Saturday, May 24, 2008

Lets go Pens!

Its Stanley Cup time!!! Go Pittsburgh!

T. Boone Pickens Speaks! $150 oil Coming

Its video Saturday!

Since oil is the talk of the markets I figured today would be a perfect time to hear T. Boone Pickens most recent take on oil. This guy is the most respected man in the oil markets, and he puts his money where his mouth is.

Mr. Pickens is now predicting oil is going to $150 a barrel. The reason? Supply and demand. Take a listen to this whole video. Higher oil sounds like its going to be around awhile.


Friday, May 23, 2008

Lehman Takes heat over Bad Assets and Capital

Happy Memorial Day Weekend!

I am out of here until tomorrow. I wanted to just leave with a quick note on Lehman Brothers. The market sold off today on the housing/oil news. I hinted yesterday that today could be a solid day in the red for the markets heading into the long weekend.

Just a quick note on Lehman. It looks like they are taking some heat by not writing off enough of their rotten smelly assets. Here it is from Reuters:

"NEW YORK (Reuters) - Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research) has not written down bad assets enough, and should raise large amounts of capital to support its assets, short-seller David Einhorn told investors.

A spokesman for Lehman declined on Thursday to comment on Einhorn's remarks at the Ira W. Sohn Investment Research conference on Wednesday.

Einhorn said Lehman Brothers only wrote down a $6.5 billion collateralized debt obligation portfolio by about $200 million in the first quarter.

That small write-down is surprising given that Lehman said in a footnote to its quarterly filing with regulators that about 25 percent of the CDOs were junk rated, Einhorn said. The CDO portfolio in question does not have exposure to subprime mortgage loans, but does have exposure to small business loans, consumer loans, and other assets.

Einhorn said that Lehman Chief Financial Officer Erin Callan, when asked about the magnitude of this write-down, did not explain the first-quarter write-down. But he said Lehman would expect to record further write-downs in the second quarter on the assets.

"Said Einhorn on Wednesday, "When management teams complain about short sellers, it is a sign that management is attempting to distract investors from serious problems."

My Take:

What I find interesting here is the muted response from Lehman. If you recall the last time the heat was on, Lehman was defiant and immediately went on the offensive, insinuating that short sellers were trying to force another Bear Stearns type event.

They seem awfully quiet this go around. Also, I took notice that the CDO in question has zero subprime and is mainly small business and consumer based.

That's a little frightening! This is the first time I have seen any serious pressure to take marks on CDO's that don't involve subprime.

What does that say about the consumer and the economy?

Expect another capital raise and more dilution of Lehman's shares shortly. The credit bubble continues to deflate leaving the financials in dire straits.

I hope everyone gets a chance to head to the beach and forget about the economy for a few days. Enjoy the holiday weekend and travel safe!

Happy Friday and talk to you tomorrow!

Bloomberg: Enron Accounting exposed on Wall St./Markets

I wanted to discuss a few things today as stocks take another drop this morning. I want to focus on a STARTLING report from Bloomberg discussing how the Enron accounting standards were never really changed, and they are now being abused all throughout Wall St.

Lets first get to the markets real quick. All eyes are on oil and the existing home sales report. Oil is on its way back up and is now sitting close to $134 /barrel.

Home sales again looked grim as inventories rose to an all time record of over 11 months. Prices dropped 8% which is the second highest price drop ever recorded. Here is a little blurb about housing on Bloomberg:

"May 23 (Bloomberg) -- Sales of previously owned homes in the U.S. fell in April, matching a record low and signaling no let-up in the housing recession.
Purchases declined 1 percent to a higher than forecast annual rate of 4.89 million from 4.94 million in March, the National Association of Realtors said today in Washington. The median price dropped 8 percent from April last year, the second- biggest decline."

``There is no indication that things are improving,'' said Christopher Low, chief economist at FTN Financial in New York, who forecast sales would drop to a 4.9 million pace. ``Inventories will stay out of balance at least until the end of 2009 and prices will keep falling.''

Sales were down 18 percent compared with April 2007.
The number of previously owned unsold homes on the market at the end of April jump to 4.55 million, up from 4.12 million in March. The total represented 11.2 months' supply at the current sales pace, the highest on record and up from 10 months at the end of the prior month.

The median price of an existing home fell to $202,300 from $219,900 in April 2007."

Quick Take:

Do I really even have to say anything here? These numbers are horrific. We are near time highs in inventory and price drops. The bursting of the housing bubble is showing no signs of slowing down. The whole debacle is just terrible, and Wall St. should be ashamed of itself. This is going to take years to straighten out.

Lets get the the Enron Accounting:

This is another HousingTimeBomb must read. When I read this article I was both angry and shocked at how bad Wall St. is cooking the books. I knew the fraud was historic, but I had no idea how lax the accounting standards were.

Here is the Bloomberg article. Please read the whole thing. Some of the key highlights below(sorry its long, its important).

"May 22 (Bloomberg) -- Citigroup Inc. created a $2.5 billion mortgage-backed security called Bonifacius Ltd. in August as capital markets seized up and panic swept Wall Street.

The issue took the name of a general, called by historian Edward Gibbon the ``last of the Romans,'' who fought and died for a fading empire. The bonds were created from subprime home loans as demand evaporated. Within six months, Bonifacius collapsed as homeowners fell behind on their payments in record numbers.

Citigroup, Merrill Lynch & Co., UBS AG and other banks created more than $1.5 trillion of collateralized debt obligations like Bonifacius, keeping an undisclosed amount in off-balance-sheet funds called variable interest entities. Bonifacius and $190 billion of similar securities have gone bust since October, spotlighting loopholes the Financial Accounting Standards Board failed to close when Enron Corp. went bankrupt in 2001 after disclosing investments that weren't on its books.

``They never got the real problem fixed after Enron,'' said Lynn Turner, the chief accountant for the Securities and Exchange Commission when the Enron scandal was exposed. ``When people find out how little FASB did, they're going to be shocked. FASB needs to be taken out behind the woodshed and given a good whoopin'.''

The biggest underwriters of defaulted CDOs are New York- based Merrill, with $39 billion, followed by Citigroup at $35.1 billion and UBS in Zurich with $20.1 billion, according to S&P and Bloomberg data. They sold almost half the CDOs that were either in default or in so-called acceleration mode as of May 12, the data show.

FASB restricted the use of off-balance-sheet accounting in the wake of Enron, once the seventh-biggest U.S. company by sales. More than 5,000 jobs and $1 billion in employee retirement funds were wiped out when Enron plunged into bankruptcy after widespread accounting fraud was revealed.

After, FASB wrote rules that permitted such transactions only if banks had minimal discretion over the activities of the ventures and brought them back on their books if they were obligated to absorb a majority of expected losses.
One way banks comply with the rules is by placing the AAA, or ``super-senior,'' pieces of CDOs into VIEs and selling the riskiest portions to investors. The AAA portions are typically the largest part of a CDO.

Good Fate

The strategy is backfiring because mortgage defaults are rising so fast -- home foreclosure rates in the U.S. increased 65 percent in April from a year earlier, according to RealtyTrac Inc. --that banks can no longer argue they have the least at stake, forcing them to bring failing assets of VIEs back on their books."

Final quick take:

The FASB and the banks are both at fault here. The fact that we didn't learn our lessons from Enron will end up costing this country trillions. The FASB knew that the financials found a loophole to get around the tightening of accounting standards post Enron, and they decided to look away.

The banks got around it by selling off the risk to investors and claimed the stuff they have on their books was AAA and very low in risk so it shouldn't have to be on their balance sheet. Well guess what, since housing blew up everything on the balance sheets looks risky.

There is going to be a blowup here folks. As this garbage is forced onto the balance sheets by the FASB there will be massive writedowns. $1.5 trillion of this crap was created by the banks. Since its subprime based, most of it is most likely worthless.

We have a long way to go to sort out this mess. Shame shame shame Wall st.! This is outright fraud people. Most of these pigmen should be in prison over this.

The news keeps getting worse, and equities will pay the price.

Thursday, May 22, 2008

Roubini: Countrywide Deal Collapsing?

Things quieted down on Wall St. today. The market seems very cautious and unsure of itself right now. The end of the rally from the Bear Stearns save was pretty much confirmed this week. The bulls have lost all of their momentum as oil continues to rise, and housing continues to flounder.

Everyone knows the economy is in deep trouble with $130 oil. No one wants to talk about it. Denial is a powerful emotion. You get this ominous feeling that Wall St. is just waiting for a bomb to drop as inflation continues to pressure the economy.

Is Countrywide the next Time Bomb?

Economist Nouriel Roubini thinks so. Take a look at his blog:

"It looks increasingly likely that the deal of Bank of America (BAC) buying Countrywide (CFC) may collapse: according to many banking experts once BAC does its due diligence on this deal it will become obvious that Countrywide is effectively bankrupt (negative equity) and saddled with a mountain of litigation and potential liabilities whose size are likely to be extremely large and uncertain. The point that is becoming clear is that BAC will be better off paying the modest break-up fee and walk away from a deal that sucks in every dimension. So if CFC goes bankrupt (its bank subsidiary into a FDIC receivership and the holding company into Chapter 7 liquidation) what will be the systemic implication of the biggest banking bust in US history? Remember that CFC originated almost 20% of all mortgages in the US in the last few years. So the collapse of the biggest mortgage lender will have massive and systemic ripple effects in financial markets.
Let us consider in more detail why Countrywide will go bust and what will be the systemic consequences of such massive bankruptcy…"

My take:

For those of you who don't subscribe, Mr. Roubini's conclusion is that Bank of America will pay the $160 million breakup fee and walk away from the deal with Countrywide.

Roubini was laughed at when he called housing a bubble over 18 months ago. Now he is on CNBC as a respected economist. Nouriel has been very accurate with his calls on the housing market so this call deserves some attention.

As soon as Bank of America announced that they wanted to walk away from $300 billion of Countrywide's debt, you knew that CFC was toast. Bank of America has told Wall St. that the deal will close in the third quarter. Watch the reaction of Wall St. when it doesn't.

Bank of America doesn't even need to announce they are walking away from Countrywide in order for the market to react. The writing will be on the wall when the deal gets delayed.

This could cause a banking panic as Nouriel suggests. If/When Countrywide fails, it will be the largest bank failure in history. I know I will be hitting the bank the day this deal collapses.

The Fed could force everyone close up shop for a few days if there is a bank run.. Its been done before. Don't get caught with your pants down. Have some cash on hand for a rainy day!

Isn't it ironic that Bank of America might be "walking away" from Countrywide as many homeowners do the same?

Lets see what happens. Tomorrow will be an interesting day in the markets. I wouldn't be surprised to see a sell off heading into the long weekend. Who wants to hold stocks over the long weekend when the economy is teetering on the edge of a cliff?

Oil holds the market Hostage/Richard Bove

Stocks are struggling to bounce today as supply concerns on oil pushed prices to over $135/barrel overnight.

The relentless rise of oil is putting the economy on the brink of a collapse. The airlines are in deep trouble if this continues. Expect a BK or two among the major carriers if oil prices stay at these levels or higher.

Ford also came out today and announced they will only break even in 2009 versus their previous forecast of turning a profit. They are being forced to get out of the profitable SUV business and turn their production more towards smaller cars due to higher oil prices.

Oil is the story on the street short term. There was a report on CNBC today that said gas prices will go to $4.61/gallon if oil goes to $150/barrel. Ouch!

I expected a bit more of a bounce today after two brutal trading sessions. Expect the market to struggle big time with oil at these levels.

Richard Bove

I find this research report from Richard Bove amusing because this was the same guy who said buying financials a few months ago were a "generational buy" for investors.

Well I guess a "generational buy" now lasts 2 months on Wall St. Bove put a "sell" rating on Lehman today and downgraded all of the investment banks. Here is Bove from Bloomberg:

"May 22 (Bloomberg) -- Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Goldman Sachs Group Inc. had their stock ratings and price estimate cut by Ladenburg Thalmann & Co. analyst Richard Bove on concern that earnings will falter.

Goldman Sachs, the largest securities firm by market value, Merrill, the third-largest U.S. securities company, and No. 4 Lehman were reduced to ``sell'' from ``neutral,'' Bove said in notes to clients. Merrill and Goldman face disruptions in cash and ``hedge'' markets, while Lehman's bets on financial indexes to offset writedowns may have backfired, he said."

My Take:

Does this guy look like a fool or what? I agree with his revised call of course, but he needs to make up his mind! Is it a "generational buy" or is it a "sell" on the financials?

Analysts can look like fools when bubbles are bursting.

Keep an eye on oil today. The market is a hostage to it right now as long as oil holds at these levels. Something has got to give folks, and with a weak dollar, I am guessing its the market.

Wednesday, May 21, 2008

Market Update/Interest Rate Cuts are Over

Alright guys and gals lets get right to it.

The market reversal intensified today as oil soared over $134/barrel, and the Fed minutes were very hawkish on interest rates.

I don't know how else to put this. The market is realizing that with soaring energy costs, the Fed simply has lost all of its power on the markets. The basis of the current rally from March is the Fed will save anyone thats in trouble. Inflation has completly taken that chip off the table.

George Soros explained it best today. Soros from Reuters:

"LONDON, May 21 (Reuters) - Billionaire hedge fund manager George Soros said on Wednesday the current rebound in stock markets is only a bear market rally because monetary authorities are unlikely to be able to handle the credit crisis.

Soros told a seminar at the London School of Economics, "The prevailing market opinion is that this crisis is like previous ones. ... Markets have been rallying on that. But I think it's actually just a bear market rally based on a false conception the authorities can handle all these crises.
"This time the ability of the authorities to handle the crisis is constrained -- they'll not be able to avoid a recession," he said

"Certainly the idea that the economy is going to recover (at the end of this year) is totally unrealistic," he said."

My take:

Soros nailed it in a few sentences. I have been warning that this recession will be different then the baby recessions we saw in '91/2001 because its a consumer led recession and inflation is raging!

Inflation completely takes the Fed out of the game. Their hands are totally tied. The rate cutting has forced inflation to rise much more rapidly than anticipated, and there isn't a darn thing they can do about it. That's right folks, the Fed is now powerless.

This is why you saw the financials get creamed today. No more rate cut gifts to Wall St. There has been talk that the Fed is actually beginning to pull liquidity from the system in a very quiet manner by reducing liquidity injection amounts.

Why would they be doing this? To try to put a cap on inflation. Inflation has the potential to stop an economy in its tracks, and the Fed simply can't risk this in order to save some financial institutions.

So what does this mean? The market is now on its own, and companies like Bear Stearns that should have failed will not be saved by the Fed going forward.

Stay away from financials in this inflation environment!

The Fed Minutes

So how hawkish was the Fed in their minutes report? Well they basically admitted that we are lucky we got our rate cut in April. Most of the Fed officials thought cutting in April was a bad idea. Gee you think so as oil now passes $134/barrel?..Duh!

Here are some comments from the Fed minutes today on Bloomberg:

"May 21 (Bloomberg) -- Most Federal Reserve officials viewed the decision to cut the benchmark interest rate as ``a close call'' in April, signaling they may hold off from further reductions.

``The risks to growth were now thought to be more closely balanced by the risks to inflation,'' minutes of the April 29-30 Federal Open Market Committee meeting, released in Washington today, said. Several policy makers judged ``it was unlikely to be appropriate'' to lower rates further unless data indicated a ``significant weakening'' in the outlook.

``Although downside risks to growth remained, members were also concerned about the upside risks to the inflation outlook, given the continued increases in oil and commodity prices and that fact that some indicators suggested that inflation expectations had risen in recent months,'' the minutes said.

`Calibrated' Stance

Fed Vice Chairman Donald Kohn said yesterday that ``monetary policy appears to be appropriately calibrated for now to promote both rising employment and moderating inflation of the medium term.'' He also said the recovery in growth into next year may be ``relatively moderate'' as it will take time for investors to regain confidence and for housing demand to rise.

Stocks tumbled after the report stoked speculation Chairman Ben S. Bernanke and his colleagues are finished lowering borrowing costs as the threat of inflation rises.

`A Crawl'

``Growth in consumer spending appeared to have slowed to a crawl in recent months and consumer sentiment had fallen sharply,'' the minutes aid. ``The outlook for business spending remained decidedly downbeat.''

Final take:

Well I guess since they now see the consumer "crawling" like a two year old, they realized maybe we better stop slashing rates and killing the dollar.

The stock market is extremely vulnerable here. If rates start to rise you will see destruction in the financial markets and housing. If interest rates continue to drop, the consumer gets strangled by inflation. The Fed can't win in this scenario just like it couldn't in the 70's. All they can do is choose the lesser of two evils.

Which way will the Fed go?

When push comes to shove, the Fed will let the market potentially tumble in order to protect the consumer and itself. Remember, the Fed is almost broke from trying to save Wall St. They have spent over 1/2 of the $800 billion they have in reserves, and it hasn't done anything other than save the pigmen from going under.

Now that inflation is soaring and the average American is in jeopardy due to inflation, expect the Fed to turn their heads and hope for the best as the blood hits the streets in the markets. They simply have no other choice.

The bear market rally is over.

Long term, this will be healthy as we wring out the losses and get back to a more affordable standard of living.

Wall St.: Fraud Exposed as the Regulators turn up the Heat

As I start this post I have noticed that stocks are beginning to roll over again. DOW is now down 73 points. What a shocker....Not!

I wanted to bring a couple of articles to every ones attention that discuss what regulators are starting to find as they turn up the heat on the Wall St.

We all know that the pressure was enormous to keep the profits going as the bull market soared through 2006. Well, we found out today that Moody's has begun a probe looking into a computer bug that falsely issued Aaa ratings to debt that actually should have been rated four notches below. Here is the Moody's article from Bloomberg:

"May 21 (Bloomberg) -- Moody's Investors Service said it's conducting ``a thorough review'' of whether a computer error was responsible for assigning Aaa ratings to debt securities that later fell in value.

Some senior staff at Moody's were aware in early 2007 that constant proportion debt obligations, funds that used borrowed money to bet on credit-default swaps, should have been ranked four levels lower, the Financial Times said, citing internal Moody's documents. Moody's altered some assumptions to avoid having to assign lower grades after it corrected the error, the paper said.

The allegations raise questions about internal controls at credit ratings firms as they face scrutiny from lawmakers and regulators for assigning their top grades to securities derived from loans to people with poor credit."

Quick Take:

Ooops! This sure sounds shady. Its amazing what you will find if you are a regulator and you turn on a flashlight in Moody's closet. I blame the ratings agencies more than anyone for this CDO fraud.

Wall St. essentially paid these ratings agencies to rate debt at AAA when they clearly had no justification to rate it at this level. 27% of subprime loans are now delinquent. These ratings agencies had to know that the risk of borrowing to lifelong renters was high. Yet, they still rated these pieces of garbage at AAA which is the highest rating any securitization can get.

Lets see how many skeleton's are found after this probe is finished.

Fraud # 2

The other piece of fraud in the news today was the lawsuits that are being announced over the auction rate securities market.

Wall St. has already lawyered up and is preparing for a waterfall of lawsuits due to this debacle. Here is the info from The Independent:

"Some of Wall Street's biggest financial institutions are bracing themselves for large fines and legal settlements over the collapsed auction-rate securities market, which is shaping up to be one of the costliest mis-selling scandals of the credit crisis to date.

Thousands of individuals, and many more institutional investors, have been left holding bonds that they cannot sell, despite being told that these investments were the equivalent of cash.

An auction-rate security is a bond whose interest rate is not fixed, but set at a weekly or monthly auction, when existing holders can sell the bonds. For more than 20 years, Wall Street banks acted as "market-makers", stepping in to buy the bonds at auction if demand was weak, so that holders could cash out. But amid the spiralling credit crisis, they stopped acting as buyers of last resort and since then almost 60 per cent of auctions have failed.

Banks created, ran and then ultimately abandoned the auction-rate market, said Jonathan Levine, attorney at Girard Gibbs in San Francisco, one of several law firms launching class action suits against the biggest players.

"We think this is one of the biggest frauds on Wall Street in years," he said. "There is a perception that this is just a temporary liquidity problem for a few rich people, but that is not true. Brokers were selling this stuff to anyone who walked in the door with $25,000 (£12,800), to people who had sold a house and not yet bought a new one, to people who had come into a small inheritance. People can't retire, small business owners cannot pay payrolls, it is affecting people's lives."

Those stories are set to give the auction-rate securities issue a particularly human face as regulators pick through the myriad scandals and market failures revealed by the credit crisis. Wall Street made about $825m a year in fees from handling the regular auctions, on top of a total of $1bn from underwriting the issuance of the bonds in the first place."

Quick Take:

When the money was flowing on Wall St., it wasn't a problem to pick up the tab if an auction failed. Now that the credit crisis has clobbered the banks, they are leaving the little guy stuck with bonds that they cannot sell as the banks have now refused to be the buyer of last resort.

Expect this one to hit a nerve with judges because it hurts the little guy. I said yesterday that many a lawsuit will be filed as this debacle plays out.

Ohhh look at that. The DOW is now down 87 points. I better sign off now before we hit triple digits.

Tuesday, May 20, 2008

The Consumer has run out of options

Good Evening!

Well we saw one heck of a gloomy a market today as sentiment among investors begins to worsen. Every indicator is showing we are heading for a deep slowdown. Overpriced housing, soaring energy cost, flat wages, food inflation, failing banks. Did I leave anything out?

Oil continues to ratchet up and is starting to put a tremendous amount of pressure on your average Joe. The average per capita income is around $37,000/year in this country. After taxes, you figure the average household is taking home $2300 a month give or take.

When your gas tank costs $60-70 a pop, and you fill it at least once a week, it starts to really hurt you in the the wallet. If you fill it up 6 times a month it comes out to about $400 a month. Add your $200 gas or heating bill on top of that and your energy costs start to look like another mortgage payment!

This is what Americans are facing with $130/oil and $4/gallon gas. Credit availability is now dwindling because the banks are struggling to stay solvent as housing delinquencies rise. So where does this leave the consumer?

The only answer to this is the consumer will be forced to STOP SPENDING. The consumer can no longer attain anymore credit, and the house is now dropping in value.

Interest rates going forward will be rising, and until they do, inflation is going to continue to be relentless on the consumer. When rates finally rise he will get killed on the value of his house. Sadly, its a lose/lose for the consumer in either scenario.

We all know how we got here

The party for the consumer started in the mid 90's as we came out of the last housing slump and the tech boom hit. We partied like rock starts as Amazon and went to $300/share.

We had a small recession when the music stopped. The Fed then said "Hey don't worry we will help" and proceded to lower interest rates and hold them there wayyy to long. This of course created the housing bubble, and like very other bubble in history, we know how they end.

So whats next?

This is where we need to start to focus. I think its pretty obvious to anyone not involved in the stock market that we are heading towards a big slowdown and a lower standard of living for awhile.

The Fed and Wall St. will fight this until the very end, but history repeats itself and today is no different. The financial innovation of today has gotten much more sophisticated. This has allowed the party to go on for a much longer period of time. However, it will still end up failing because in the end, people are human and we make mistakes.

I think we are heading for another 1070's style stagflation over the next decade as we wring out the greed and fraud of the past 20 years. We will have a huge correction followed by a decade of finger pointing, regulation, and lawsuits that will eventually clean up this mess.

Anyone thinking there will be hyperinflation with people stocking their houses with gold and guns needs to get real. This country always comes back, and I will never underestimate the resolve of Americans or the ongoing greed on Wall St.!!

I believe the next game on Wall St. is already being woven and it will be alternative energy. We need to wring out the losses from todays greed before this game really gets going. Stocks have a long way to fall IMO.

The big players need to take their hits and build capital before starting up the music again. Many investors simply don't realize this. The music always stops before the next game can begin as the losses of the previous game get worked out of the system.

The investors piling into alternative energy right now are playing a risky game because is there is a ton of desperate money out there that is looking high returns. As a result, many of these stocks like First Solar are already bubbly because there are so few areas in which to make money in a market like this. We all know what happens to bubbles now right?

These stocks will eventually get taken to the cleaners because they will get run up by speculators to ridiculous earnings multiples that will be impossible for these companies to achieve. Its too late to get into them now. Think Dotcom part Deux.

You better be nimble if you are going to play with these stocks and commodities in general. They are going to be volatile to say the least.

Bottom Line:

Now is a time for patience and conservative investing. The bull will be back but its going to be awhile. However, this too shall pass and we will slowly begin to recover over time.

Morgan Stanley: 2-1/2 Year Downturn in the Financials?

The market is deteriorating rapidly this morning as the bad news is coming from all directions. Oil is soaring to $130/barrel. Boone Pickens now says oil is heading to $150/barrel. If oil goes to $150/barrel we are looking at $5 gas people! Thats a consumer killer!

The PPI came in hot hot hot:

"May 20 (Bloomberg) -- Prices paid to U.S. producers, excluding food and fuel, rose more than forecast in April, reflecting increases in automobile and furniture costs.

The 0.4 percent gain in so-called core prices was twice as big as anticipated and followed a 0.2 percent increase in March, the Labor Department said today in Washington. A drop in energy costs and unchanged food expenses held the total price measure to a 0.2 percent gain.

Soaring raw-material costs are likely to hurt profits as a slowing economy prevents companies from raising prices enough to cover expenses. A report last week showed prices paid by consumers rose less than forecast in April"

Quick Take:

Remember this number does not include food and energy. Imagine what it would have looked like if it did? Expect this trend to continue until we finally decide to protect the dollar. You can guarantee that interest rates are going higher very soon if inflation gets out of control.

Every other central bank is raising rates in the world, and we eventually will be forced to do the same. You can kiss those low rate mortgages goodbye when this starts. Housing prices will then move lower to make up for higher rates. Whoa! Its a bad spiral we are stuck in ladies and gentleman.

So how bad is this financial crisis versus the ones we have seen in the past 20+ years?

Look at the chart below. Morgan Stanley is predicting a 2-1/2 year downturn in the financials. This is another must read from The Economist. There are too many things to highlight so take a look. You will understand why this is going to be such a rough period economically.

Bottom Line:

Pretty scary stuff eh? We are basically looking at a downturn that's going to last almost twice as long as the Dotcom bubble that burst. If you recall we had a 50% decline in the S&P 500 during the last downturn.

This is far from being over. Don't forget, after the acute phase of this is over, we still have the hangover to recover from. The severe part of this downturn is going to last right into 2010. Housing and the rest of the economy will not recover for years after that.

Monday, May 19, 2008

Is the Relief Rally Over?

Happy Monday everyone!

What an interesting day in the markets. After watching the market action the last few days I am starting to believe that the Bear Stearns relief rally may be coming to an end.

The news flow continues to be bad and Wall St. is now starting to question where the earnings are going to come from going forward as more cuts were announced by the financials today.

The market is starting to focus on the consumer as oil continues to rise to all time highs. The market gave up almost all of its gains based one little profit warning from SanDisk, who claimed higher oil prices are starting to affect "consumer behaviour".

Here is the warning from SanDisk on Bloomberg:

"May 19 (Bloomberg) -- SanDisk Corp., the world's largest maker of flash-memory cards, fell the most in two months in Nasdaq trading after Chief Executive Officer Eli Harari said sales to makers of consumer products were ``soft'' last month.

Rising oil prices have prompted consumers to tighten their budgets, Harari told analysts at a conference sponsored by JPMorgan Chase & Co. today. Milpitas, California-based SanDisk's memory cards are used in consumer electronics such as digital cameras and media players.

``Gas prices are weighing and will weigh on consumer patterns,'' ThinkPanmure analyst Vijay Rakesh said in an interview today from Chicago. ``Demand is a little soft.''

Quick Take:

Duh. Anyone who can't see this coming as gas hits $4 a gallon needs their head examined. Remember, gas really didn't get up to the $4 level until around April. The consumer is also facing the reality that the spring selling season in housing has been a bust, and housing prices are going down month after month.

Banks are also pulling home equity lines right and left which is putting further pressure on the consumer.

Wall St. continues to crow that the worst of the credit crunch is behind us. I have yet to hear one good explanation from a bullish analysts as to where the new growth will come from going forward.

How can we continue to grow when you read this type of news:

Banks fail to disclose $35 billion in writedowns:

"May 19 (Bloomberg) -- Banks and securities firms, reeling from record losses resulting from the collapse of the mortgage securities market, are failing to acknowledge in their income statements at least $35 billion of additional writedowns included in their balance sheets, regulatory filings show."

Or how about this one?

"May 19 (Bloomberg) -- Take away Exxon Mobil Corp., Chevron Corp. and ConocoPhillips and profits at U.S. companies are the worst in at least a decade.

Without the $70 billion that oil producers earned in the last two quarters, profits at companies in the Standard & Poor's 500 Index tumbled 26 percent and 30.2 percent, the biggest decreases for any quarter since Bloomberg started compiling data in 1998.

Energy companies made up almost half the income growth reported by S&P 500 companies in the first three months of 2008 as oil prices surged past $100 per barrel, the data show."

Or how about this piece on the economy going forward:

"May 19 (Bloomberg) -- A normal U.S. economy is likely to look a lot different, and worse, after the credit crisis is over and financial markets settle down.

Companies will continue to struggle to raise cash for expansion and innovation as investors and lenders remain focused on conserving capital. Workers, too, may have less flexibility to go after new opportunities, because many will be stuck where they are -- in homes worth less than the balances on their mortgages.

``Once you've made terrible, overly optimistic errors, that paralyzes you for some time,'' says economist Paul Samuelson, a Nobel laureate.

The bottom line: The U.S. may have to get used to a new definition of normal, characterized by weaker productivity gains, slower economic growth, higher unemployment and a diminished financial-services industry."

Final Take:

There were 10 other examples I could have put up here proving that the bull market is grinding to a halt. Without the energy boom the past few months, the S&P 500 would have gotten slaughtered. Profits were the worst on record according to Bloomberg.

The consumer is dead and paying too much for their homes. In the meantime they are getting socked in the mouth by inflation.

Wall St. is beginning to look like a graveyard. CNBC reported that the financial firms on Wall St. may cut 15% of their workforce. You don't think that's going to leave a mark on the economy going forward?

Expect stocks to sink after this reality begins to set in. If commodities start to loose steam based on weaker demand then there will be no place left for the speculators to make money.

This might be a good exit point if you have some stocks that you have been looking to sell. Its going to get worse folks.

Wall St. may have relieved itself with a nice rally, but they need to start asking themselves "Now What?".

Sunday, May 18, 2008

A Salute to Big Brown!

Anyone who missed this yesterday needs to watch this. We are watching history here folks. I have never seen a horse like this. Big brown is the real deal and I hope he will win the triple crown!

I will be on early tonight with a post on the markets. Enjoy!