Saturday, June 21, 2008

More Meredith Whitney

This is about three weeks old but I just love Meredith. Since the banks have tumbled, I thought many would enjoy seeing how accurate she was in explaining why this was going to happen.

The banks are in deeeeeep trouble!

I don't think there is a better analyst on the street covering the financials. Brown University should be proud of this brillant graduate!


Friday, June 20, 2008

S&P drops Rating on Bank of America to Sell/Hedge Funds turn Bearish

Ugly day today folks! I had to throw this up here tonight. Bank of America(BAC) has been dropped to a sell rating by S&P.

Why in the hell is Bank of America buying Countrywide? This deal is a disaster and makes no sense. The only explanation that I can think of is the Fed is orchestrating it.

I think there is a chance BAC still walks away as conditions deteriorate.

Here is the link

"NEW YORK (MarketWatch) -- Standard & Poor's Equity Research on Friday downgraded shares of Bank of America Corp. to sell from hold amid worries about the mortgage portfolio the bank will inherit when it acquires lender Countrywide Financial Corp.on July 1. "We take unfavorable note of the large Countrywide option-adjustable rate mortgage portfolio that Bank of America will inherit, since we believe this portfolio has yet to be stress tested," S&P said in its action. The agency also said it expects BofA to "significantly" increase its loss provisions to reflect a weakening U.S. consumer and predicted a dividend cut. S&P cut earnings estimates for 2008 for the bank by 51 cents to $2.16 and reduced its target price by $9 to $24"

Hedge funds fear worst recession Since the Great Depression

And I thought I was bearish. Take a look at some of the quotes from a hedge fund conference below.

Here is the link to Bloomberg discussing the conference:

"June 20 (Bloomberg) -- The credit market contagion that led to record losses at some of the world's largest financial institutions may be far from over, according to hedge fund managers gathered in Monaco this week.

``It's all bad news on the horizon,'' said Maria Boyazny, who oversees a $3 billion fund that invests in other hedge funds for Siguler Guff & Co. in New York. ``This correction is going to be a long one. It's a recipe for disaster for credit markets.''

Edward Altman, a professor at New York University's Stern School of Business who has tracked defaulted debt for nearly 40 years, said an impending wave of defaults could be the worst on record in the U.S., at 16 percent of corporate debt.

``It may be the worst recession since the Great Depression, that's not impossible,'' said Altman, who estimates default rates on U.S. corporate debt have tripled so far this year from record lows last year. ``There's a lot of negatives out there.''

The U.S. recession will be deeper and longer than the previous one because of the drop in home values, said Max Holmes, founder of Plainfield Asset Management, a $4.8 billion hedge fund in Greenwich, Connecticut. He bought distressed assets in the previous three U.S. recessions and lived in Houston during the region's real-estate bust in the 1980s.

``This is a major, major event, it's going to take a while to resolve itself,'' said Holmes, who reckons the U.S. slipped into recession in December. ``In the last recession the banking industry was healthy, this time it's very, very sick.''

``We have a lot more wood to chop,'' said Alberto Musalem Borrero, head of research for Tudor Investment Corp., the $18 billion hedge fund manager founded by Paul Tudor Jones. ``I wouldn't be surprised to see another $600 billion in losses.''

Quick Take:

My oh my how the mood has changed on the street. Can anyone remember the ridiculous chatter cheering the Fed as they bailed out Bear Stearns?

They threw all of that liquidity at the financial system and what do we have to show for it? $136 oil and a 7% annual inflation.

Thanks Ben! Keep up the great work.

Financials continue to pound the Markets/Oil Soars

Good Morning

What a morning. Stocks are down sharply on more horrendous news from the financial sector. What I find frightening about this sharp move south over the last three weeks is we haven't had any banks begin to fail to any large degree.

Trust me folks, many of these regional banks are toast. Recapitalizing will become much more difficult as investors have gotten continually burned throwing capital at these banks.

Going forward only the best of breed are going to be able to raise capital, and this will put many regional banks in deep doo doo. The fact that we are near the 11,600 lows on the DOW without a major trigger should raise some eyebrows..

Lets take a look at some of the news today.

Merrill Lynch reports Regional Banks are capitulating

Here is a nice summary of the financial news:

"June 20 (Bloomberg) -- U.S. stocks slid, extending a third straight weekly drop for the Standard & Poor's 500 Index, after analysts said worsening credit losses will reduce earnings at financial companies. Shares in Europe and Asia declined.

Wachovia Corp. retreated after Merrill Lynch & Co. said U.S. regional-bank stocks are in ``capitulation mode'' and cut share- price estimates, while Lehman Brothers Holdings Inc.'s prediction that losses may grow at Fannie Mae and Freddie Mac sent the two largest U.S. mortgage-finance companies lower. MBIA Inc. and Ambac Financial Group Inc. decreased after Moody's Investors Service stripped the bond insurers of their Aaa ratings. Merrill, Goldman Sachs Group Inc. and Lehman also dropped.

Trading volume may be higher than normal before today's expiration of futures and options on indexes and individual stocks. So-called quadruple witching occurs once every three months. The quarterly rebalancing of the S&P 500 after the close of exchanges also may spur trading as investors whose funds mimic the index buy or sell shares to reflect the adjustments."

Quick Take:

As you can see, the whole world sold off today. Regional banks are capitulating according to Merrill Lynch and this is without any failures! Where are these banks going to be when the failures start? Remember folks, in 1990/91 there were hundreds and hundreds of bank failures. Many were merged into stronger banks.

This bubble was 10 times worse than the 1990/91 bubble! There were no subprime loans or 100% negative am loans in the previous cycle. There were no zero doc alt A loans that allowed speculators to leverage up and buy seven $500,000 houses on a $100,000 income.

All of this financial innovation in lending was created to keep the game going. It was pure greed plain and simple.

Oil Soars on Israel Military Exercises

As if the news in the financials wasn't bad enough today, Israel decided to start preparing for an attack on Iran. Oil soared over $4.00 a barrel on the news.

Here is the Israel news from Bloomberg

"June 20 (Bloomberg) -- Crude oil rose as the weaker dollar enhanced the appeal of commodities as a currency hedge and the New York Times reported that Israel held a rehearsal for a potential bombing attack on nuclear targets in Iran.

Oil futures have nearly doubled over the past year as investors sought refuge from a declining dollar. Traders have pared bets for a Federal Reserve rate increase on June 25. Iran, OPEC's second-biggest oil producer, would respond to an Israeli attack with a ``heavy blow,'' a senior cleric said.

An Israeli military exercise involving more than 100 F-16 and F-15 fighters seems to have been a rehearsal for a bombing attack on Iran's nuclear facilities and long-range conventional missiles, the New York Times reported, citing several unidentified U.S. officials.

``If enemies, especially Israelis and their U.S. supporters, wish to speak in the language of force, they should rest assured they will be dealt a heavy blow on the face by the Iranian nation,'' said Ayatollah Ahmad Khatami, leading Friday prayers in Tehran, according to the state-run Islamic Republic News Agency "

Final Take:

If Israel attacks all hell is going to break loose in the oil and stock markets. Israel has the best intelligence agency in the world and they must see something they don't like. I am sure the USA deep inside would love to see Israel do the "dirty work" that eventually needs to be done.

Lets be realistic, Iran cannot have the bomb. I can't see us getting in the way of trying to stop this attack as a result.

The stock market is obsessed over three things right now: Oil, the financials, and inflation. The news was grim this week on all three fronts. Stocks are taking a beatdown as aresult.

Bottom Line:

The Nasdaq is down over 2%, and the DOW is down 1.3% as I write this post.

Be careful trading here because there is a big risk of some intervention by the Fed. However long term, I am very afraid of what we are going to see.

Housing is going to end up slaughtering the banks. Rates continue to rise and this story only keeps getting worse.

I hope we can find a way out of this mess. Unfortunately, its going to be a very painful process. The destruction that I have already seen in the markets without a major trigger like another Bear Stearns type failure is alarming.

Hold on to your hats folks, its going to get worse from here.

Thursday, June 19, 2008

Forum Is finally up!

The forum is finally up and working. Feel free to stop on by and share your thoughts. Anyone is welcome. You can also find the link to the forum at the bottom of the page, and the upper right hand corner of the site.

Here is the link

Global Fund Managers Turn Bearish

Good article here discussing the bearish view of global fund managers. We look to be in the middle of a major rotation in certian foreign markets.

From the Telegraph:
"Investors have sudden change of heart on China and India, reports Ambrose Evans-Pritchard
The world's fund managers are pulling their money out of China and India at a record pace on mounting fears of inflation and are now more pessimistic about global equities than at any time in the past decade.

The latest survey of investors by Merrill Lynch shows that Europe has become the most unpopular region, while Britain is still trapped in the doldrums.
But the big surprise is the sudden change in view on the emerging powers of Asia, as overheating and spiralling oil costs spoil the boom."
Quick take:
As you can see even the pros have been spooked by the market. There seems to be a major rotation going on in the global markets. International Funds may not perform as well. China's market is down almost 50% from the peak.
The big question now is did these managers rotate to cash or other equity markets?

Wednesday, June 18, 2008

Credit Cards are next Next!/Market update

Good afternoon!

Blood continued to flow through Wall St. as the DOW continues to sink. We actually got below 12,000 on the DOW before settling down over 100 points at 12029.

This news just hit the wires.

"LOS ANGELES (Reuters) - Two former hedge fund managers at investment bank Bear Stearns are expected to be indicted following a federal criminal probe into the funds' collapse, a person with knowledge of the situation said on Wednesday.

NPR said in a report on its Web site on Wednesday that a grand jury was expected to sign indictments for the two men as early as Wednesday and that the indictment would be unsealed on Thursday, when Cioffi and Tannin could be arrested or opt to turn themselves in"

Here come the cops!

Its about time. Both of these pigmen have a cellmate that's eager to meet them. Expect to see more indictments as the cops begin to hone in on how this $400 billion fraud was committed. The total tab could be several trillion dollars.

How could the bankers think they would get away with this?

It may take some time, but many will take the fall as justice starts to prevail. Hopefully, this will help send a message to the next group of pigmen that fraud will not be tolerated. We should be ashamed that our regulators ever let this happen!

Mortgage Rates rise to 6.57%!

This is only going to make our housing problem worse.

Rates are rising in the bond market which is forcing interest rates up. Its hard to buy a $500,000 McMansion crapbox when rates start rising up over 6.5%. Think we might see a few price drops?

I talked to a stressed out homebuyer the other day that paid $500,000 for a crapbox in Chicago.

He can't believe that his mortgage and taxes are now over $3500 a month. Meanwhile he is probably $100,000 in the hole because he bought at the peak in 2006, and he is now nervous about his job because his customers tell him they are struggling with higher costs.

Any renters that avoided this disaster should rejoice!

Your house will be much more affordable in a couple years after all of the excesses are worked out of the system.

Credit Cards are Next!

Here is a great read from the USA today explaining why credit cards are the next financial disaster.

"By raising credit limits to encourage borrowers to pile up more debt and then urging them to pay that debt off with home equity, banks put card customers on a "lucrative hamster wheel," says Joseph Ridout, a spokesman for Consumer Action, an advocacy group.

In theory, paying off high-rate card debt with lower-rate home equity is wise, says Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling. But the reality, she says, is that many who did so during the boom just "re-debted," running up more card and mortgage debt.

Industry analysts, consumer advocates and lawmakers are starting to fear that some of the $461 billion in card debt that the Fed says was sold as securities to Wall Street investors could unravel, just as a sizable chunk of the $6.5 trillion in mortgage-backed securities is now doing."

Final Take:

They better be worried because credit card debt is unravelling right now. As described in the article above, Credit card default rates are at a 6 year high and worsening.

The home always goes first because god forbid our credit cards get taken from our binging consumers. They just have to buy that 58" HDTV. Forget the house!

The banks knew what they were doing whenthey were giving out credit cards like candy. Our consumer was weak and vulnerable and an easy prey. Shame on them for taking advantage of it. They got what they deserved in my eyes. Maybe those billions in credit losses will make you think next time before they take advantage of people.

Hold on tight folks, the news gets worse everyday!

RBS Issues Global Crash Alert/FedEx misses

Good Morning to all

Its another red day on Wall St. as the recession deepens. There were some big headlines in the news today including a warning of a global stock market crash.

Some highlights:

"RBS issues global stock and credit crash

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.

A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.

RBS warning: Be prepared for a 'nasty' period

I do not think I can be much blunter. If you have to be in credit, focus on quality, short durations, non-cyclical defensive names.

"Cash is the key safe haven. This is about not losing your money, and not losing your job," said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.a slide on world bourses would amount to one of the worst bear markets over the last century."

Quick Take:

If thats not a headline then I don't know what is. All I can say is wow. When you start reading stuff like this its pretty scary. Some traders like to use such headlines as a way to call a bottom. Unfortunately, I do not think this is one of those times.

These warnings should have been out a long time ago. I have said all along that cash will be king in this market. Now is a time where you try to protect what assets you have versus looking for high returns.

FedEx Warns of a rough 2009

Here is the Scoop on the FedEx warning:

"FedEx has been unable to raise surcharges fast enough to keep pace with fuel costs that have almost doubled the past year, while a cooling U.S. economy is curbing sales of the company's more expensive shipping options. The results at FedEx, often considered a proxy for the U.S. economy, suggest fuel expenses and slowing demand will continue to erode growth prospects in industries ranging from shipping to airlines.

The coming year will be ``very difficult due to the weak U.S. economy and extremely high fuel prices,'' FedEx Chief Financial Officer Alan Graf said in a statement."

Final Take:

Always pay attention when FedEx warns. They are a great bell weather to use when you are looking for signs of a weakening economy. People stop shipping things when times get tough.

A global slowdown combined with high gas prices is a big one two punch for FedEx.

Bottom Line:

I see no signs that we are bottoming here folks. You can smell the fear on Wall St. I think the current dose of inflation is about to take this economy down.

Companies from all industries are raising prices right and left. Southwest is out warning of rising air fares. Something has to give when you try to do this to a consumer thats already on its knees.

I think our economy is going to buckle before inflation has a chance to recede due to decreased demand.

Play defense and ride out the storm. This one isn't close to being over yet.

Tuesday, June 17, 2008

Goldman Sinks the Financials/Market Update

Good Afternoon!

It looks like its going to be a long rough summer for the stock market. Volumes are extremely light. Stocks are falling further out of favor with investors as profits start to shrink amid inflation.

We started the day out with a HOT HOT HOT inflation number, and the lowest number of housing starts since the last housing slowdown in 1991.

"June 17 (Bloomberg) -- The U.S. economy may be suffering from its first bout of stagflation since the start of this decade, reports on housing, prices and manufacturing indicated.
Builders broke ground on 975,000 homes at an annual pace in May, the least in 17 years, and construction permits fell, the Commerce Department reported in Washington. Meanwhile, the Labor Department said producer prices jumped 1.4 percent, more than economists forecast. A further report from the Federal Reserve showed industrial production unexpectedly dropped 0.2 percent.

``The latest round of commodity-price pressure is adding to both inflation and weak growth,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. ``It's a pretty negative cocktail for the economy and financial markets.''

Quick Take:

Get used to seeing days like today when it comes to the markets this summer folks. Recessions can be long, boring, and involve very little price action.

Its obvious there are no catalysts to take stocks higher. HOWEVER , there are many catalysts that could take stocks lower. Those risks include a bank blowup, Builder BK, bank runs, high unemployment, inflation. Name the risk and you will see it in a market like this. This is why you need to be defensive with your portfolio.

Take note of the top line PPI inflation number of 1.4%. That's an annualized rate of 16-17% rise in prices. Not good when you are getting 3% raises annually from your job!! At this rate we will be trading our SUV's in for food stamps.

Goldman torpedos the financials

This was the news that sparked the sell off late in the afternoon. Goldman came out with a gloomy report on the banks. Here is the news from Bloomberg:


June 17 (Bloomberg) -- U.S. stocks fell for the first time in four days as Goldman Sachs Group Inc. predicted banks will have to raise $65 billion in new capital to cover losses and housing starts and industrial production trailed forecasts.

``The growth in the market is going to be in companies that increase the supply of materials and commodities, and the area that's going to struggle is going to be financials because they're going to go through this long period of deleveraging,'' said Richard Campagna, portfolio manager at Provident Investment Counsel in Pasadena, California, which manages $3 billion. ``I don't see that changing for the next bunch of years.''

Goldman analysts led by New York-based Richard Ramsden said investors should sell regional banks such as Marshall & Ilsley Corp., which is on its ``conviction sell'' list, and buy trust banks such as Bank of New York Mellon Corp. and State Street Corp., on the firm's ``conviction buy'' list.
Marshall & Ilsley, Wisconsin's biggest bank, fell 5.2 percent to $18.21, a seven-year low.
$65 Billion More

Large lenders also declined. The Goldman analysts said U.S. banks may need to raise $65 billion in additional capital as losses and writedowns continue into the first quarter of 2009. Declining home prices, expected to continue falling through the year, are driving the deterioration in the credit markets, Goldman said."

My Take:

What happened to that second half rally that the bulls were expecting? Goldman is finally admitting that this crisis is going to seep into 2009. I think its going to last much longer.

We will see an economic recovery after debt is either paid off or defaulted on, inflation is tamed, and houses become affordable. Think we can do this in 6 months? HA! Good Luck!

It may take several years for us to dig out of this hole. The Fed needs to start raising rates instead of just warning about pulling the trigger. Will this cause destruction and a lot of pain? Yes. However, it gets us to the recovery that much sooner.

We can no longer prosper in such a toxic environment. Everyone needs to deleverage just like Wall St. is in the process of doing. We have lived far beyond are means for two decades through debt and its time to face the hangover.

Is Europe about to take a Tumble?

Good morning!

I spend a lot of time discussing the US markets, but today I wanted to put the focus on Europe and its potential for a meltdown. I almost did a post on the Euro currency crisis the other day but something in the news over here trumped it.

Every US investor needs to be aware of the bind that some countries in Europe are in. The ECB has as tough a task as the Fed right now trying to tip toe through this economic downturn. As our multinational companies have flourished over here through exports and our cheap currency, the big European multinationals are struggling as the strong Euro is killing profits.

This has put the Euro and its possible future on center stage. Now I for one think the Euro will survive but not before potentially melting in value.

The big problem across the Atlantic is you have basically a line being drawn in the sand between Southern and Northern Europe. Southern European countries like Spain, Italy, and Greece all have struggling economies and are in desperate need for a rate cut. Spain for example has a bigger housing bubble than we do along with 4.7% inflation.

The UK also has a housing bubble, but they seem to be weathering it for now and are not in as bad a shape as Spain or Greece.

However, countries like Germany and Austria are faring much better than their southern counterparts. They prefer the ECB keeps rates high in order to control inflation. Their economies are in much better shape, and more capable of handling a slowdown in order to control prices. The ECB's Trichet(BBernanke of Europe) so far has been siding with the north.

Germany still remembers the horrors of hyperinflation in the '30's and has zero desire to see that nightmare again.

Trichet basically seems hell bent on showing the US that holding rates and controlling inflation is what needs to be done. The Fed has recently become much more hawkish on inflation and warning of higher rates.

However, if the Fed decises to back away due to weakness in the economy, Europe could end up getting screwed.

Signs of a European Crash?

The ECB is walking a fine line similar to the Fed. The risk they run is if they overplay their hand, they could destroy some of the economies in Europe which would put major stresses on the Euro as a currency. The way I see it, Trichet seems hell bent on risking Spain, Italy and Greece in order to control inflation.

Keeping rates high for too long can be dangerous.. Anyone remember the Great Depression? Lack of liquidity was the culprit.

As you can see here below, Morgan Stanley is starting to get nervous.

The UK's Telegraph reported today that Morgan Stanley is now warning of a potential for a 'catastrophic event' in Europe as the ECB fights with the Federal Reserve on policy.

Here is the story from the Telegraph:

Some highlights:

"The clash between the European Central Bank and the US Federal Reserve over monetary strategy is causing serious strains in the global financial system and could lead to a replay of Europe's exchange rate crisis in the 1990s, a team of bankers has warned.

"We see striking similarities between the transatlantic tensions that built up in the early 1990s and those that are accumulating again today. The outcome of the 1992 deadlock was a major currency crisis and a recession in Europe," said a report by Morgan Stanley's European experts.

Jean-Claude Trichet is taking a hard line on rates
Just as then, Washington has slashed rates to bail out the banks and prevent an economic hard-landing, while Frankfurt has stuck to its hawkish line - ignoring angry protests from politicians and squeals of pain from Europe's export industry.
Indeed, the ECB has let the de facto interest rate - Euribor - rise by over 100 basis points since the credit crisis began.

The point of maximum stress could occur in coming months if the ECB carries out the threat this month by Jean-Claude Trichet to raise rates. It will be worse yet - for Europe - if the Fed backs away from expected tightening. "This could trigger another 'catastrophic' event," warned Morgan Stanley.
The markets have priced in two US rates rises later this year following a series of "hawkish" comments by Fed chief Ben Bernanke and other US officials, but this may have been a misjudgment.
An article in the Washington Post by veteran columnist Robert Novak suggested that Mr Bernanke is concerned that runaway oil costs will cause a slump in growth, viewing inflation as the lesser threat. He is irked by the ECB's talk of further monetary tightening at such a dangerous juncture.

Ben Bernanke is reported to be irked by the ECB's approach

The contrasting approaches in Washington and Frankfurt make some sense. America's flexible structure allows it to adjust quickly to shocks. Europe's more rigid system leaves it with "sticky" prices that take longer to fall back as growth slows.

Morgan Stanley says the current account deficits of Spain (10.5pc of GDP), Portugal (10.5pc), and Greece (14pc) would never have been able to reach such extreme levels before the launch of the euro."

Quick Take:

Its an interesting game of chess between the Fed and the ECB isn't it? If parts of Europe like Spain start to blow up due to interest rates being too high than I could see the dollar strengthening significantly.

The dollar could suddenly become an even safer currency than it already is perceive as even though the Fed has done everything to destroy its credibility.

Keep an eye on this situation. The Fed could be all bark and no bite when it comes to raising rates. Consider this to be a game of "chicken" between the Fed and the ECB, whoever blinks first loses.

Bottom Line:

A global slowdown seems likely. If Europe blows up, how are our multinationals going to sell anything? We sure as hell can't afford to buy anything here. Our consumer is on its last leg. If the dollar strengthens, these companies will also face the headwinds of a stronger currency which will hurt exports.

Its beginning to look like the whole world has consumed about as much as it possibly could. If Europe and the US both slow down, its going to kill Chindia's exports and badly damage the emerging markets.

Trying to find a bullish scenario among this disaster is becoming increasingly more difficult. We saw a "Hindenburg" yesterday in the stock market. Could Europe's crisis be the trigger for a correction over here?

Time will tell.

Monday, June 16, 2008

How are we going to pay for this?

Good afternoon!

Sorry I am a little late today. The market has been pretty quiet. The Fed's Lacker was out warning of higher interest rates. An overview from Bloomberg:

"June 16 (Bloomberg) -- Richmond Federal Reserve Bank President Jeffrey Lacker said downside risks to growth have ``diminished'' and reversing previous interest rate cuts makes ``eminent sense'' as the economy recovers.

While the danger of a more rapid slowing in growth ``has not entirely disappeared, my sense is that such downside risks have diminished appreciably,'' Lacker said today in a speech in Spartanburg, South Carolina. ``And just as easing policy aggressively in response to emerging downside risks made sense, withdrawing some of that stimulus as those risks diminish makes eminent sense as well.''

Quick Take:

I am starting to wonder if the Fed is all bark and no bite when it comes to raising rates. I see no signs of an economic recovery, and I am starting to think this interest rate talk is a bunch of jawboning versus actually taking action. I am increasingly reading that this is the general consensus of many economists.

If they pull the trigger and raise rates, the economy could collapse. If they don't raise them than inflation soars. The Fed is pretty much screwed no matter what they do.

The New York factory numbers were negative today which shows the economy is contracting. Builder confidence dropped again to an all time low. I can't see how they raise rates unless inflation becomes unbearably high.

I think this is why you see so many Fed presidents disagreeing with one another and dissenting as the Fed meetings. They really have no clue on what to do. They are starting to realize that they are losing any control they had on the economy, and the bond market is taking yields higher which makes Fed rate cuts useless.

Inflation is now higher than the Fed funds rate of 2%. This means rates are at zero. Taking them lower will only make the bond market panic more which will result in higher rates. The Fed is using a BB gun to fight a problem that requires an army of tanks.

On top of these issues, we have this giant nightmare in front of us

Ok people! So how are we going to pay for all of these entitlements going forward? Anyone have any ideas? Something has to give here folks.

I advise everyone to go take a look at this site that was created by Ross Perot. The former presidential candidate is trying to form a consortium of the best and the brightest to search for ideas on howto tackle this huge disaster we face in the future.

I am sure these are the stats that the Fed's Richard Fisher saw when he warned about this problem a few weeks ago during his excellent speech. The government still refuses to discuss this problem and it should be close to the top in terms of priorities right now!

The costs of these programs currently eat up 18% of our GDP. If we continue to spend at the same rate, in 30 years its going to be 30% of GDP. In 40 years it will be more than half of GDP!! There is no way we can allow this to happen. Costs must be cut and taxes must be dramatically raised in order to keep these programs solvent.

I hate taxes as much as the next guy, but our economy is facing a severe downturn if major changes are not made.!

We need to fix these problem now or our economic future is in terrible jeopardy. What makes this even worse is we are facing this monster problem as our economy is on the verge of a collapse.

An economic reset with a dramatic reduction in the cost of assets is the only part of the answer. The second part involves massively reigning in spending by the government and increasing taxes. This is going to be a very painful process, but it must be done.

How anyone can be bullish on stocks in this environment is beyond me.

Sunday, June 15, 2008

Fleckenstein on Inflation and the Debt Bubble

This is a great read on the Fed, inflation, and the massive debt bubble that is in the process of being deleveraged.

Hoping to have the forum up tomorrow. I am working out a few kinks.

Here is the link for Bill's article!


Fannie & Freddy: 22,000 REO's in Florida alone/The Oil bubble surpasses the Tech Wreck

I hope everyone is enjoying their weekend.

I had an interesting dinner over the weekend with one of the Wall St. boys. I have learned through this source that Fannie and Freddie currently have over 22000 foreclosures just in the state of Florida alone!

Many on Wall St. are now offering proposals to Fannie and Freddie on what to do with them. I have learned through this source that one of the proposals being discussed is setting up a government sponsored program that places veterans from Iraq into these REO's with a grant from the government.

In other words, Washington would subsidize the 20-30% loss that Fannie and Freddie would take on these REO's with a grant for each veteran homebuyer. Its a win/win for both sides. The grant makes the house affordable for the vets and it would save Fannie and Freddie from taking massive losses. There are 1.5 million vets that will be coming back from Iraq so there are plenty of potential homebuyers.

Pretty brilliant isn't it? Remember, the best and the brightest are on Wall St. and they can't be underestimated. The banks are hiding massive losses, but they are already figuring out ways to make money on the destruction in housing. Investors placing bets that Fannie and Freddie are going down are making a big mistake. Its obvious the government has their backs.

I have written about how vulnerable Fannie and Freddie are with such small capital bases and questioned their ability to survive. However, after hearing proposals like the one above, you realize that DC won't allow them to go under.

The crude rally passes the bubble in terms of returns

I picked this up on Bloomberg today.

"June 13 (Bloomberg) -- The rally that drove oil to a record $139.12 a barrel last week surpassed the gains in Internet stocks that preceded the dot-com crash in 2000.
Crude rose 697 percent since trading at $17.45 a barrel on the New York Mercantile Exchange in November 2001, and reached 28 record highs this year. The last time a similar pattern was seen in equities was eight years ago, when Internet-related stocks sent the Nasdaq Composite Index up 640 percent to its highest level ever, according to data compiled by Bloomberg and Bespoke Investment Group LLC.

The Nasdaq tumbled 78 percent from its March 2000 peak, erasing about $6 trillion of market value, as investors concluded that prices weren't supported by profits at companies such as Broadcom Corp. and Inc. Billionaire investor George Soros and Stephen Schork, president of Schork Group Inc., say oil is ready to tumble because prices aren't justified by supply and demand.

``There's nothing different between this mania, the dot-com mania, the real estate mania, the Dow Jones mania of the 1920s, the South Sea bubble and the Dutch tulip-bulb mania,'' said Schork, whose Villanova, Pennsylvania-based firm advises the Organization of Petroleum Exporting Countries, Wall Street firms and oil companies on the outlook for energy prices. ``History repeats itself over and over and over again"

My Take:

Amazing isn't it? I love the quote at the end. We seem to never learn from our mistakes. One contact that I have on Wall St. has told me in the past that the street gets more and more reckless and stupid with each bubble.

If we hit a deep recession crude will deflate like every other bubble because demand will drop. Could this game still run to $200? Sure. However, to think it won't end like any other bubble at some point would be illogical.

The sad thing for homeowners is its a foregone conclusion that Wall St. has moved on from real estate and taken their money elsewhere. Wall St. has a brutal reputation of completely walking away when a game like housing is no longer profitable.

Wild specualtion in the oil markets only helps confirms this conclucsion.

The next time you see the pigmen sniffing around the housing market will be after the carnage has taken place and they can start buying up assets for pennies on the dollar.

The losses in housing when its all said and done are going to be stunning.

The sad thing is, we are nowhere near the bottom.