BOO: The Insanity Continues!

Good Afternoon Folks!

Not much to say today other than fear continues to dominate the market. Watching the last hour before the close is like watching the ball bounce around on a roulette wheel. Will it be black or red? Who knows!

I don't think anyone has a clue which direction the market will break at the end of each day. We rise and fall hundreds of points every few minutes. Anyone that went long Thursday or today was sweating bullets near the close as we dropped two hundred points around 3:30 before bouncing back 100 right at the bell. Those on the short side have been sweating bullets all week after taking big losses!

This results in high volatility because there is a ton of fear selling from each side. Many of the bulls and bears prefer to sell on Friday because neither side knows what potential ghosts or goblins could be released from a news perspective over the weekend. In this type of market, holding over a weekend can be suicide!

One thing that was interesting today was JP Morgan announcing they are going to start modifying mortgages:

"Oct. 31 (Bloomberg) -- JPMorgan Chase & Co., the largest U.S. bank by market value, plans to modify terms on $110 billion of mortgages and forgo foreclosure proceedings on all real-estate loans while the changes are implemented in the next 90 days.

The offer extends to customers of Washington Mutual Inc., the savings and loan JPMorgan agreed to buy last month, the New York-based bank said today in a statement. Loan modifications may include interest-rate or principal reductions. The bank said it will establish 24 regional counseling centers to provide face-to- face help in areas with high delinquency rates.

The JP Morgan program is expected to help 400,000 families with $70 billion in loans in the next two years, JP Morgan said. The company said an additional 250,000 families with $40 billion in mortgages have already been helped under existing loan- modification programs.

The programs are aimed only at homeowners who ``show a willingness to pay,'' the bank said. ``Customers should continue to make mortgage payments to reflect their intent to honor their commitments.''

JP Morgan said it will also donate or offer a ``substantial discount'' on 500 homes to community groups in order to stabilize local markets. "

Final Take:

If this doesn't have disaster written all over it than I don't know what does! Why would anyone pay their mortgage regardless of whether they can afford it or not? If I overpaid for a $600,000 McMansion, I would be the first guy calling JP Morgan to get my bailout.

I'll "show a willingness to pay" JP! Just drop my mortgage by 200,000k. This is going to be a disaster for the banks if they decide to go down this road. Where do they draw the line in terms of who gets a modification and who doesn't?

If you are struggling to pay your mortgage, I would be taking advantage of this immediately whether your loan is with JP Morgan or not. My guess here is there is some serious political pressure being put on these banks to "lighten the load" for homeowners by the Treasury.

Washington is now deeply worried about torches and pitchforks. Homeowners are ANGRY as they watch Wall St get bailed out while they continue to struggle.

Bottom Line:

Folks, this whole nightmare is starting to unwind at a frantic pace. The government is trying to juggle too many balls at once as it tries to prevent a multi trillion dollar debt bubble from unwinding.

This is a house of cards that is about to come tumbling down. The government does NOT have the money to prevent this unwind from happening! They are going to end up defaulting on themselves if they continue this bailout mentality.

The Treasury announced this week that they are going to be forced to run $2 trillion in treasury auctions in order to try and pay for this fiasco. You can be sure that the demand for all of these new treasuries is going to be tepid at best. Yields will have to be raised in order to get it all sold. We all know what that does to lending rates. To the moon Alice!

I mean think about it, why would you risk buying the debt of a nation that is filled with a bunch of consumers that have no savings and are in debt up to their eyeball?.The T-bills will get sold but it will be at a price.

When these yields go through the roof, expect equities to swirl down the toilet bowl.

As for the market short term, good luck! My advice is to avoid it unless you have a very strong stomach. The bounce this week looks tired but we have the election on Tuesday. There is a lot of debate as to what happens to equities depending on who wins.

You would think an heavy taxing Obama victory would be bad for equities, but Wall St seems to be pulling for him so I wouldn't take that bet.

I plan on taking a breather here and hold onto my current positions until the election shakes out.

In terms of trades I hedged myself a bit today. I picked up some UYG and sold some of my short 2x inverses. I am still hedged to the short side but more protected from volatility. I also picked up some SRS today. This has pulled way back from its highs and I think commercial real estate is going to get killed during this downturn.

Happy Halloween!

So how is that rate cut helping you?

Good evening folks!

Today was an interesting day. Stocks were choppy throughout the day before ending the day with a nice bounce. We got a negative print on the GDP of -0.3 which was better than expected:

"Oct. 30 (Bloomberg) -- The economy suffered its biggest decline since 2001 in the third quarter, ushering in what may be the worst recession in a quarter-century and boosting the chances of Barack Obama and fellow Democrats in next week's elections.

Gross domestic product contracted at a 0.3 percent pace from July to September, according to a Commerce Department report today in Washington. The decline was smaller than forecast and stocks rose. Even so, the economy may be in for a larger drop this quarter after the record two-decade expansion in consumer spending came to an end.

Consumer spending dropped at a 3.1 percent annual pace, the first decline since 1991 and the biggest since 1980, after President Jimmy Carter imposed credit controls. The median forecast was for a 2.4 percent drop."

Quick Take:

The market seemed to focus on the fact that the 0.3 drop was better than expected. What they should be focusing on is the fact that consumer spending dropped 3.1% which was the biggest drop since 1980. Remember folks, the consumer represents 70% of the economy. If they fall off a cliff, the economy is toast. Consider this drop in Q3 to be a very ominous sign of whats to come.

Rate cut

So let me ask you a question. How is yesterday's rate cut helping you? Answer: Its not. It does of course help the bankers. What a shock right? The proof is in the charts. Think mortgage rates will drop following the rate cut? Think again:

Now lets take a look at the 10-year today a day after the rate cut:

Final Take:

Thanks for the help Ben! Now its even more expensive to buy a house. Gee, I am sure glad you got another chance to make your banking buddies even more rich after cutting rates for them! What a putz.

These cuts will do nothing but help Wall St's balance sheets. Rate cuts will no longer help mortgage rates because banks are scared to death to lend right now because they are insolvent and have no desire to lend to a tapped out consumer.

The metioric rise in the 10-year over the last few days is something to take note of. If this trend continues, mortgage rates are going to rise considerably. It appears the bond market is starting to rumble. What I find interesting in this trend is the 10-year is going up on days when the market is down. The exact opposite should be happening because investors should be flying to the safety of treasuries on down days.

Think the Fed is done cutting? Think again:

"Oct. 30 (Bloomberg) -- Federal Reserve Bank of San Francisco President Janet Yellen said the central bank may cut the benchmark interest rate close to zero percent from the current 1 percent level should the economy remain weak.

``We would do it because we are concerned about weakness in the economy,'' Yellen said today after a speech, responding to an audience question about the impact on the economy should the Fed reduce the main rate to as low as zero. ``I think we could, potentially, go a little bit lower than'' 1 percent, she said in Berkeley, California.

Recent data on the U.S. economy is ``deeply worrisome'' and the government should consider new ways to help homeowners and stem foreclosures, Yellen said in the speech."

Bottom Line:

If you have ever had a desire to visit Japan, I advise you that you wait because the USA is going to look just like it very soon. Why waste the money on flying there when all you will need to do is look out the window in a few months to see what its like over there?

Folks I say this because it appears we are following the Japan deflation playbook to a tee. Japan ended up with zero interest rates and zombie banks after their deflationary spiral. Sound familiar? We are only 1% away from being right there with them. The economy is detiorating rapidly. The consumer showed signs of collapsing in the third quarter. Its going to be a grinch style Christmas this year!

Company after company are announcing massive layoffs. Hell, even the US postal service announced they are going to layoff 40,000! The situation looks to be getting more dire by the minute despite the recent stock market rally. Yellen's speech above tells me the Fed is scared ****less.

There are reprocussions to zero interest rates. Money markets lose their profitability. Consumers on fixed income will become paralyzed and may not even be able to pay their bills as their return on equity vanishes.

The stock market continues to act erratic as hell. "Sybil" continues to beat to her own drum. Its almost impossible to predict whats going to happen on a day to day basis. Day trading at these levels is basically gambling at this point. We can rise and fall hundreds of points in a matter of minutes. Albert Einstein couldn't come up with an accurate short term trading thesis in this trading environment.

Long term its pretty easy to see how this is all going to end in a disaster.

Stay Tuned!

Leverage is a Bitch

Good Evening Folks!

Ahhh.... Another day, another Fed rate cut. Its now official folks, Helicopter Ben has officially matched Greenspan's Fed Funds Rate of 1%. Hooray! The housing bubble days are back! NOT!

So how did the market like the rate cuts? Well, Bennie was looking good for awhile until the last 10 minutes of the trading session. The DOW virtually collapsed at the close and fell over 300 points which took the DOW into negative territory. The GE news at 3:47 was one of the culprits. Take a look:

The Fed and the Treasury continue to scramble around like little rats in an attempt to pump massive amounts of liquidity into the system. Its the same old story week after week. Everyday another multi-billion dollar bailout is announced. The latest one today involves other countries:

"Oct. 29 (Bloomberg) -- The Federal Reserve agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore in its biggest effort yet to curtail the spread of financial market turmoil beyond developed economies.

The Fed set up ``liquidity swap facilities with the central banks of these four large systemically important economies'' effective until April 30, the central bank said today in a statement. The arrangements aim ``to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well managed economies.''

My Take:

Hell Hank, lets just bailout the whole world! The story and thesis remain the same folks. We are in the middle of the largest debt unwinding in the history of the world. This Ponzi bubble was blown up on leverage, and it will be torn apart as the leverage is taken out of the system.

This is what happens when you deregulate a bunch of greedy bankers. In 2003, the investment banks on Wall St were deregulated and allowed to lend out money at a 40-1 leverage rate off of their capital. This means that they lent out $40 on every $1 of capital that they had. All of the hedge funds and world banks all followed suit as the debt bubble grew to historic proportions.

This is all fine an dandy when the game is working and assets continue to rise in value. However, when this trend reverses, the leverage that allowed you to dramatically increase your profits on the way up now exacerbates your losses as assets come screaming back down. We are now witnessing this historic explosion of a giant debt bubble via deleveraging.

Banks can now only lend at a leverage rate of 12-1 instead of 40-1. This creates a giant black hole/loss of wealth in the financial system. What the Fed and Treasury are now trying to do is use their balance sheet to fill this black whole and keep the game going.

The problem with this premise is all of this wealth was nothing but an illusion! The Fed is trying to replace wealth that was never liquid. Many Americans assumed that they were worth $400,000 if they bought a house for $200k as the credit bubble rose and got it appraised a few years later at $600,000. The reality here is you were only $400,000 wealthier if you SOLD.

Most did not, and many others bought at the peak. Markets crash when there is a lack of liquidity in the system. The Fed is throwing money out of helicopters in an attempt to get banks and to lend and consumers to borrow. The problem is you can lead a horse to water but you can't make him drink!

The banks don't want to lend because they have about as much money as I do in my front pocket. The consumer doesn't want to lend because he is worried about keeping his job abd he is already in debt up to his eyeballs.

The banks have a severe disaster on their hands from a leverage standpoint:

If you use the example above, the problem the banks have now is they are stuck holding millions of homes at the $600,000 price tag when there was 40-1 leverage in the system.

The brutal reality is that the banks are all now facing is is there is now only 12-1 borrowing leverage in the system available for housing. This is about a 70% reduction in lending capacity(from 40-1 down to 12-1)!

It doesn't take a math genious to realize how screwed the banks are in this situation. They own billions of mortgage assets at peak prices that now must be sold into a lending pool that's 70% smaller. Its not hard to guess whats going to happen to housing prices over the next several years when there is 70% less money available to borrow. Can you say WATERFALL? Bank profits will WATERFALL down right along with them!

A very smart pigmen(who is way up the food chain) loves to laugh when he hears CNBC talk about all of the money that's "sitting on the sidelines". His quote to me after hearing this was "yeah right, let me know how much money is on the sidelines when they take the 40-1 leverage out of the system". This is the same guy that told me two years ago that Merrill Lynch was going to be the next Enron.

Bottom Line:

Tomorrow will be dominated by the GDP number tomorrow. If we get a bad print, we could see a giant flush. I am still very bearish on equities. What a shocker right??

The market is over priced for two key reasons.

1. 70% of the leverage must be taken out of the banking/financial system.

2. The economy is about to slam into a brutal consumer led recession.

This is a one two knockout punch IMO. The Fed is now about out of bullets. What are they gonna do go to zero? It will be Japan 2 if they do. The interventions are looking more and more desperate in the eyes of investors.

Sheila Bair from the FDIC announced today that she wants a $600 billion bailout for homeowners. You have got to be kidding me with this idea...Gimme a break! Socialism here we come! What an embarrassing situation for this country. We will never be able to call ourselves capitalists ever again after stomping all over the free market system.

If you are leaning to the long side(good luck to you), I would wait for a pullback before trying to chase this rally.

As for myself, I scaled into another short (SDS) this afternoon on the Fed rate cut bounce. Which ever way you are positioning yourself, play small and scale yourself into positions.

Stay hedged and be diversified in either event.

Until next time!

Merrill Lynch's David Rosenberg

Just a quick note this morning.

If you only have time to read one research note this morning:

GIVE THIS A READ

This is from Merrill Lynch's famed economist David Rosenberg.

Thanks to him I didn't sleep well last night. The data included on the economy in this report is flat out frightening. Make sure you read the whole thing. This is some awesome research.

Warning: You might need a sleeping pill after reading this so call your doctor and get some Ambien!

Enjoy

Fear Works Both Ways

Wow

That was interesting. This market continues to amaze me. The DOW took a moonshot on a day when consumer confidence hit an all time low:

"WASHINGTON (MarketWatch) -- Wounded by the financial crisis, U.S. consumer confidence plunged in October, reaching an all-time low, the Conference Board reported Tuesday.

The October consumer confidence index fell to 38 from an upwardly revised September reading of 61.4. Economists surveyed by MarketWatch had expected an October reading of 52.

Expectations turned "significantly more pessimistic," with the percentage of consumers expecting business conditions to worsen over the next six months rising to 36.6% from 21%, and those expecting fewer jobs rising to 41.5% from 26.9%."

My Take:

Today was another historic day on Wall St. One thing you need to keep in mind after seeing days like today. When you have this much panic in the markets, stocks can move violently in either direction. Fear works both ways. Investors can panic about missing the next big move higher just as much as they can worry about losing everything when the market begins to crash.

We had some obvious short covering towards the close as the pain threshold for the shorts became intolerable once we got towards the highs of the day. This exacerbated the move higher.

We have seen this move before:

Anyone remember the parabolic move below on October 13th?:




Final Take:

I think its worth noting how this bounce turned out. If you were a bull and bought at the top on the 13th, you are probably wondering where your next meal is coming from. As you can see there was an immediate reversal the following day followed by further violent selling the following week.

Now I am not predicting we will see the same pattern this time, specially with an imminent announcement of more fed rate cuts.

Now this Fed announcement sets up an interesting inflection point tomorrow. Most think a .50 cut is baked in the cake. If they go .75 does the market cheer the news and rally or do they sell in a panic thinking the economy is worse off than anyone expected? If we get the expected .50 cut, does the market sell the news? If we get only a 1/4 point cut, does the market tank because they were expecting .50?

Its going to be very interesting to see what happens. I am not going to get in front of this announcement with any new trades. I will hold what I have and adjust accordingly until after we hear from the Fed.

Bottom Line:

Lets see what kinda follow through we see on the rally today. Keep in mind only 1.4 billion shares were traded on the floor. This is light for such a big move which means you should probably take it with a grain of salt. Panic moves are never a sign of health for the market. We are still in a pretty tight trading range.

You gotta trade small in this kind of trading environment because the whipsaws can rip you apart. There really is no strong confirmation for the bulls or the bears at these levels. The news continues to be daunting, but the government intervention to prop up the markets is just as strong.

This leaves the bulls and the bears both in the dark. Its time to settle down and see what the Fed says tomorrow. Lets also see what happens in the credit markets over the next few days in response to the TARP and the commercial credit support from the Fed that began this week.

When this rally burns itself out which could be as early as late tomorrow, its going to set up a nice entry point to short. The news out there is too horrific for any of the bulls to hold long. This is a traders market. Many stocks had 50% moves today. I see very little reason why traders wouldn't take profits here.

Be careful out there folks! Keep any positons small and hedge yourself. The market is about as mentally stable as Cybil right now.

Capitulation is a MUST Before we Bounce

Good Afternoon Everyone!

Lets go back in history to 1929 and take a look at a chart. We need to capitulate like we did in 1929 before we bounce:

I have been listening to the bottom callers all day on CNBC that are looking for a significant bounce. I find it funny because they are all trying to cover their butts now by saying "we have hit a bottom, BUT I am not saying this is the bottom". I guess the "bubble boys" figure maybe now its time to add a disclaimer to the end of their bullish claims that NOW is the time to buy. What fools.

My other favorite pigmen line right now is "I think now its time to start nibbling on the consumer staples". Folks, this is the bulls way of saying "Run for the hills!". Anytime you hear them advising you to buy healthcare and consumer staples...Run for your life! God forbid they actually tell you the truth when they think the market sucks!

I am even starting to see some bounce calls on some of the bearish websites that I like to follow. This surprises me. Trading 101 in bear markets tells you that you need to have capitulation in stocks in order to wash out all of the weak longs before you begin to see any type of tradeable bounce.

Art Cashin has been saying this for weeks. Look at the chart above, we needed a "Black Tuesday" in 1929 before people felt comfortable jumping back in. When the market psychology is horrific and the market slowly bleeds everyday, you create a situation where the bulls aren't confident in going long.

This results in a "no bid" environment as people continue to sit on the sidelines. Any bounce is immediately sold into. Today was a perfect example. When the market jumped 200 points in the afternoon the bulls immediately sold into the rally. The bottom then fell out in the last hour as the buyers went back to the sidelines.

I simply cannot see any chance of a significant bounce until we see a 1000+ point down day on the DOW. The lack of trust, confidence, and continuous bad news simply is too much for the bulls to overcome. Psychologically, they are a mess right now. If you were a bull and walked into a pysch ward right now, you would end up in a straight jacket.

Capitulations are certainly not fun, but they are badly needed at times. Today would be one of those times. Investors need a reason to buy. They need to psychologically think that they are jumping in near the bottom. The problem we have now is how on earth can you have the confidence to buy when the DOW slowly sinks day after day?

I believe a washout is the psychological shift that is needed to pull us out of this for the short term. This will bring many buyers back into the market. Why? Because everyone knows the playbook. Brutal bear markets find bottoms after capitulation. Its been this way all the way through time. The smart money like Art Cashin knows it. He isn't going to send his clients back into this tsunami until he sees the classic signs of capitulation. That goes for every other veteran trader that's worth a crap on Wall St.

In this modern fast paced world we always love to say "its different this time".

History has almost always shown that this is never the case.

Bottom Line:

I continue to hold onto my shorts that I bought on Friday. I grew a few grey hairs in doing so today though due to the volatility! I will probably sell them off on any serious tankage. I see no significant bounce until we see a sharp capitulation type selloff.

We have the Fed back in the picture over the next couple of days. I am sure we will see more rate cuts. I kinda see this as a non event at this point. A half a point rate cut is nothing after bailing out the whole financial system!

We somehow need to restore confidence before we start moving higher.

I'll end this with some more great news:

"Oct. 27 (Bloomberg) -- Yields on Fannie Mae, Freddie Mac and Ginnie Mae mortgage bonds soared to the highest in more than seven months relative to government notes, potentially boosting home-loan rates.

The difference between yields on Washington-based Fannie's current-coupon 30-year fixed-rate mortgage securities and 10-year U.S. Treasuries climbed about 21 basis points to 224 basis points as of 3:45 p.m. in New York, up from 162 basis points on Oct. 20, data compiled by Bloomberg show. A basis point is 0.01 percentage point.

``It is the deleveraging,'' Mohamed El-Erian, the co-chief executive officer of Pacific Investment Management Co., said in a Bloomberg Television interview today from Newport Beach, California. ``There are still people who absolutely have to liquidate, and that is keeping a number of the spreads in the high end of the markets much wider than they should be.''

The average rate on a typical 30-year fixed-rate mortgage climbed to 6.08 percent at the end of last week, after falling to 5.92 percent on Oct. 22 from a two-month high of 6.38 percent, according to Bankrate.com data. That compares with as low as 5.72 percent last month."

Sigh...Just what we needed: Higher mortgage rates!

Stay tuned

Is Citadel going Down?

Rumor has it that the reason the futures went lock limit down on Friday was because the massive hedge fund Citadel was going down.

Here is the article from Reuters. It appears that Citadel went to the the government looking for a handout:

"CHICAGO, Oct 25 (Reuters) - Examiners with the Federal Reserve have questioned Wall Street counterparties in recent days about their exposure to debt and other holdings of Citadel Investment Group, the Wall Street Journal reported on Saturday.

The report came a day after Citadel, one of the world's largest hedge funds, said it has more than $10 billion in available credit. The Chicago-based fund was seeking to stop rumors it was liquidating some portfolios after its two main funds had lost 35 percent since January.

Citing people familiar with the matter, the Journal said the Fed had questioned the counterparties in at least two instances.

Talk has swirled in the market that Citadel had asked the U.S. government for a cash injection and that financial regulators were coming to inspect its accounts."

Final Take:

This seems to be the next kaboom in the stock market. I doubt that the Feds will start bailing out hedge funds. The Citadel was leveraged at 10-1. A 35% loss on their equity pretty much tells me they are toast.

Expect a violent market reaction if this turns out to be true.

The Credit Spreads say it ALL

Good Afternoon!

I can imagine that many of you are wondering why the market blew up last week. I talked a lot about the locked credit markets yesterday and how this problem is wreaking havoc on the stock market. Today I wanted share some graphs with you showing you why the traders in the credit markets look like they just saw a ghost.

First, lets take a look at AAA debt spreads:

Quick Take:

This is AAA rated debt. This is supposed to be the best of the best from a debt perspective. As you can see above, the spreads came down sharply on October 10th as the central bankers of the world decided to bailout everything under the sun. This was done to loosen up the credit markets and get the banks to start lending again. Short term it helped as spreads dropped earlier this week. However, as you can see it only lasted a few days and now spreads are actually rising.

Folks, if this continues, you will see Financial Armageddon. Without credit, the economy stops working. You don't hear about this stuff on CNBC because its too terrifying for them to report. They prefer to stick with their "silver linings".

Please ignore these talking head idiots. Hour after hour they continue to give air time to these "bottom calling" morons. Folks if you listen to these clowns you will end up bankrupt. How many times have they called bottoms?

How many tech wreck bottoms were called by the pigmen at Nasdaq 4000 then again at 3000, 2000 etc.? The "bubble boys" bottom called themselves right down the toilet bowl. Focus on the steak like the credit markets and the fundamentals and please ignore the CNBC bubblevision "sizzle"!

Lets take a look at "Garbage debt" spreads:

Final Take:

Folks, this chart is even worse. Number one, the spreads are already back to the highs when we all thought the world was going to end if the worlds central bankers didn't bailout out Wall St.

Number two, spreads this wide make this debt essentially worthless. I will repeat what I said yesterday. Any debt that isn't government guaranteed is screwed. Its worthless. The Treasury has essentially thrown all non backstopped debt under the bus.

As a result, banks are going to continue to keep their money in government guaranteed debt versus lending it out. Why risk lending to a bunch of companies that are about to get trounced by one of the worst global slowdowns in history?

I am extremely concerned about what I am hearing out there folks.

There are some frightening reports of uprisings in countries all around the world. Poverty stricken countries are much less able to handle a global slowdown than we are. If you can't put food on the table, you rise up and raise hell.

I am afraid its going to start happening here if things don't start turning around.

Bottom Line:

Watch the credit spreads like a hawk. If spreads continue to rise, head for the hills. I am extremely concerned that you could see the mother of all stock market crashes if these spreads continue to stay elevated or rise from their current levels.

The credit market is what causes stock market crashes. I am officially on crash alert now.

If the economy has no funding it will fall off a cliff. Lets all hope we find a way out of this.

So far, its not looking good.

The Treasury Bailout Fiasco

Good Afternoon Folks!

Ahhh, another day another 300 point loss on the DOW. This is getting ridiculous isn't it? I can't wait for the day where I can sign on here and blog about going long the stock market. I prefer sunshine over dark clouds any day of the week despite the extreme bearishness you read everyday on this blog. Unfortunately.............I just can't be long yet.

I hate to say it but its time for another bearish post. I can't help it! I gotta call it like I see it and folks, the credit markets are still a mess. This crisis is all about the credit markets. Until these markets loosen up you gotta stay out of the stock market.

The equity markets are now dominated by what happens in the credit world. The credit market is the dog that wags the tail which is the stock market.

You must remember this as you invest right now. You cannot look at stocks being historically cheap because its not whats driving prices. Are there generational buys out there in certain blue chips from an earnings perspective? Hell yes, but not until the credit markets get straightened out.

The lack of availability to credit in this market is what is destroying equities. Hedge funds are continuing to liquidate as they are forced to leverage down and meet redemption requests. This is not a 1 or 2 week process folks. This could go on for several weeks, and it will continue to put constant pressure on equity prices.

Banks are hoarding the capital that they received from the Treasury as they try to fix their balance sheets instead of lending:

"Oct. 24 (Bloomberg) -- The cost of borrowing in dollars overnight in London rose as the increased likelihood of a global recession spurred banks to hoard cash even after policy makers pumped record amounts of the U.S. currency into financial markets.

The London interbank offered rate, or Libor, that banks charge for such loans climbed 7 basis points to 1.28 percent today, British Bankers' Association said. It gained for the first time in 10 days yesterday. The comparable rate for U.K. pounds jumped 19 basis points to 4.75 percent. The Libor-OIS spread, a measure of cash scarcity, widened by the most since Oct. 10. "

Quick Take:

The Treasury hoped to stimulate lending after investing $250 billion in our large banks. I guess that didn't work! If you are a bank and you don't trust who you are lending to and you are insolvent yourself, why would you lend?

Take a look in the mirror. If you personally were technically insolvent, would you lend someone $500 or would you keep the money and start digging yourself out of debt? Ummm I choose option #2 Alex!

Hank's Bailout Spree Continues

Well, it looks like the insurer's are next as Hank continues to spend our taxpayer dollars.

"Oct. 24 (Bloomberg) -- The U.S. Treasury is considering taking stakes in insurers as well as regional banks in the next round of capital injections to thaw a freeze-up of the financial system, a person briefed on the plan said.

A final decision hasn't been made on firms to be included, said the person, who spoke on the condition of anonymity. An initial $125 billion out of $700 billion approved by Congress was allocated last week to buy preferred shares of nine of the largest U.S. banks.

``Capital adequacy has been a major concern among investors'' in insurance companies, said Nigel Dally, an analyst at Morgan Stanley in New York, in a note to investors today. ``If the Treasury were to purchase preferred equity stakes in some insurers, it would help calm these concerns.''

Treasury Secretary Henry Paulson has shifted the government's financial rescue program to focus on equity purchases after markets deteriorated faster than policy makers anticipated. The strategy offers a quicker way to deploy taxpayer funds, Neel Kashkari, the Treasury official running the bailout plan, told lawmakers yesterday.

Earlier today, PNC Financial Services Group Inc. said it is acquiring National City Corp. for about $5.2 billion in stock after getting a $7.7 billion infusion from the Treasury. The purchase is the first in the government's phase two of a $250 billion program for financial companies, the person familiar with the matter said."

Final Take:

R.I.P. National City.

There is a large concern in the credit markets about the Treasury's actions. From what I understand, the big boys in the credit markets are concerned that the smart money is only going to invest in the debt and companies that the Fed and Treasury have promised to backstop.

The Fed and Treasury have taken on tremendous loads of debt onto their balance sheet as they continue to be forced to bailout practically everything. I mean take a look at who they have backstopped in the past few months: Fannie/Freddie, Bear Stearns, AIG, money market funds, discount window, all deposit accounts(via FDIC), autos, and now possibly the insurers. Don't forget we also had a semi bailout of our largest banks via capital injections.

I am sure I have missed a few, but when you look at the bailout list, its truly mind boggling.

The problem with throwing money out of helicopters is you put enormous amounts of pressure on the areas of the economy that you haven't bailed out. If I am debt investor, why would I invest in an area of the credit markets that's not insured by the US government?

For example, why on earth would I ever invest in an MBS(mortgage backed security) that wasn't issued by Fannie and Freddie. There are hundreds of billions of MBS securities that are floating around in the system that are not guaranteed by the US government because they were not done by Fannie/Freddie . I would value these securities at close to zero now that all of the Fannie/Freddie MBS's are guaranteed.

This is another "unintended consequence" of the housing bailout. The more industries or debt instruments you bailout, the higher the risk of future failures in other industries or debt instrument that is not backstopped by the government.

The Treasury plugs one leak by bailing out the insurers and then creates 5 more because it weakens the areas that have not been saved by the government.

You weaken the companies that you haven't backstopped because the smart money wants to follow the guarantees. So the Treasury has essentially increased the risk of blowups in the economic system by becoming bailout buffoons!

This is a big reason why the credit markets continue to be locked up. If banks and investors are worried about a total economic meltdown, they will simply pile into the Fed and Treasury backstops and wait. This leaves no money left for areas of the economy that must continue to function(like shipping) in order to prevent a global meltdown. The whole problem then feeds on itself!

The only way to fix this is to stop the bailouts and let the weak companies fail. They must ONLY use their balance sheet to ensure that the financial system continues to function. Anything past this is a waste of money and actually harms the system!

Bottom Line:

I continue to be bearish as long as the credit problems persist. I held onto my shorts over the weekend. I picked up a gold ETF and plan on adding to my positions here. I am getting more bullish on gold with each bailout that is announced.

This spending spree by the government will eventually create an inflationary monster that the Fed will be forced to deal with down the road.

All roads for now lead through the credit markets folks. Expect more suffering in equities as long as they remain locked.

Made a Few Trades Today

Be careful today folks.(11:29AM)

I bought some QID and TWM with tight stops as we came back up on the DOW to the -300-350 area.

I think we could flush today or Monday.

The 10-year is up on a huge down day! This is a very bad sign. A bond dislocation could happen anytime here folks.

I also bought some gold calls here. This looks a little overdone. I set very tight stops on the short trades.

My gut tells me that investors are going to sell into the weekend. Lets see how we finish. The news flow is terrible today.

The Debt Bubble Fantasy

Good Evening Everyone!

I hope everyone has had a great week. Its great to be back after some needed rest. A market like this can really wear you out. What a volatile week! It appears the market has temporarily come to a fork in the road.

The next step at this level is trying to figure out how bad the recession will be, and how much of it is priced into the market. The "bubble boys" seem to think we are in a bottoming process and are starting to nibble on stocks. The bears think there is a ways to go on the downside. This battle combined with high levels of fear and government intervention has created a market that's dominated by volatility and chaos.

The old saying used to be "bulls make money, bears make money, and pigs get slaughtered". They need to change this saying too "bulls lose money, bears lose money, and pigs get slaughtered (unless you were a a bearish pig)"!

The bulls are losing money obviously because we are down 40+% on the year in the markets. The bears are getting dinged as government interventional bounces continue to suck out trading accounts. As for the pigs? Well if you were a piggish bear, you are probably a millionaire by now!

The problem here is almost everyone is losing money. Hell, even the gold bugs are getting their butts handed to them as gold plummets! When everyone is getting crushed by the market, no one wants to participate because they are full of fear, and they don't trust the system

The bears have had it right in the current cycle, but most are too afraid to hold onto positions because of the constant interventions by the Feds. Many bears were wiped out by the two month mega Bear Stearns rally back in March. The ones left standing are still suffering from PTSD.

Now were there a few bear traders with steel balls who held onto their positions as the market moved down big from 10k to 8k? Yes, but I guarantee you most of them sold out much earlier and missed big profits. I sold many of my positions before getting to these levels because of interventional fear. I luckily held onto a few, but I honestly didn't have faith that the bets would pay off because this market no longer trades on fundamentals.

The stock market now trades based on how the government wants to intervene on any particular day. If they decide to announce a bailout or save a bank, the market rallies. If they stay out of the market for a day, the deleveraging of everything from hedge funds to banks continues and stocks tend to drop sharply.

What you are left with here is a market that is filled with corruption, intervention, confusion, fear, and fraud. As a result, it trades like a giant casino. When you buy a stock or a short ETF these days , you just hope its your lucky news day!

This is no way to invest people! If I want to gamble, I will head out to Las Vegas! This is why I continue to say that the best thing you can do with your money is keep it in cash until things mellow out.

The debt bubble dream world

The bottom line here folks is the debt bubble was nothing but a fantasy.

Lets take a look at incomes as the housing bubble peaked in 2006:

My Take:

Take one look at that graph and you realize that the housing bubble was not created based on fundamentally sound income growth like it usually does in a healthy market. Incomes were higher 8 years earlier in 1998 than they were when the bubble peaked in '2006! How could houses double and triple in value when incomes stayed the same? The answer is they can't.

This fantasy was created by the pigmen of Wall St. It was done via a combination of artificially low interest rates, bad lending standards, and the fraudulent "financial innovation" of leveraged finance on Wall St.

Bottom Line:

We are now entering the next phase of the debt bubble blowup. I will call this the blame game phase. The market attempted to keep the debt bubble fantasy going via huge liquidity injections from the government. This has failed miserably and the market is now realizing it.

Now that the market understands that the game can no longer continue, its time for the fallout. This is where the lawyers will have a field day. It started with AIG and Lehman(Fuld) last week. Today, Greenspan got reemed by Congress for creating this mess via with his horrible low interest rate policies. Expect many more hearings on this debacle followed by criminal trials as the market continues to suffer.

Stocks are now in the process of being repriced as the market accepts the fact that the debt bubble has burst and is not coming back. This is going to take awhile because so much damage has been done. To make things worse and even more confusing, stocks must also be repriced based on the reality that we are now in a recession that will last at least through 2009.

My belief is we still have further to go on the downside. The credit markets are still too tight, and earnings expectations by the analysts are still way too high going forward. I believe that at the least, we will test the S&P lows of the last recession which was around 800.

I expect a lot of choppiness before we get there, and there is a good chance that we head lower from there. The best thing from an investing standpoint is to stay in cash with your core long term assets until we begin too see a trend here. I expect we may trade sideways here for awhile. The range should continue to be large as the VIX continues to stay at elevated levels. Volatility will rule with an iron fist!

If you are a trading addict, use the volatility to your advantage. I have had some good success shorting the interventional bounces that we see on a weekly basis. For example, Monday created a great entry point for some short positions.

Enter these at your own risk, stay nimble, and be prepared to hit the sell button. Take profits and get out quickly on a nice plunge like we had on Tues. This market is fast and profits can be lost in minutes.

Right now I am sitting on the sidelines looking for some better entry points.

Stay Tuned!

Vacation Time!

I'm off for a few days everyone. Heading south for some R&R. Good luck with your trading and investing. I am sure we will have another volatile week. I will try to hop on and publish any comments if possible but I can't promise anything.

Have a great start to the week!

Jeff

Hey Wall St: Give back Your Bubble Bonuses

The Fast Money crew brings up some excellent points here. Why should Wall St. be allowed to keep hundreds of millions in bonuses that were made off of this fraudulent housing bubble?

Why is the taxpayer being forced to pay for this mess? I hope the MSM starts to run with this story. Its time for the pigmen give back the bonuses that they made during this ponzi scheme to help pay for this mess. The fact that they kept all of this money is deplorable.





On a political note

I have been a lifelong Republican, but I must admit the financial crisis is starting to sway me over to the left. I am still unsure as to how I will vote this year.

Here is a great commentary from the Baltimore Sun. Perhaps Reagan's trickle down economics was more trickle up as suggested below:

"Maintaining a tradition that has been around since at least the Reagan Revolution, John McCain the other night ridiculed the idea of "spreading the wealth" and accused Barack Obama of playing "class warfare.

"This is the tired Republican knee-jerk that occurs whenever someone in the room - Democrat or independent, academic researcher or nonpartisan think-tank thinker - raises the unsettling issue of income disparity in the United States. Republicans throw the "class warfare" flag whenever somebody gets too close to the story of America in the nearly 30 years since Ronald Reagan brought us trickle-down economics.

And the story is this: Most of the money in this nation during that time has trickled up, not down, and the disparity between the wealthiest 5 percent of citizens and the poorest 5 percent has never been wider. People in the middle haven't done much better than those just below them.

There are two prime reasons for the anger among Americans over the Wall Street meltdown and the ensuing federal bailout: Government at all levels allowed the free markets to build a time bomb of complex and grossly expensive problems that taxpayers are now on the hook to fix, and a million men in suits made fortunes off the smoke-and-mirrors promise of easy credit and ever-rising asset values."

Bottom Line

I am still undecided, but commentary such as this really makes me think twice.

Thinking of buying a Foreclosure? WAIT!

Good afternoon Everyone!

I hope everybody is having a great weekend! I can imagine many potential homebuyers are probably thinking about sticking your toe in the water and seeing whats out there now that our country is littered with foreclosures.

Before you decide to do this take a look at the the number of Countrywide foreclosures that are available:


My Take:

As you can see, we had a dropoff in April/May as the "early idiots" decided to jump in and gobble up foreclosures as soon as they became available.

I warned everyone back in March that this was a horrible idea. Most of these buyers bought these foreclosures at 15-30% discounts. The same homes in the bubble areas are probably down another 20-30% since then as the foreclosures continue to pile up.

I mean look at the huge jump on that chart in the last month as lending standards have tightened. The financial crisis has forced the banks to hoard cash and play defense. Bill Gates would probably have a tough time qualifying to buy right now.

Housing cycles are much different from any other normal business cycle. They take years to play out. It took 7 years for home prices to get back to even following the 1991 housing bust.

I expect it may take well over a decade for prices to recover from this cycle because the lending was much so much more irresponsible and full of fraud.

Bottom Line

There is no rush to run out and buy a foreclosure right now. The more foreclosures that are out there, the cheaper prices will get because the banks will be more desperate to get rid of them.

You need to at least wait until the number of foreclosures have peaked before trying to negotiate with a bank on buying a foreclosure. I don't expect this peek anytime soon. The number of foreclosures should to continue to soar as we head into a deep recession and unemployment continues to rise.

Bottom line here is please be patient. Home prices won't be going up for years which gives you plenty of time to get a house at a great price. This is one of the biggest financial decisions you will ever make in your life.

Its better to be a little late here than too early. If you don't believe me, ask one of those suckers that bought a foreclosure back in April.

Buyers remorse is a terrible feeling.

Treasury Auctions Soar

Good Evening Everyone!

Sorry I am late today. I have lots going on over the next week so I might not be able to hop on here too much.

I picked this interesting report up on government treasury issuances:

My Take:

I guess after you have just spent over a trillion dollars bailing out Wall St, you need to raise some cash.

As you can see, the Government is raising money via selling treasuries at nearly three times the pace they were a few years ago.

Now the feds will try to spin it by saying that they need to do these auctions because they need to satisfy the strong demand for treasuries as the stock markets continues to collapse. That may be partly true, but I think the real reason is because the Treasury needs cash badly in order to fund the bailouts.

If they were doing it for demand reasons, then why the big sudden spike in Sept/Oct? Stocks have been plummeting for the whole year. If these auctions were done because people were running out of stocks and into treasuries, then why the sudden spike in the the last 6 weeks?

If this rise was based on a rotation into treasuries, this chart should show a slow gradual rise throughout the year instead of a giant spike.

The spike "coincidentally" occurred right as the bailouts were announced. Coincedence huh?..Yeah right. I think this demand argument is a crock and nothing but a smoke screen.

The real reason for the auctions is we need to fund the bailout of the criminals. My question here is why in the hell do foreign central bankers continue to fund our corrupt government by buying treasuries? We can't consume anymore. We are now nothing but a country of debt slaves.

China would be better off keeping that money at home and using it to fund their country as the whole world falls into a deep recession. China should be marketing their toys to the billions of Chinese rather than focusing on a US consumer thats drowning and debt.

Countries are going to start needing cash to to take care of its people as the whole world gets swallowed up by this black hole of debt. When this happens, demand for treasuries is going to fall off a cliff. 10% interest rates are right around the corner when this happens.

Think about it. Why buy the the paper of a government that's going to eventually default on itself. Its obvious we can't control ourselves. I mean look at this sickening news story from the UK today:

Financial workers at Wall Street's top banks are to receive pay deals worth more than $70bn (£40.4bn), a substantial proportion of which is expected to be paid in bonuses, for their work so far this year - despite plunging the global financial system into its worst crisis since the 1929 stock market crash, the Guardian has learned.

Staff at six banks including Goldman Sachs and Citigroup will pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted widespread criticism. The government cash has been poured in on the condition that excessive executive pay will be curbed.

Pay plans for bankers have been disclosed in recent corporate statements. Pressure on the US firms to review preparations for annual bonuses increased today when Germany's Deutsche Bank said many of its leading traders would join chief executive Josef Ackermann in waiving millions of euro in annual payouts.

In the first nine months of the year Citigroup, which employs thousands of staff in the UK, accrued $25.9bn for salaries and bonuses, an increase on the previous year of 4%. Earlier this week the bank accepted a $25bn investment by the US government as part of its bail-out plan.

At Goldman Sachs the figure was $11.4bn, Morgan Stanley $10.73bn, JP MorganChase $6.53bn and Merrill Lynch $11.7bn. At Merrill, which was on the point of going bust last month before being taken over by Bank of America, the amount accrued in the last quarter grew 76% to $3.49bn. At Morgan Stanley, the amount put aside for staff compensation also grew in the last quarter to the end of September by 3% to $3.7bn.

Days before it collapsed into bankruptcy protection a month ago Lehman Brothers revealed $6.12bn of staff pay plans in its corporate filings. These payouts, the bank insisted, were justified despite net revenue collapsing from $14.9bn to a net outgoing of $64m. None of the banks the Guardian contacted wished to comment on the record about their pay plans."

Final Take:

Its obvious these crooks have an addiction to money. If this story doesn't anger you I don't know what will. German executives have suffered a "come to Jesus" moment and agreed to walk away from these pay packages.

Our crooked bankers continue to take the money and run. Lehman was paying out bonuses right up until the day the declared BK. How do they have the nerve to take this money after destroying the economy? They have successfully conned every American into borrow themselves into oblivion and now they want to get rewarded for it! This behaviour is sick! Their obsession with money is beyond belief.

What in the hell has happened to this country? Is this what capitalism is? Commit fraud and then pay yourself 10's of billions of dollars as a reward? I feel like I am watching an episode of the Sopranos when I watch these bankers operate.

Bottom Line:

We have a long ways to go before this all gets straightened out. I am sure all of you saw that Warren Buffet announced that he is buying American stocks today! Uhhh..Haven't we seen this move before?

The same thing was attempted in 1929:

"John D Rockefeller announced he was buying common stocks. The exchange declared a holiday to help the sleepless floor clerks rest and then climb through the mountains of unfilled orders. But the market fell and fell again. And in the middle of November the deluge hit rock bottom. In two weeks, thirty billion dollars no longer existed on paper or in life - which was just about the money the United States had spent to fight the First World War. "

Continue to keep an eye on treasuries and the credit markets. Things have loosened up slightly. The problem is they need loosen up dramatically.

If this credit loosening stalls, investors will get spooked. Be very careful trading right now. I haven't taken anymore positions until the picture becomes more clear.

Mortgage Rates continue to Surge

Good Afternoon

I am actually happy to see an up day in the market! At the rate the market was going, the whole nation would have needed Prozac by the end of the week. Expect large moves up or down with the VIX this high. I expect this volatility to be around for awhile so get used to it!

Things were pretty quiet today on the news front. Interest rates continue to surge:

We are starting to creep up to dangerous levels here folks. If we get above 7%, the housing market is going to implode. Thanks for the bailouts Mr. Paulson! You have somehow found another way to further hurt the taxpayers as you continue to bailout your banking buddies.

In fact, last week was the largest weekly rise in mortgage rates in 21 years!:

"NEW YORK, Oct 16, 2008 /PRNewswire-FirstCall via COMTEX/ -- Mortgage rates soared this week, with the average 30-year fixed mortgage rate jumping more than one-half percentage point to 6.74 percent. According to Bankrate.com's weekly national survey, the average 30-year fixed mortgage has an average of 0.42 discount and origination points.

The average 15-year fixed rate mortgage climbed to 6.40 percent, while the average jumbo 30-year fixed rate rose to 7.87 percent. Adjustable mortgage rates were sharply higher also, with the average 1-year ARM now 6.32 percent and the average 5/1 ARM skyrocketing to 6.61 percent.

Mortgage rates posted the biggest one week increase since April 1987, soaring as credit fears reached a fever pitch. In addition, yields on benchmark 10-year Treasury notes climbed as investors worried about the additional supply of government debt resulting from billions of dollars in various rescue packages. Mortgage rates move in relation to Treasury yields, but at a spread -- or markup -- over the risk-free government debt. The intensifying credit crunch and the government guarantees on bank debt drove up the spread between mortgage bonds and benchmark Treasuries. But since Treasury yields climbed from 3.5 percent to over 4 percent over the previous week, mortgage borrowers had two factors working against them.

This sharp increase in mortgage rates over the past week has a direct impact on a homebuyer's affordability. At last week's rate of 6.20 percent, a $200,000 loan carried a monthly payment of $1,224.94. This week, with the average rate at 6.74 percent, the monthly payment on a $200,000 loan is $1,295.87."

My take:

Thanks to Paulson and his cronies, it now costs you an additional $70 a month this week to buy a $200,000 house versus last week.

If you got a mortgage on $600k bubble McMansion today, it now costs you an additional $210 a month than it did last Thursday.

Of course, we all know that no one could qualify for a loan on that same McMansion last week. This rise in rates just widens the affordability gap.

This reality is giving homebuilders a heart attack.

"Oct. 16 (Bloomberg) -- Confidence among U.S. homebuilders slid in October to the lowest level since record-keeping began in 1985, a sign the crisis in credit markets may deepen the worst housing recession in a generation.

The National Association of Home Builders/Wells Fargo index of builder confidence decreased to 14, less than forecast, from 17 in September, the Washington-based association said today. A reading less than 50 means most respondents view conditions as poor."

Final take:

14 on an index that considers anything under 50 to be poor. How pathetic. Maybe the homebuilders need that Prozac right now!

Remember folks, the housing crisis is what got us into this mess. Its also represents the largest portion of debt that is held on our banks balance sheets. If housing continues to deteriorate, the banks balance sheets will as well.

My concern here is as housing prices continue to come down, more and more buyers are going to decide to walk away from their homes. Many are already deeply underwater, and there will be a tipping point where a homeowner realizes his house may never be worth what he paid for it. When this realization hits, many are going to walk away.

Think about it, if a homeowner is eating baked potatoes every night for dinner so he can pay his mortgage, why wouldn't he/she decide to say "**** it" and walk. This is what I would do. Many financial planners are going to advising their clients to do the same thing.

Why be a debt slave and live like a homeless person to pay back a 30 year mortgage on an asset that's going to lose money? Most struggling homeowners have bigger things to worry about. Whats more important: Sending your kids to college or paying back a 30 year bubble loan on a worthless investment?

Don't get me wrong, is it nice to own your own house and raise a family? Of course, but not when it ruins the quality of you and your families life. Many of these debt slaves will never be able to pay for their daughters wedding if they decide to pay off these home loans.

Bottom Line:

If mortgage rates keep rising and homeowners continue to get deeper and deeper underwater, J6P is going to rethink his decision on paying the mortgage. This will result in another leg down in the stock market.

The nice thing about walking away if you are a homebuyer is you are sticking it to the pigs on Wall St who got you into this mess in the first place!

Stocks Collapse/10-Year Rises

Good Afternoon Folks!

Take a bow Mr. Paulson. The market just loved your bailout: For 1 Day! Stocks are plunging today as retail sales fell off a cliff, and long term treasury yields continue to rise. The Fed's beige book should be out before I finish this so I will update it if its out before I finish this post.

Ok, lets start with retail sales:

"Oct. 15 (Bloomberg) -- The eroding U.S. economy drove retail sales into their longest slump in at least 16 years, even before this month's market collapse signaled a deepening recession.

Consumer purchases fell 1.2 percent in September, extending the decline to three straight months, the first time that's happened since comparable records began in 1992, Commerce Department figures showed today. In another sign of weakening demand, prices paid to U.S.
producers fell last month on lower fuel costs.

The median forecast of 75 economists surveyed projected purchases would drop 0.7 percent following a previously reported 0.3 percent decline the prior month.

``I don't think things can get much worse,'' said Brian Bethune, chief financial economist at Global Insight Inc. in Lexington, Massachusetts. ``September was a terrible month in terms of the overall situation, in both sales and production. The fourth quarter is guaranteed to be a terrible quarter.''

Quick Take:

Welcome to the 2008 recession ladies and gentleman. These numbers are terrible. It looks like there will be a lot of Scrooges this Christmas as the consumer goes down the toilet. Expect the 4th quarter to be even worse as the consumer folds like a tent. All indications so far in October show that things are continuing to slow.

Shipping

The shipping industry reported that world trade is slowing as the credit market remains locked. The shipping industry reports traders are seeing letters of credit dry up and are afraid to let ships leave port according to Bloomberg:

"Oct. 15 (Bloomberg) -- Pacific Basin Shipping Ltd., Hong Kong's biggest dry-bulk carrier, and Precious Shipping Pcl. said demand for moving coal, iron ore and other commodities will fall because banks are guaranteeing fewer loads.

``Letters of credit and the credit lines for trade currently are frozen,'' Khalid Hashim, managing director of Precious Shipping, Thailand's second-largest shipping company, said in Singapore yesterday. ``Nothing is moving because the trader doesn't want to take the risk of putting cargo on the boat and finding that nobody can pay.''

The lack of letters of credit, in which banks guarantee payment for merchandise, could become a ``big issue'' for world trade, according to Klaus Nyborg, Deputy Chief Executive Officer at Pacific Basin. Tighter credit has contributed to this year's 80 percent drop in the Baltic Dry Index, a measure of commodity-shipping costs. About 90 percent of world trade moves by sea."

Quick Take:

I thought banks were going to start lending again after getting hundreds of billions in bailouts from the worlds central bankers? Word is the banks are hoarding this money and stuffing it in treasuries and fixing their balance sheets instead of using it for lending.

This is bad news folks. If world trade slows considerably, all hell is going to break loose. The repercussions would be devastating to countries all over the world. Trading is imperitave to keeping the world economies going. 90% of trade moves by sea folks!

10-year Note

I may make this a permanent part of my blog. The 10-year is basically flat today which is bad considering we are down almost 6% in equities today. Money should be flying into these bonds as a flight to safety trade. Not today! Demand continues to be weak here despite the selloff because of the The Treasury's out of control spending via bailouts.

This is bad folks! If the credit markets don't loosen up, ships filled with worldwide goods are going to end up stuck in ports around the world. The Libor rate continues to stay elevated despite the massive stimulus injected by the worlds central bankers. Credit remains harder to find than a guy in LA that hasn't slept with Brittany Spears!

Bottom Line:

It looks like we may retest the lows set last week in the near future. We are halfway there so far in the last two trading sessions. I sold my TWM(no sense in trying to be a pig) that I picked up yesterday.

I am going to buy some Puts on TLT(long term treasuries) as soon as the VIX drops back down. I think treasuries eventually will turn into toilet paper down the road. We have spent way beyond our means as a government, and its going to take trillions more in spending to get us out of this mess. This is very bearish for treasuries. This is a long term trade that will take months to play out.

I plan on staying in cash for awhile at these levels. I still have my bearish long term hedges on. The next question we need to ask ourselves is how much of the recession is priced in here? For now I will be a spectator. Expect the volatility to continue.

BTW, there was nothing earth shattering in the beige book. The Fed basically said the economy sucks. Tell me something I don't know!

If treasuries continue to fight the Fed and take rates higher, the shorts will go back on. More confirmation is needed before taking any additional positions.

Stay tuned!

Mortgage Rates Soar as the Bond Market Awakens

Good Afternoon Folks!

Been a busy week. Sorry I couldn't hop on sooner. Well, well, well, lets take a look at mortgage rates from Bankrate.com since Paulson began his spending binge:

Quick Take:

Think the bond market likes the bailout? Treasuries were down even further today, so expect mortgage rates to rise further tomorrow. As I have explained before, when the yields rise on treasuries, so do mortgage rates.

These are the "unintended consequences" that Paulson and Bernanke refuse to consider when they decide to spend hundreds of billion of dollars via bailouts. Both of these clowns should be replaced. They are a disgrace. The $250 billion that Paulson gave to the banks today was sickening.

This was basically a $250 billion handout. The US taxpayers got no common or preferred stock in return for bailing them out. England got it right this weekend when they gave their taxpayers both common and preferred stock in addition to forcing the banks to eliminate all of their dividends. As a result, the Brits taxpayers now have a chance to get their money bank in the future when the banks recover. The US taxpayer gets stuck holding the bag as our pigmen laugh all the way to the bank.

Paulson is a crook and a sham and should be removed. The arrogance of the pigmen and the government in the handling of this situation is really beyond belief. I am flabbergasted. When this fails, expect pitchforks and torches in DC.

I wonder what Paulson is going to do now that mortgage rates are starting to soar as the bond market tells him to pound sand?

The housing market is what put us into this mess, and his spending solution has resulted in making housing even MORE unaffordable. Paulsons bailouts are actually making the problem he is trying to solve WORSE. Nice job there Skeletor. The only winners here are Paulsons banking buddies who walk away with another $250 billion of our money.

The rise in mortgage rates will continue to put further pressure on housing prices. This will result in further pressure on the banks, and a deeper recession. Paulson needs to realize that we can't reflate the bubble by throwing money at this problem. There are repercussions when you spend like Paris Hilton in a Saks Fifth Ave.

Here is another unintended consequence:

"Oct. 14 (Bloomberg) -- Yields on Fannie Mae and Freddie Mac corporate debt rose to records relative to Treasuries as the government said it would guarantee borrowing by banks, providing bond buyers with competing U.S.-backed investments.

The difference between yields on Washington-based Fannie's five-year debt and similar-maturity Treasuries rose 15.8 basis points to 118.2 basis points as of 3:35 p.m. in New York, according to data complied by Bloomberg.

As part of U.S. plans announced today to halt a credit freeze, the Federal Deposit Insurance Corp. will fully guarantee newly issued, senior unsecured debt from some banks. The bank notes initially will probably carry yields greater than those on Fannie and Freddie's $1.7 trillion of debt, reducing demand for so-called agency bonds, said Jim Vogel, an analyst at FTN Financial Group.

Investors may also be concerned that an increase in supply of Fannie and Freddie debt may hit the market, following reports that the U.S. has directed the companies to buy $40 billion a month of subprime and Alt-A mortgage securities, Cloud said.

The difference between yields on McLean, Virginia-based Freddie's five-year debt and similar-maturity Treasuries rose 18.1 basis points to 124.2 basis points."

Final Take:

Gee, Why are Fannie spreads continuing to widen after the mother of all bailouts? If we just finished guaranteeing every debt in America, spreads should be coming in shouldn't they?

The answer here is investors aren't buying it. There is only so much money to go around unless you print folks. When its all said and done, The government simply won't have the money to absorb all of the additional consumer and bank losses that will continue to add up as the recession deepens. Don't think the bond market doesn't understand this.

This is why treasury demand is dropping, and spreads are widening or holding firm in many areas of the credit market. If spreads continue to not respond to this massive financial stimulus, equities are going to tumble.

Lets not forget about the rapidly vanishing economy on top of the credit problem. Take a look at Pepsi and Microsoft today:

"Oct. 14 (Bloomberg) -- U.S. stocks fell a day after the market's biggest rally since the 1930s as a worsening outlook for earnings forced investors to look beyond a $2 trillion global push to rescue banks.

PepsiCo Inc. lost 12 percent, the most since 1982, after lowering its profit forecast as customers cut back on snacks and soft drinks. Microsoft Corp. and Intel Corp. slid more than 5 percent as analysts said demand for computers is slowing."

Pepsi was an eye opener! It looks like the consumer can't even to afford to buy a bottle of cola now let alone a house!

Bottom Line:

Stocks retreated after an insane bounce yesterday. I put a little short on TWM this morning and held it through the close. I am still remaining relatively flat as a board from a trading perspective. (CHK) is one long I am keeping my eye on although I haven't pulled the trigger. This is a nice energy play and its behaving nicely this week.

I see nothing bullish about the economy folks. The jump in mortgage rates is very alarming. I simply see now way out of this mess. Its going to take a lot of pain and sacrifice for this country to get through this, and the quicker Paulson accepts this the better. These bailouts do nothing but prolong the agony. I would prefer to rip the band aid off all at once and get it over with versus sitting here and suffering.

The bond market was fairly well behaved today considering the news. However, the long term trend on treasury demand is declining. Bond market moves don't all take place in one day. I focus more on trends here versus one day moves unless they are huge like the one I showed you last week.

This drop in treasuries does not bode well for the housing market folks. Treasuries down=yields up=higher mortgage rates. Remember this equation if you are house shopping.

There are two areas to focus on short term: The credit markets, and corporate earnings. If the credit market continues to be locked up, the market is going to suffer.

Market Surges on Bailout News

Good Afternoon Everyone!

The market continues to amaze me. I expected a big bounce today but this is ridiculous. Stocks were up 10% today after the European bailout was announced. The Treasury is expected to announce a similar plan tomorrow.

I would take today's moonshot with a grain of salt. Tomorrow is what we need to focus on because the bond market opens back up. One thing is for sure, the next few days are not a good time to be short. The bulls should have control short term if the bond market behaves.

Now this is a big if. All of these bailouts are just find and dandy, but the problem is they need to be paid for. Keep a close eye on treasury yields tomorrow, especially the 10-year. The bond market controls long term rates, and if they don't like government spending on the bailouts, yields will rise. Lets see where these are tomorrow.

Euribor Hardly Budges

Overnight lending rates between the banks must come down in response to this massive stimulus by the world's central bankers. If these do not come down tomorrow we are in deep trouble folks! So far the Euribor lending rates have barely come in at all:

Current Euribor ratesperiod 10-13-2008 10-10-2008 10-09-2008
1 month 5.024% 5.118% 5.126%
3 months 5.318% 5.381% 5.393%
6 months 5.367% 5.431% 5.448%
12 months 5.425% 5.489% 5.512%

The reason we dropped like a rock last week was because the commercial credit markets were frozen as Euribor rates soared. As you can see above, so far the bailout hasn't done squat to lower lending rates. I am very concerned that these rates have barely come in at all after the largest global bailout in history! If the central bankers can't stimulate lending after flooding the global system with cash, then what will?

Bottom Line:

The market has turned into a speculative casino. I did not like the price action today. These extreme moves are not the signs of a market recovery. Its a sign of complete chaos.

The worlds central bankers just took their best shot at ending the financial crisis. There are no weapons left in their arsenal. If the lending rates continue to stay high and the banks continue to hoard cash, we are going to fold like a tent. The second threat here is the bond market. If they decide to have a temper tantrum, demand for treasuries will drop which sends yields higher.

It will be critical to see how these two threats digest all of the stimulus that was just thrown into the system. It will take some time for this all to play out. The bond market will want to see exactly how much capital is thrown into the banks. They will also be looking at how the TARP(housing bailout) is being used and to what extent.

The Euribor so far doesn't seem impressed with the bailouts. Consider this to be a red flag. The commercial markets must get unclogged, and the banks must start lending to one another. If this rate continues to stay high, we will be back in the dumps very quickly.

As for the equities, today's monster rally looked overdone. This muddied the waters short term. If the move up was more orderly today, I would have said that the short term looked rather bullish for equities.

However, the violence of the move combined with all of the data that must be absorbed by the market makes tomorrow a good day to watch rather than participate. Lets see what the bond boys and Euribor have to say tomorrow. This should give us a better idea as to where we are headed.

Stay tuned!