, and everything to do with history and religion. Somehow people don't get this!

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