Saturday, August 16, 2008

Is it time to go long Lehman Brothers?

Good Afternoon!

Let me preface this post by saying that no I have not been smoking crack and I didnt drink a case of wine before typing this post! I gotta admit though after reading the Financial Times today, going long Lehman has a nice risk/reward if they can pull off this sale without going BK.

Here is the Financial Times piece:

"Lehman in talks to sell $40bn in real estate
By Henny Sender in New York
Published: August 15 2008

Lehman Brothers is in talks with potential buyers over the sale of its $40bn portfolio of commercial real estate assets and securities in an effort to replenish its balance sheet.
People who have been in the discussions say the troubled investment bank wants to sell the assets either as a whole or in pieces but added there was a gap between Lehman’s perception of the value of the portfolio and that of buyers

In a move to lure buyers, Lehman has offered to shoulder the first $5bn of any losses suffered on the portfolio’s assets following a sale, they said.

If the sale talks fail, Lehman is believed to be considering spinning off the entire commercial property division and listing it separately, people close to the discussions said.

Such a move might not raise much fresh capital but could help Lehman to dispel the concerns over its balance sheet and financial health that have dogged it for the past few months.

Since May 15 its shares have fallen by about 63 per cent while the S&P 500 index of financial stocks has dropped about 20 per cent.

Lehman, which has raised more than $13bn in capital after suffering credit-related writedowns and losses of more than $8bn, is expected to make a decision by the time it reports third-quarter results next month.

Those who have held talks with Lehman on the fate of the troubled division include BlackRock, Blackstone, Colony Capital, and J.E. Robert Companies – all of which have large real estate portfolios.

Lehman has been slow to deal with its commercial real estate portfolio, which the company valued at almost $52bn at the end of November and was worth $40bn at the end of May.
The portfolio includes mortgages and mortgage-backed securities that were valued at $29.4bn as of May 31. It also contains real estate assets worth $10.4bn at the end of May.

The scale of the operations is huge when compared with either Lehman’s market capitalisation of about $12bn or its balance sheet.

Lehman declined to comment. People close to the discussions said no final decision had been made on the commercial real estate portfolio."

My Take:

Let me preface this by saying buying Lehman here is very risky trade. However, there are several reasons why I think this makes some sense. If Lehman does this and can still say solvent, then they have essentially will dumped all of their real estate risk onto someone else's balance sheet.

Remember one thing about the investment banks. They are much smarter than the buyers they are selling too. They also have a history of rarely holding the bag when its all said and done. I have been waiting for news like this. This tells me that the IB's are capitulating on this toxic mess, and they realize its time to clean up the balance sheet before the regulators do.

Now will Lehman be hurting for years? Of course! However, dumping these assets will almost assuredly guarantee Lehman's survival. This alone should move shares higher.

Another thing to consider here is George Soros just took a huge position in Lehman and he is as bearish as anyone on the economy.

Fuld(Lehmans Chief) is also considered one of the best and brightest executives on Wall St. If this sale goes through, then I think we have a nice entry point on a stock at a distressed price.

Buying this stock here is not for the faint at heart! My position here will be small due to the risk.

Distressed sales will be bad for homeowners

When the massive sales of distressed assets(including foreclosures) start, the effects will be chilling. Fannie has 54,000 homes in Cali that they need to sell. If they decide to start selling these foreclosures in the thousands to distressed asset buyers, you can say goodbye to housing values. Some of these homes will be bought for pennies on the dollar.

Homeowners that live in the neighborhoods where these houses are will watch their comps get destroyed literally overnight.

Capitulation in housing seems to be approaching as Wall St. realizes the jig is up.
Its about time for the fireworks!

Stay tuned.

Friday, August 15, 2008

Don't be Fooled by the "Denial Bounce"!

A little commentary tonight folks!

I wanted to just send out a warning tonight after listening to bubblevision today. The pigmen were on all day pumping equities.

Some common themes from the bubble boys as they pumped:

1 The US will be the first one out of the global recession so you need to get in now and buy.
2 The instability in Georgia makes the US a safer place to invest.
3 Oil/gold are dropping which is pushing investors back into equities. Don't be the last one in!
4 Inflation has peaked and we have seen the worst of it.(yeah right)

Lets take a reality check on each of these points:

Lets start with #1. The US may be the first one out but it might be a decade from now. The pigmen always want you to think that a new bull is about to begin. The reality is we still haven't taken the credit losses from the last bull run. until this happens, equities aren't going anywhere.

Point 2. I am still trying to figure out why this is a good reason to buy equities. If you are looking for safety then why wouldn't you just come over to the US and buy treasuries?

Point 3. Oil is dropping because the bottom is falling out from under the economy. This is an easy spin job for the pigmen: Gas is cheaper so the consumer is back. I say yes, gas is cheaper, but its still 4 fold higher than it was 5 years ago. Never mind the fact that people are starting to choke on their debt.

Point 4. Yeah ok, then why was inflation double expectations this month. Note that the biggest reason for the increase in inflation this month were prices on consumer items not gas.

My Take:

These idiots are all rotating out of gold and oil back into the equity markets. The problem with this move is they got out of oil/dollar trade and rotated into a hornets nest(US equities). The fundamentals are as bad as I have ever seen them. You know my argument so I won't repeat it again.

When the pigmen realize what they rotated into has zero earnings power, they are going to get crushed. There will be an inflection point at which they all realize this. When this inflection point occurs, you are going to see a drop in equities that will be a once in a lifetime event.

Look at the stocks that are rising during this "denial bounce". Financials, homebuilders, and retail all had huge days today. Each of these sectors all reported horrific news this week. There is no fundamental reason to be in these stocks right now.

What the bulls will soon realize is they are WAY too early and they will all head to the exits at once. I believe you are going to start seeing a lot of this speculator money start to dry up.

I say this because each rotation will reduce the amount of liquidity that these clowns have, because most of them get too greedy and end up taking losses. Imagine the billions that have been lost since oil and gold have plummeted. Now were some of these traders smart enough to get out before the big dump? Of course! However, the majority stay in the trade too long and got creamed because this is how speculative bubbles blow up.

When the speculators make money on a trade like long oil, they continue to leverage more and more into the trade until it unravels violently. When the margin calls hit they are forced to sell more gold and oil in order to raise cash and cover. This makes the reversal even more violent and painful

Bottom Line:

Expect a huge equity pump from the pigmen in the coming weeks. They realize if this pump doesn't work the game is over. There is nowhere else left to speculate and they know it.

The problem they face is the earnings are not there to get the game going.

Stay on the sidelines and let these speculators burn themselves out. Each bounce will be smaller than the last one until reality sets in. Notice that this weeks bounce was achieved with extremely low volume.

Remember, bottoms are never seen until no one wants to own stocks anymore. The debt/financial markets are falling apart, housing is a mess, and the consumer continues to tank. This is completely being ignored by the pigmen because they have nowhere else to play other than the stock market.

I expect that you will see a strong reversal to the downside next week. The rally today looked extremely tired.

Thursday, August 14, 2008

The Housing Crisis Deepens

Good evening everyone!

Well guys the markets bounced today. I have no idea why given the horrifying housing news that was released today. Take a look at the data on Bloomberg:

"Aug. 14 (Bloomberg) -- Existing U.S. home sales fell to a 10- year low in the second quarter and the median price for a single- family house dropped 7.6 percent as the real estate recession deepened.

The median price tumbled to $206,500 from $223,500 a year earlier, the Chicago-based National Association of Realtors said today. Sales of single-family houses and condominiums fell 16 percent to 4.913 million at an annualized pace.

``It's getting worse,'' Rick Sharga, RealtyTrac's executive vice president for marketing, said in an interview. ``The number of properties that have been foreclosed on by the banks and still haven't sold is the highest we've ever seen.''

Bank seizures of properties in default rose 184 percent to 77,295 in July, according to RealtyTrac. That was the steepest increase since the Irvine, California-based company began reporting data in January 2005.

There were 4.49 million U.S. homes for sale at the end of June, the highest in a year, according the Realtors' association. At the current sales pace, that represented 11.1 months' worth, up from 10.8 months' worth at the end of May, the trade group said in a July 24 report.

Default notices in July increased 53 percent from a year earlier and auction notices rose 11 percent, RealtyTrac said.

Foreclosures could put 8.4 percent of total U.S. homeowners, or 12.7 percent of homeowners with mortgages, out of their homes, according to New York-based analysts at Credit Suisse. About 53 percent of subprime borrowers, those with poor or incomplete credit histories, will have negative equity in their homes this year, and that percentage will rise to 63 percent next year, the analysts said in an April 23 report."

My take:

I don't even know where to begin. Stephen King never wrote anything as scary as this housing article.

Lets start with the bank seizures: 184% increase! Banks are going to start aggresively dumping these homes as these REO's #'s continue to soar. Reuters reported today that Fannie/Freddie are setting up offices in California and are going to start selling their bank seizures in bulk to investors. Can you imagine the price cuts that will be seen if they start doing deals like this?

The REO's obviously will continue to push prices down.

Bloomberg also reported that inventories rose to over 11 months! The bulls keep trying to spin the fact that home sales are up significantly in distressed areas because many buyers are gobbling up foreclosed homes.

The problem is there are more homes being dumped on the market than are being bought. This bullish arguement is pure silliness! The higher inventory rises, the lower the prices in the long run. I still say its too early to be buying foreclosures. If Fannie plans on bulk selling properties, you need to at least wait and see what price they puke them out at.

When these sales occur, you may start to see what the bottom in housing might look like. The only way I would buy a home right now is if I could pick it up at at a distressed price.

In my opinion, this housing crisis is the perfect storm. You have inventories rising, bank seizures soaring to all time highs, free falling prices, and rising interest rates with tougher lending standards.

This is all occurring as unemployment continues to rise and inflation soars. Note the inflation numbers today:

"Aug. 14 (Bloomberg) -- U.S. consumer prices rose at the fastest pace in 17 years in July, limiting the ability of the Federal Reserve to lower interest rates as economic growth slows.
The cost of living climbed 5.6 percent in the year ended in July, the Labor Department said today in Washington. It was up 0.8 percent from the previous month, twice as much as anticipated. So-called core prices, which exclude food and energy, also advanced more than projected.

The surge last month reflected energy prices that have since declined, signaling July may represent the peak in inflation. Still, increases went beyond food and fuel, including gains in clothing, airline fares and education, likely intensifying discussions among Fed policy makers about how quickly to shift toward raising rates."

Bottom Line:

I continue to be amazed at how the market reacts to such bad news. I guess denial is a powerful emotion!

The housing data released today tells us that there are no signs of bottoming, and things are getting much worse. What concerns me even more is as prices drop, people who can afford their homes may decide to walk away because they are overpaying on an asset that might never be worth what they paid for it.

The fact that Credit Swiss expects 13% of homeowners with mortgages to be thrown out of their houses via foreclosure is astonishing. Just stop and think about that for a second. If you live in a suburb, chances are a handful of your neighbors will be tossed out of their homes. At the same time, you get to sit there and watch your home drop in value month after month as the inventory gets cleaned out.

The psychological effect of this crisis will be dramatic as potential homebuyers see families torn apart via the foreclosure process. They will also hear the disaster stories of families that paid twice what their home is worth. When this all starts to hit they may ask themselves: Do I really want to risk buying a home?

The stigma of being a renter will be gone by the time this crisis passes.

Owning a house is no longer the American Dream. It has become the American Nightmare.

Wednesday, August 13, 2008

"AAA" Spreads Surge...Risk is Back!

Hello All!

Take a look at the chart below. I talked about the widening in spreads yesterday, but I thought a chart would help.

My Take:

Ok guys, this is the spread for "AAA' paper. To simplify things, the higher the spread, the more it costs to borrow money. Right now based on the borrowing spreads, you need a return on investment of about 10% just to break even if you spread your risk out properly as an IB or hedge fund.

This means throwing "BBB" paper in with your "AAA" paper in order to get the best ROI as an investment bank. This is the toxic crap that the bond market is avoiding which is why you are seeing spreads open up.

Bottom Line:

As I explained yesterday, the cost of borrowing money is surging for everyone including banks! The bond market is going into treasuries which is forcing the borrowing of money to be more expensive as the spreads rise in order to attract money.

Keep in mind, a lot of this "AAA" toilet paper was levered by the IB's by ridiculous multiples. This will make the losses on this paper that much worse .

This data is horrific! I have no idea how the market trades this information short term, but I know what the long term implications are.

When borrowing "AAA" paper risk rises, its time to take notice. the market has still not priced this in IMO. Once they "wake up", equities are in trouble.

Look Out! Here Comes The Bond Market!

Hello All:

Things are about to get very interesting. This has been floating around the blogosphere, and it now appears to be confirmed by The New York Times. The bond market has had enough of the Fannie/Freddie games.

I was first alerted to this today when Fast Money talked about how the credit spreads have now climbed close to the highs that we saw when Bear Stearns went bust in March. It looks like the bond vigalantes are back with a vengeance.

Here is the article from the Times:

"A year after financial tremors first shook Wall Street, a crucial artery of modern money management remains broken. And until that conduit is fixed or replaced, analysts say borrowers will see interest rates continue to rise even as availability worsens for home mortgages, student loans, auto loans and commercial mortgages. The conduit, the market for securitization, through which mortgages and other debts are packaged and sold as securities, has become sclerotic and almost totally dependent on government support. The problems, intensified by bond investors who have grown leery of these instruments, have been a drag on the economy and have persisted despite the exercise of extraordinary regulatory powers by policy makers.

Bond investors first stopped buying private home mortgage deals, then shunned commercial mortgages. Now, they are becoming wary of credit card debts and auto loans. In the first half, private securitizations reached just $131 billion, down sharply from $1 trillion in the same period last year, according to data compiled by Thomson Reuters.

Some analysts say investors are acting like the “bond vigilantes” of the 1980s and early 1990s. Those traders drove a surge in interest rates because they feared inflation and a mounting federal budget deficit. Their actions helped slow the economy and forced policy makers in Washington to rein in spending and raise taxes, at least for a time.

“The bond vigilantes took law and order in their own hands and pushed yields up, which would slow down the economy and bring down inflation,” said Edward E. Yardeni, an investment strategist who is credited with coining the term. “This time the bond credit vigilantes are refusing to go into the saloon and start drinking what Wall Street’s financial engineers are mixing.”

Money market funds, the short-term cash alternatives, grew to $2.9 trillion in June, up from $2.1 trillion a year ago, according to Crane Data. Those funds, in turn, have more than tripled their holdings of Treasuries and other government debt while reducing the share of their portfolios invested in somewhat riskier commercial paper and corporate notes.

The pullback is compounded by a continued rise in interest rates despite the Fed’s efforts to grease the wheels of finance by gradually slashing its benchmark rate to 2 percent, down from 5.25 percent last August. The average interest rate on a 30-year fixed mortgage climbed to 6.7 percent last week, from 5.89 percent in the spring.

“It appears that every time we peel away this onion, there is another layer,” said Curtis D. Ishii, the senior investment officer for fixed income at Calpers, the large California pension fund. He added that investors were starting to realize that the pain in the credit market would persist for some time."

Final Take:

Take this very seriously guys. The fear in the credit markets is back up to its March highs.

As you can see above, money market inflows rose $800 billion from $2.1 trillion up to $2.9 trillion in June versus this period last year. The money markets took this cash and put 75% of it in treasuries. You know the saying "follow the money"? This situation is no different.

The market is running out of Wall St. and heading into treasuries for cover! No one wants any part of the mortgage slop that Fannie/Freddie has put together. The bond market has had enough of Wall St.'s games and the jig is up folks.

Whats different about the current scare versus the March Bear Stearns blowup is the Fed is out of bullets. They are helpless to stop this correction because its the bond market that is taking rates higher. The Fed can't slash bond market rates! Money gets more expensive when fear and losses grip the street.

Bottom Line:

Its become pretty clear that the bond market doesn't buy into the Fed bailout of Fannie/Freddie. The fact that the bond market wants no part of the GSE's paper means that they are calling out the Fed on their guarantee that they will back the $5 trillion in Fannie/Freddie paper. This is a startling development.

If the bond market did buy into the Fed backing of the two GSE's, than they would be buying this mortgage paper hand over fist because they know its guaranteed by the government. Spreads would have narrowed significantly if the bond market bought it. Instead we are back to the highs of March! Mortgage rates now sit close to 7%!

This is a very interesting development and one that I did not expect. If the bond market continues to push rates higher than its lights out for the housing market and all of the garbage paper that sits on Wall St's books.

Be very very afraid folks. This isn't going to be pretty.

Tuesday, August 12, 2008


Good evening!

Today was an interesting day in the markets. We had another triple digit move today on the DOW today. Stocks quietly dropped about 140 points. It seems like anything under a 200 point move almost seems like a flat day the way the markets have been trading lately doesn't it?

The market badly wants to move higher as the dollar strengthens, commodities drop, and Europe starts to falter. This bullish sentiment is further fueled by the idea that the US will be the first country to recover from the global slowdown.

As a result, the bottom callers have been screaming that we have seen the market lows based on these data points.

As the bulls were reminded today, there is one big problem that refuses to die and continues to put a drag on the markets: Housing! The bursting housing bubble refuses to dissapear no matter how much the bulls try to put it behind them! Its like that little dog that refuses to let go of your pant leg no matter how hard you shake.

The news on the housing front was frightening today. Bloomberg reported that 1/3 of the buyers that bought homes within the last five years now owe more on their loan than their house is worth:

"Aug. 12 (Bloomberg) -- Almost one-third of U.S. homeowners who bought in the last five years now owe more on their mortgages than their properties are worth, according to, an Internet provider of home valuations.

Second-quarter home prices fell 9.9 percent from a year earlier, giving 29 percent of owners negative equity, said Zillow, the Seattle-based service that offers values for more than 80 million homes. For those who bought at the 2006 peak of the housing market, 45 percent are now underwater, Zillow said.

``For homeowners who need to sell, this is a gravely serious situation,'' Humphries said in an interview. ``It can also be harmful to communities where the number of unsold homes adds more to inventory and puts downward pressure on prices.''

The highest percentages of homeowners with negative equity were located in California. In four of the state's metropolitan areas -- Stockton, Modesto, Merced and Vallejo-Fairfield -- the number of homeowners whose mortgage debts exceeded the values of their properties topped 90 percent, Zillow said."

Quick Take:

I thought housing prices always go up? Ha! Obviously this is a nightmare scenario for anyone trying to sell a home. Very few homeowners have the cash to cover a short sale. This will eventually increase the number of foreclosures as buyers run out of options when they have to move or can't afford to pay the mortgage.

This will continue to weigh heavily on the financial stocks. They got creamed today by the way.


This is the biggest problem that the bulls face. The news today provided more evidence that this credit collapse is spreading into all asset types as the debt bubble bursts. Prime loans are even starting to become affected. From CNN:

"The next wave of mortgage defaults
More borrowers with good credit are defaulting on their home loans, and that's going to make it even harder for the staggering housing market to recover.

NEW YORK ( ) -- Prime mortgages are starting to default at disturbingly high rates - a development that threatens to slow any potential housing recovery.

The delinquency rate for prime mortgages worth less than $417,000 was 2.44% in May, compared with 1.38% a year earlier, according to LoanPerformance, a unit of First American (FAF, Fortune 500) CoreLogic that compiles and analyzes residential mortgage statistics.

Delinquencies jumped even more for prime loans of more than $417,000, so-called jumbo loans. They rose to 4.03% of outstanding loans in May, compared with 1.11% a year earlier.

And prime loans issued in 2007 are performing the worst of all, failing at a rate nearly triple that of prime loans issued in 2006, according to LoanPerformance.

"The extent of how bad these loans are doing is very troubling," said Pat Newport, real estate economist with Global Insight, a forecasting firm.

Washington Mutual (WM, Fortune 500) CEO Kerry Killinger said last month that the bank's prime loan delinquencies are on the rise. As of June 30, 2.19% of the prime loans issued by WaMu in 2007 were already delinquent, compared with 1.40% of prime loans issued in 2005.
Also last month, JP Morgan Chase (JPM, Fortune 500) CEO Jaime Dimon called prime mortgage performance "terrible" and suggested that losses connected to prime may triple. For the second quarter, the bank reported net charges of $104 million for prime rate delinquencies, more than double the $50 million recorded three months earlier."

Further Evidence:

The contagion into prime loans isn't the only area of contagion as seen here from Bloomberg:

"Aug. 12 (Bloomberg) -- Banks' losses from the U.S. subprime crisis and the ensuing credit crunch crossed the $500 billion mark as writedowns spread to more asset types.

The writedowns and credit losses at more than 100 of the world's biggest banks and securities firms rose after UBS AG reported second-quarter earnings today, which included $6 billion of charges on subprime-related assets.

``It just keeps spreading from one asset to another, so it's hard to know when these writedowns will stop,'' said Makeem Asif, an analyst at KBC Financial Products in London. ``The U.S. economy needs to stabilize first. But even then, Europe could lag and recover later. There's still a lot more downside.''

Banks and brokers have raised $353 billion of capital to cope with the writedowns, according to data compiled by Bloomberg. The gap between losses and capital infusions, which now stands at $148 billion, has regularly narrowed to about $80 billion as capital raising follows writedown announcements."

Final Take:

The evidence of contagion is becoming overwhelming. The data on prime loans is flat out frightening. Notice that the delinquency rates on loans over $417,000 were almost double the rate of homes under $417,000.

The jumbo prime loans are supposed to be the loans of the rich and were considered to be safe. Now the data is showing that they have almost double the delinquency rates of the average middle income "subprime" homebuyer!

I have one question to ask. If the wealthy can't pay off their loans than who in the hell can? The answer is these jumbo loan buyers made the same stupid mistakes that the subprime low income buyers did. They bought houses that they couldn't afford!!

It appears that wealthy were even bigger morons when it came down to buying houses than their "subprime" counterparts based on these delinquency rates.

This is why contagion is setting in folks. The rich and the poor are both in deep trouble. Houses for the wealthy became just as unaffordable as houses for the middle class.

As a result, this economic mess is spreading into all types of loans. Cars, boats, student loans, you name it. The worst part about this is its coming at a time when the banks can least afford it.

This is going to force the banks to tighten their lending standards and raise interest rates which will push housing prices down even further.

Bottom Line:

I wouldn't touch financials with a ten foot pole here. The total losses from this debacle are expected to be about $2 trillion dollars according to economists like Dr. Roubini. The financials have currently written down about $500 billion.

I am no math major but this tells me we are about 25% through the writedowns that need to be taken by the financials.

The market woke up today and realized that this credit crisis is going strong. Waves of bad news from JP Morgan, Goldman, and UBS forced the markets to take a reality check.

The bulls will continue to ignore this glaring problem as they try to shake that pesky little dog off their leg.

Smart investors will realize that this little dog bites like a Tyrannosaurus Rex.

Monday, August 11, 2008

The "Speculator" Well has run Dry

A few random thoughts today:

I continue to be fascinated by the "schitzo" market that we now see before our very eyes. The markets in the new millennium are definitely different than the markets from previous century.

I blame a lot of this on the "speculator" money that has taken over a lot of the price action that is seen in the markets. Hedge Fund growth has soared and the larger ones now rival some of the investment banks in terms of assets. E-trade signs up 3000 new "daytraders" a day which just enhances the speculator froth.

Computer "quants" continue to grow and add to the confusion as they trade billions of dollars based on price movements in the stock markets on a day to day basis. Heck, its gotten to the point now where the quants seem to be making trades based on minute to minute price action.

So where does this leave the long term investor?

LOST! Its gotten to the point where its hard to make any long term calls because the stock movements are so violent on a day to day basis. Financials can rise or fall 10% each day depending on the news.

This makes it very difficult to buy stocks as a long term investor. If you buy on the wrong day, you may find yourself 10-20% underwater in a matter of days if bad news hits the markets. On the flip side, bear market rallies can toast the shorts during the same time frame.

So how did we get here?

Speculation, greed, and bubbles. Its pretty simple, when you have 25 straight years of prosperity(minus our little tech mess) and consumer growth, you forget the value of a dollar. As a result, you throw money around like candy thinking that you can always make more if you make a mistake.

We were quickly able to recover from the tech mess by simply blowing up the housing bubble. This was an easy recovery because the banks were very solvent and unemployment stayed at fairly low levels. When the Fed dropped rates to almost zero and held them there, the banks took the money out of their coffers and turned into Santa Clause.

If you had a pulse and job you were qualified for a loan! All of this easy access to money fueled the "speculation" mentality that now dominates our society. As a result, when the bubbles were allowed to form like housing via Fed policy, Wall St. and the speculators went hog wild buying and selling homes like they were baseball cards.

The mania of easy money spread into all parts of our economy. It gave private finance the ability to buy a huge car company like Chrysler. Homeowners borrowed against their home equity and bought Hummers and went on dream vacations. Americans stopped saving because they assumed their "home" equity was real money. Life was good until the music suddenly stopped.

So where are we now?

This is what the speculators are now asking themselves now that commodities are in a free fall. This was the last bubble left from the bull market that began in 2003 IMO. The bubble days are over folks. The easy money is gone, the banks are broke and so are many Americans.

The specs are now attempting to rotate into stocks. This move up has been moderatley effective so far but it will fail in the long run. Why? Because the economy sucks!!! Unemployment is creeping up towards 6%, the consumer has disappeared, and housing prices are free falling.

On top of this, the financials are broke and more importantly have lost their ability to make money going forward. Their business models are completely broken. Almost all of their profit was based on housing which is now dead.

So I ask one final question

When reality sets in and poor earnings are unable to prop up stock prices, where do the speculators go next?

My answer is nowhere. You must have liquidity in the market in order to raise the value of stocks or assets. Something has to have value or it will eventually fall in price. Right now there is very little value in stocks as we head into a consumer led recession.

When the speculator is forced to rotate into another sector and they realize there is nowhere else to go is when the markets are going take a big nosedive.

The rotation from commodities to stocks trade is working for now. What the speculators don't realize is they have rotated back into stocks that are littered with garbage, potential shoe drops, and reduced earnings power.

I am amazed at the piece of crap companies that have doubled during this rotation. MBIA, Ambac are up 100-300%. Hell even Washington Mutual is up 20% since this absurd rally started. Based on what? Do we now all of the sudden pay more for zero earnings growth? Is the stock market now valued based on how much money a company loses versus what it earned? This is insane!

Bottom Line:

History shows that stocks always end up being valued on earnings. Expect nothing different this time other than it might take a little longer.

I say this because the speculators have a lot of money to piss away after having so many years of easy money.

Chasing stocks like Ambac and MBIA tells you that the speculative money is desperate and cannot find any value in the market.

As the speculators run out of investment vehicles to chase, the market should get back to historical norms.

Until then, realize that there are major dislocations in the market. Stocks historically have been most vulnerable when these dislocations occur.