Saturday, October 11, 2008

Its Time to Nationalize the US Banks

Good Afternoon Everyone!

I hope everybody is having a great weekend. I must say its a sad day when I see socialism as the only way to save our financial system.

A nationalization of our banking system is the only way to get out of this mess IMO.. After watching Goldman Sachs and Morgan Stanley tumble on Friday. I came to the conclusion that if they aren't propped up with direct capital, they will follow the path taken by Lehman Brothers. If we allow this to happen, I believe the financial system is toast.

Drastic steps must be taken in order to prevent this from happening. I see nationalization as the only solution. Buying bad assets doesn't solve the problem because you will be left with zombie banks that still don't want to lend.

There was a great article in Bloomberg today on this.

"Oct. 11 (Bloomberg) -- Morgan Stanley and Goldman Sachs Group Inc., the biggest independent U.S. investment banks, may reap cash infusions as part of Treasury Secretary Henry Paulson's plan to buy stakes in financial institutions, investors said.

Paulson, in a statement yesterday, said the U.S. will purchase equity in a ``broad array'' of banks and other financial firms to restore market stability and ensure economic growth. The Treasury is working on a ``standardized program that is open to a broad array of financial institutions,'' he said.

Morgan Stanley Chief Executive Officer John Mack, 63, and Goldman Sachs CEO Lloyd Blankfein, 54, failed to regain investor confidence by converting their firms into bank holding companies last month and raising new capital from private investors. Morgan Stanley's stock dropped almost 60 percent this week, while Goldman's fell 29 percent."

Its obvious from the article that even the pigmen are beginning to understand that this is the only solution:

``Based on the fact that they're allegedly commercial banks now and are moving that way, I think they're likely to get protection,'' said Benjamin Wallace, an analyst at Grimes & Co. at Westborough, Massachusetts, which manages about $700 million. ``Whatever solution they come up with for the banking industry as a whole will apply to them, because they're no longer special.''

``The government can go a long way by buying a stake in Morgan Stanley,'' said David Killian, a portfolio manager at Valley Forge Advisors LLC, which oversees $650 million, including Morgan Stanley shares and bonds. ``Paulson has to follow through on his promises; he and Bernanke went to Congress and said `we need this TARP facility to protect against ongoing systemic risk' and here we go, put your money where your mouth is.''

Egan-Jones Ratings Co. said Morgan Stanley probably needs to raise $60 billion in new equity to reassure customers and investors. The investment bank has about $900 billion of assets and an equity market value of $10 billion. Mark Lake, a Morgan Stanley spokesman, declined to comment.

``The analogy is a snowball rolling down a mountain; the mass needed to stop that negative momentum increases as that snowball picks up speed and size,'' Egan-Jones's Sean Egan said in a phone interview yesterday. ``Perception trumps reality. They need a massive injection to stop the slide.''

The government can't allow financial companies to continue collapsing, Paul Krugman, an economics professor at Princeton University, said in an Oct. 9 interview.

`Big Mistake'

``It's really hard to put humpty-dumpty back together again after those things fail,'' Krugman said. ``The failure to rescue Lehman it turns out was a really big mistake.''

My Take:

I don't see any other way out of this crisis. Unlike our counterparts in Europe, The New York Times reported today that the short term debt of the US banks is only 15% of GDP. This makes it doable if the government can talk the banks into being nationalized.

Some of the European countries have bank debt that totals 3.5 x total GDP. Mathmatically, this is much less doable for Europe's banks. IMO Europe's crisis is much worse than ours. What makes nationalization here even more critical is the fact that if the European banks fail, they most likely take our banks down as well. This makes it even more imperative for the US to take ownership in the banks. We need to make our banking system as liquid as possible to make it through this mess.

Now are their risks here? Of course! Inflation will rise dramaticallyas the government spends like a rock star. The government may realize they don't have the resources to do anything. Even worse, the USA may end up defaulting on its own debt in the process as we head into a severe US recession which will most assuredly pummel the banks with another round of severe losses.

On the positive side, if you regulate all the banks to a standardized 12-1 capital ratio, the $700 billion bailout turns into a heck of a lot more money if you directly inject it into the banks.

Banks could lend out 12 times the capital they received which would result in more than $8 trillion of additional lending capacity if the Treasury spent the bailout on capital injections. That's a lot of money folks. Does it solve all of our problems? No, but its a nice start. It would go a long way towards loosening up the credit market lockup.

Banks would be much more likely to lend if they have huge injections in capital along with the backing of the US government.

Now, getting the pigmen to agree to be nationalized will be a battle. The bankers will be extremely reluctant to accept terms that include watching their stock price go to zero and being forced to share profits with the US government.

However, if they care anything at all about this country, they will do the right thing and accept the terms. After all, they created this mess!

Bottom Line:

I don't see any other solution folks. I am also not sure if this will work, but its the only shot we have in my opinion. After seeing the huge losses in the auction of CDS Lehman swaps last week, its apparent to me that some of these banks are too big to fail.

I am ready to roll the dice and give it a shot. If it worked for Sweden, why can't it work for us?

Friday, October 10, 2008

Commodity Castration/Things to Watch

Hello everyone!

I just wanted to send out a quick update to everyone as we head into the close. Stay away from commodities short term.

Hedge funds are being forced to liquidate as they continue to get margin calls from the banks and redemption requests from investors. Gold has dropped 5%. The fundamentals for gold may be strong, but hedge funds need money so stay the hell away until this process is over!

Here is a gold update from Bloomberg. Gold is now down $45 a share. this has nothing to do with valuations. The reason the hedge funds are selling good stocks and commodities is because there is a lot of stuff on their books that has no bid right now. Securities like AAA subprime sandwiches have no value so the hedgies can't us them to raise cash.

This is also spreading into stocks in the equity markets. Wait until this process is over and look for a bottoming pattern before jumping back into commodities. This is a good thing because its going to create a great entry point on commodities like oil and gold when the hedgies are done liquidating.

Oil is another great example of this. It has dropped almost $10 on the day. These are incredible moves. Be patient before jumping into these. I expect that these margin calls are close to being over but today is not the day to try and find a bottom!

Don't forget that we also have a severe deflation threat to commodities as well.

Expect the close to be violent either higher or lower from here. The G-7 supposedly cannot come to an agreement on how to solve the financial crisis. This is creating some fear on the floor. Italy has supposedly not been very supportive.

This could spark another wave of selling Monday if the world cannot come to some type of agreement on global intervention that can relieve the credit markets.

Best wishes to all, and have a great weekend.

The Stock Market Going Forward

Good Morning Everyone!

I have a little time this morning so I thought I would say hello. What an opening this morning! I expected a bounce today after the futures dropped to -411 on the DOW. This set us up for a classic snapback rally. This is exactly how it played out. We dropped 680 points at the open and then rallied 500 points in a matter of minutes as buyers couldn't resist the oversold technicals.

This brings me to my point today. Technically we are oversold, but are we oversold historically?

Lets take a look at the DOW since 1929

My Take:

This chart looks at the DOW since 1929 up until Oct. 9th today. Notice the huge run up since 1982. We now sit at 8000 on the DOW, so you need to adjust the graph above.

I think we all need to ask ourselves long term this question: Are stocks really oversold long term at these levels? My answer is I don't think so. The DOW 8000 level is a very important one.

In 1995, the DOW actually sat at only 4000 before the tech bubble started getting started. We hit 8000 on the DOW as the tech bubble really got rolling before peaking at around 10,500. The tech bubble then burst. This combined with 9/11 took the DOW back down to 8000 which is right around where we sit now.

Greenspan then proceeded to drop rates to 1% for an exceeded period of time which triggered the housing bubble. In 2003, as the housing bubble started to roll, the banking regulations became very lax. Investment banks were allowed to leverage up to 30 or 40-1 and lending standards began to vanish. Subprime and Alt-A loans began to soar in popularity, and before you knew it, an $8/hour grocery clerk was able to qualify for a $350,000 house!

This allowed to the DOW to soar to 14,000 as leveraged investment banks were able to lend $40 on every $1 dollar of capital. Profits soared as housing prices went through the roof, and the DOW followed.

Many Americans started making large money simply by flipping homes. It also flowed into other parts of the economy. Mortgage reps, realtors, and banks also shared in the profits. So did retail stores like Lowes, Home Depot, and furniture stores. Commercial properties flourished as prosperity was seen everywhere.

As home equity soared due to rising home prices, Americans then began started tapping into their housing equity and proceeded so spend at unprecedented levels. I-pods, plasma TV's, and Hummers all became necessities for the average Joe versus being a luxury. This spending allowed to economy to continue to flourish.

The Hangover

Everything was great until something inevitable happened. Housing stopped going up in value. Once this started, the tools that were used via financial innovation to take us to new highs started working in reverse. The rest is history.

As investors, we need to start to asking ourselves where the DOW will trade moving forward. One thing is for sure, most of the tools that took us from 4000 up to 14,000 are now gone.

The investment banking model is history. Banks will be only be allowed to leverage up to the standard 12-1 against capital vs. 40-1 going forward. Lending standards have been severely tightened. Credit default swaps will become heavily regulated. The ratings agencies will be gutted and heavily regulated. Venture capital that fuels innovatuion has vanished as fast as the balance sheets of the banks. This will come back, but at much diminished levels.

In this newly regulated world, you need to ask yourself this question: how much money can companies make in this new environment? If companies can't borrow like they used to because the banks can only lend at 12-1, their profits will suffer. Financials will never make the money that they did because their ability to lend will be at much lower levels

Because venture capital isn't flowing, start ups will be fewer and far between. This was the key market that got tech going.

Another thing to consider is if the DOW ends up plunging 50% or more from the highs, how long will it take for the average investor to ever trust the market again. How does the market move higher without the retail investor?

Bottom Line:

My conclusion here is not complete, but I believe the DOW recovery will take years if not decades. The DOW will trade much closer to 4000 than 14,000 IMO because the instruments that took us to the highs are gone.

When I look at this graph, it tells me that the growth since 1982 is "irrationaly exuberent" and does not represent how the DOW has grown historically. With deep regulation and the disappearance of "financial innovation", things will look much different for investors going forward.

DOW 6000 seems much more realistic to me than DOW 14,000.

There is one thing history has shown us, know matter how prosperous or bubbly things become, we always revert to the mean. I see no reason why this time its different.

The DOW has now retraced back down almost 5%. Sell the rallies! What a market.

Thursday, October 9, 2008

There is Nowhere to Hide

Good evening folks

I am starting to feel like Bill Murray in the movie Ground Hog Day. Here is a shocker: The markets were down again today! I apologize for getting these posts up so late. It takes a long time to absorb all of the information out there.

What can I say folks, this is getting ridiculous. The speed of this crash has been breathtaking. We are witnessing history. We will be telling our grandchildren about the great crash of 2008. Whats scary is everything is breaking down.

There is nowhere to hide in this market. Commodities are being dragged outside and shot. Gold even dropped. I guess you can hide in stocks if you like watching your 401k drop to 0!

The big trigger today was the GM news:

"Oct. 9 (Bloomberg) -- General Motors Corp. tumbled to its lowest in New York trading in 58 years and Ford Motor Co. fell to almost a 26-year low as the U.S. auto-sales outlook worsened and Standard & Poor's said it may cut their debt deeper into junk.

Market researcher J.D. Power & Associates today estimated that car and light-truck sales will fall to 13.6 million this year and 13.2 million in 2009. The total was 16.1 million last year and hasn't been as low as the 2009 projection since 1992.

``These companies certainly wouldn't choose to file bankruptcy but they could find themselves at a point where their liquidity reached the point where they no longer could run their businesses,'' S&P analyst Robert Schulz said on Bloomberg Television. ``We think they could be pushed into that.''

Quick take:

Its very possible that GM is gone by the end of next week. If you had bought this stock in 1929 and held until today, you would be even on your investment. GM now sits at $4.76 a share. What can I say? Amazing.

Credit Crash

When they write the history books, this crash will be blamed on lack of credit. Take a look at this article from Bloomberg:

"Libor, a gauge of bank funding costs, continued to rise even after Spain and the U.K. acted to strengthen their banking systems and the U.S. Congress approved a $700 billion financial bailout. Even the Fed's decision Monday to double emergency cash auctions failed to unlock short-term lending. The European Central Bank today offered banks as much cash as they need for six days at its benchmark rate of 3.75 percent, bringing forward new measures to soothe money markets.

``You get to a situation where fear and panic take hold,'' said Peter Dixon, a London-based economist at Commerzbank AG, Germany's second-biggest bank. ``This is the eye of the storm.''

Mysterious Acronym

Still, the jargony acronym Libor mystifies most people. While U.S. presidential candidates John McCain and Barack Obama have sparred over the economy and the mortgage crisis in America, neither has braved a public discussion of Libor.

Banks aren't lending because they're worried any borrower may become the next victim and they'll be left with losses as the credit freeze deepens.

Late on Oct. 7, as U.S. stock indexes tumbled to their biggest annual declines since 1937, Axa Investment Managers, a unit of Paris-based Axa SA, sent out an updated list of acceptable counterparties to about 50 of the firm's most senior investors and traders.

The memo, obtained by Bloomberg News, barred all new trading with Royal Bank of Scotland Group Plc and ABN Amro Holding NV, even if the dealings were backed by collateral."

My Take:

Lending is all based on trust and confidence. Banks must feel confident that they will be paid back on a loan. As you can see above, trust and confidence have been shattered. The liquidity that's being thrown to them by the central banks has done nothing.

The banks are simply hoarding any funds that become available to them. Its hard to lend to anyone when you are insolvent, especially when you believe the person you are lending too may be insolvent too!

There is only one answer to this folks, and that's transparency. The smoke and mirror game must be stopped before we end up in a depression. What scares me is it might already be too late to avoid it.

If spreads on borrowing stay this expensive, companies are going to start blowing up left and right. Many corporations must have access to commercial lending in order to operate. If this credit market remains locked for another week, you are going to start hearing GM type stories on a daily basis. Millions will lose their jobs as companies are forced to shut down due to lack of financing.


This is the only long term solution to this crisis in confidence. We must force every bank to open up their balance sheets immediately and face the music.

I hate to say it, but I also believe that its time that we must temporarily nationalize our banking system. Things are that desperate folks. I am as capitalistic as they come, but ladies and gentleman: This is ridiculous! Drastic times call for drastic measures.

Its quite obvious that 3/4 of the banks drove themselves right out of business by doing loans that never should have. Its time to start cleaning up this mess Sweden style.

We need to take equity stakes in all of the banks and open up their balance sheets. The ones that are beyond repair need to fail immediately. The ones that are worth saving must be recapitalized, and the taxpayer should get an equity stake and share in future profits as compensation for having been forced to bail them out.

When the taxpayer is fully compensated years down the road, we can then privatize them and move on from this disaster.

I do not care for the capital injections that the Treasury is talking about doing if it doesn't create transparency. If they inject the money without taking ownership and continue to play smoke and mirrors, I don't believe it will work. I am glad to see that they are starting to head in this direction.

Any injections must include equity stakes. This will dilute the fiancials stock prices, but its better than doing nothing and watching most of them go to zero!

Lets pray Ben and Hank get it right.

Bottom Line:

Its time for the bankers to admit failure and pay the piper. Pigman Paulson must do the right thing and stop the banking shenanigans before we all end up unemployed and sitting in soup lines.

Policy mistakes are usually what sends countries into horrible depressions. So far, NOTHING Ben and Hank have done has worked. NOTHING!

We need change or this country may financially collapse! I am serious. They better retool their bailout plan. The bailout money should be spent on creating complete transparency versus buying back AAA rated pieces of garbage.

The country has lost complete faith and trust in the financial system. Don't believe me? Here is the proof:

"Oct. 9 (Bloomberg) -- Investors pulled a record $52.1 billion from U.S.-managed stock and bond mutual funds in the past week, seeking the safety of government-insured bank deposits as the financial crisis worsened.

Shareholders took $43.3 billion from stock funds and $8.8 billion from bond funds in the week ended Oct. 8, according to data compiled by TrimTabs Investment Research in Sausalito, California. The exodus followed $72.3 billion of outflows in September, the most in a single month. Investors deposited $185.5 billion into bank accounts last month through Sept. 22, TrimTabs said, citing U.S. Federal Reserve data.

``People are scared,'' Conrad Gann, TrimTabs' chief operating officer, said in an interview. ``This market is different from what we've seen before."

Many Americans have lost almost half of their life savings in less than one year! Many baby boomers are now unable to retire. Lives are being ruined! We are weeks away from a social uprising! Drastic actions must be taken immediatly!

The government needs to wake the hell up before its too late.

Wednesday, October 8, 2008

The Bond Market Awakens!

Good evening everyone.

What a crazy day. The bears and the bulls duked it out until the close. The bears won the fight by knockout in the last round.

I don't want to talk about the stocks tonight folks. Something terrifying happened today in the credit markets, and I don't think I am going to sleep well tonight. There was a major event in the bond market today.

This is complicated, but I will try to simplify it for everyone. I have often warned of a potential bond market dislocation if the government continued to spend like drunken sailor. It appears that as of today, the bond market finally woke up and told the government "enough already!".

The chart on the 10-year says it all:

Here is the news from Bloomberg:

"Oct. 8 (Bloomberg) -- U.S. bonds fell after the Treasury Department sold $66 billion in debt to ease ``severe dislocations'' prompted by shortages of government securities amid the turmoil in global financial markets.

Two-year note yields climbed from seven-month lows after the Treasury's emergency reopening of $20 billion in 10-year notes in two auctions. It also sold $40 billion in so-called cash management bills and $6 billion in inflation-indexed debt. Failures to deliver or receive Treasuries in the $7 trillion-a- day market for borrowing and lending securities surged to a record in the week ended Sept. 24 as investors sought the safety of U.S. government debt.

Treasury sold $20 billion in 10-year notes in emergency auctions and will issue another $20 billion in the notes tomorrow. Today's initial sale of debt maturing May 2015 yielded 3.31 percent, 40 basis points higher than the yield on the outstanding security originally issued in May 2005. The other sales also drew higher yields than they would have had the notes sold at the pre-auction market price.

Costly Auctions

Because of those differences, which are known to traders as tails, the government lost $345 million in potential proceeds, according to an analysis by Credit Suisse Securities USA LLC. Strategists and investors said the government received lower prices because it rushed to market.

``We didn't have a lot of warning,'' said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. ``I understand what they were trying to do -- those bonds have been in short supply to deliver and have been failing in repo so they wanted to boost the supply. It was a nice idea in theory but in practice it didn't go off too well.''

My Take:

Alright lets try to put this story together. The government basically "out of the blue" decided to sell treasuries via an "emergency" auction. The Fed explained that this was done because there was not enough supply of treasuries to satisfy demand the week of Sept. 24th according to their data.

How can I say this? Uhhh, the auction didn't go so well. When the treasuries went up for sale, the government was forced to raise the yields 40 basis points in order to complete the sale. Folks, This 40 point "tail" is massive. One trader explained that this is one of the highest tails they have ever seen.

Now I have a question: If this auction was done in order to satisfy the demand from a week ago, why did they have to "bend over" and raise yields to the moon in a crashing market in order to get the paper sold? I don't buy it and either do the bond traders.

Many bond traders believe this auction was done because the Fed is running short of cash as they continue to drop money out of helicopters via the bailout and TAF funds. There is also the belief that this money will be used by the Fed to loosen up the commercial paper market which is now locked as banks continue to refuse to lend to one another.

The fact that yields had to rise on order to sell the paper is an eye opener. Usually there are plenty of buyers for treasuries in a falling market. This is why the yields on treasuries always drop when you see a big dump in the stock market. The fact that yields had to go through the roof in order to sell the emergency paper tells you that there was very little demand for the paper.

Now yields themsleves are still low, but what you need to focus on is the fact that yields had to RISE sharply in order to sell treasuries on a day where yields should have been DROPPING as investors flew to the safety of treasuries. The appetite for treasuries should have been very strong today. The fact that there was no demand is troubling.

If yields go through the roof via a buyers strike, the housing market is TOAST. You can't borrow much money to buy a house if interest rates are at 10%!

The CNBC Spin

Bubblevision(CNBC) and the pigmen reported today that this rise in yield was a "good" sign. Their spin is that this rise in yield was a positive because it tells you that investors are getting out of the safety of treasuries and are placing money back into the credit markets. They concluded that this willingness to take "risk" should be seen as a bullish sign for the markets.

This is the biggest load of crap I have ever heard. The bottom line is the government had no demand for the paper.

Lets say CNBC was right and everyone was ready to pour out of treasuries and fly back into the commercial paper market? We still would be screwed because there would then be no buyers for treasuries because their money would all be in the commercial markets. So ask yourself this question: How high would treasuries have to be priced then in order to sell it if everyone flocked to the commercial paper market to celebrate the new bull market? 6%? 8%?

That would work out just dandy for the housing market wouldn't it? NOT! CNBC's bullish scenario would basically destroy the housing market because mortgage rates would go through the roof due to the higher yields on treasuries.

Bottom Line

This was a startling development today. This could signal that a bond market dislocation could be days away. My hedging shorts are going back up tomorrow based on this news. I initially thought the volatility we saw today was a sign of searching for a temporary bottom that would produce a bounce.

The fact that the bond market dissed the Fed has completely changed my short term thesis. Remember folks, if we can't sell treasuries, we can't finance our debt and the game is over!

There are many theories as to why the bond market finally woke up and lowered their appetite for treasuries. Many foreign countries are financially imploding right now. The Nikkei dropped 9% last night. Perhaps foreign countries have decided it might be better to keep their money at home to fight an internal collapse versus tying up their capital up in our treasuries.

Also, perhaps foreign countries have no desire to buy our treasuries now that they will be getting back cash via the TARP(housing bailout) for all of the subprime sandwiches they were suckered into buying.

There are many reasons why the auction had a lack of buyers today forcing yields to rise. I think its a combination of all of these factors. The massive government spending is the biggest issue IMO.

I have said it before. The bond market is almost never wrong and almost always gets its way. They sent a strong signal to the government today. STOP SPENDING or else!

Lets see how Hank and Ben react to their strong message. If they continue to ignore them and keep selling treasuries, we could have 10% mortgage rates sooner than you think. The bond vigilantes did the same thing when Clinton tried to spend like a drunken sailor in the early 90's. The government backed off and spending packages like national healthcare disappeared.

Pay close attention to the bond market. If the government is forced to reign in spending, the bailouts and the liquidity will for the most part be gone. If this happens, the economy goes down the drain and so does the housing market.

The only thing left would be a nasty consumer led recession or worse.

Tuesday, October 7, 2008


Good evening!

Thats going to leave a mark! The market is starting to look like a waterfall. You need to go back to 1937 to see a yeear this bad:

"Oct. 7 (Bloomberg) -- U.S. stocks fell, sending the Standard & Poor's 500 Index below 1,000 for the first time since 2003, on speculation banks and real-estate companies are running short of money as the credit crisis worsens.

Bank of America Corp. tumbled 26 percent after cutting its dividend in half and saying it plans to sell $10 billion in common stock to brace for a recession. Morgan Stanley, KeyCorp and JPMorgan Chase & Co. slid more than 10 percent as investors shrugged off signs the Federal Reserve will reduce interest rates. General Growth Properties Inc., a mall owner, plunged 42 percent on concern it won't be able to repay debt.

The S&P 500 slid 60.66 points, or 5.7 percent, to 996.23, extending its 2008 tumble to 32 percent in the market's worst yearly slump since 1937. The Dow Jones Industrial Average dropped 508.39, or 5.1 percent, to 9,447.11, giving it a 29 percent retreat in 2008 that would also be the worst in 71 years. The Nasdaq Composite Index lost 5.8 percent to 1,754.88.

``We've approached the edge of the cliff,'' Leon Cooperman, 65, who manages $6 billion at hedge fund Omega Advisors Inc., said at the Value Investing Congress in New York. ``Do we go over the cliff or begin to recede? History says we recede, but there's no guarantee. This is the most difficult financial environment I've lived through.''

My Take:

Folks, there really isn't much to analyze here. We are watching a combination of fear and lack of trust take over in the market, sending it into a free fall. The fact that the market ignored Bernanke's radical sticksaves was surprising to me. This is something important something that I will take notice of. Maybe the public is starting to tire of Bennie's bailouts?

I take notice of this because the market has responded very favorably to every large intervention other than the housing "bailout". The market completely ignored both the article that I posted above, and a hint that they were ready to cut rates.

You need to take this into account moving forward with your investing strategy. It tells me that fear now outweighs intervention in the market. The sticksaves may no longer be as effective as a result. In fact, they may start to have a negative effect as the public starts to lose confidence in the government as the market continues tio drop. Perhaps the next sticksave might even cause a panic? This is what happens when you intervene and things get WORSE! The Fed may be instilling fear into the marketplace versus confidence.

"The Fed will save us" strategy is a fantasy. I have spoken about this for months!. The Fed loves to talk about their "infinite" balance sheet. They promise us everyday that they will do whatever is necessary to keep the economy going.

This simply is a pipe dream folks. The Fed can only spend so much money before the bond market has a fit and raises yields on treasuries as we watch inflation soar. The Fed doesn't have "infinite" money. If it did then the Fed would have used it by now and gotten us out of this mess.

We all know they can't do this because you need to print money in order to do so. Printing money causes hyperinflation which is an end game. Ben knows he can't do this or its over.

They also risk losing their foreign buyers of treasuries if they spend too much. China may decide to stop buying treasuries if the Fed starts spending like a drunken sailor. They may ask: Why should we buy the debt of a country that's spending themselves into oblivion?

Don't believe the hype that the Fed can save the day with their balance sheet. Lets all hope they use it in a way that allows us to navigate through this financial catastrophe without heading into a depression.

Bottom Line:

I am speechless about the selling today. It reminded me a lot of the relentless selling during the tech wreck. Some great companies are being beaten senseless for no reason other than people are scared and don't trust the market. This will create great buying opportunities down the road, but now is not the time to think about this.

Stay mainly in cash folks. Get out of the way! I know its boring, but look at the bright side of this strategy. If you have stayed mainly in cash this year, you have saved 1/3 of your nest egg. If you followed the "Bubblevision" strategy and began this year with $450k invested fully in the market, you would now be receiving your September 401k statement revealing that your nest egg is now only 300k. Ouch!

On the other hand, if you went to fixed income with the same 450k at the beginning of the year and earned 3 percent, you would have about 470k. Not bad eh? One thing is for sure! You would be kicking Jim Cramer's charitable trusts ass this year if you followed this strategy.

If you threw on a few shorts at the beginning of the year you would be up even more!

Short term, its very difficult to predict where we go from here. When fear has taken over the market, you need to let it run its course until the selling has capitulated. Was today the day? Maybe.

I reduced my short positions this morning after a week of severe selling. Unfortunately I missed most of todays selloff! This doesn't mean that I think the selling is over as of today. I just locked in some profits. We appear to be severely oversold but I said that yesterday so who knows! The one thing I do know is the market never heads straight down. Only Lehman's checkbook does that!

I plan on adding shorts on any significant bounce. I think we will see a second wave of selling down the road as we settle into a severe second half recession that will destroy earnings, and it could potentially last throughout all of 2009.

Be careful out there. This bear has some big claws!

Monday, October 6, 2008

We Need Capitulation!

Good evening folks!

What a day today. Talk about a roller coaster. Lets take a look at a chart:

My take:

Whoa! Watching the market today was exhausting. For awhile there when we were down almost 800 it looked like the gate of hell were about to open up. Unfortunately, the DOW rallied back from the lows to settle down 370 points.

This is bad news for the bulls not the bears folks. You would think that the opposite would be true, but not in this type of market. Technicians explain that panicky markets like we find ourselves in right now do not find bottoms until you see capitulation selling on very high volume.

You need a complete washout with investors all running to the exits at once. Many technicians like Art Cashin were very disappointed by the rally on the close today.

Not only did we not capitulate, we sold off on relatively low volume of about 400 million shares. As you can see above, we have already had one day where 600 million shares traded on the DOW in September. The same problem was seen in the other indices like the S&P.

One of the problems that the market has right now is there are very few bids for stocks. No one wants to touch the market right now until things settle down. As a result, the market is vulnerable to violent unpredictable moves based on rumors and speculation/day traders.

The market popped this afternoon based on speculations that a global coordinated rate cut was in the works. Yeah, like that's gonna happen. The countries in the ECB alone can't agree on what do do with rates let alone the whole world. The Fed and the ECB also have two different mandates. The chances of a global rate cut are slim to none IMO.

Bottom Line:

We still aren't trading on fundementals. Expect the volatility to continue to be high with a downward trend until we see a "blood in the streets" selloff thats needed in order to stop the bleeding.

Keep an eye on the financial news. Bernanke and the world leaders are extremely panicked right now. Expect continued intervention into the world markets as they attempt to right the ship. I am keeping my trading to a minimum at these levels because we are both extremely oversold, and highly vulnerable to unpredictable shoe drops and stick saves.

You are pretty much gambling going long or short here IMO. You cannot "invest" in this type of market. Stay on the sidelines until the VIX(fear) drops and the volatility settles down before taking new positions.

I have never seen a market like this ever. It's certainly fascinating to watch!

Stocks Tumble on Global Slowdown Fears

Good Morning Folks

What a start to the week. Stocks have now dropped 350 points which puts the DOW below the famed 10,000 level. To put this in perspective, the DOW was around 10,300 in early 1999. This is now officially a lost decade of investing.

You have gotten a 0% return on equities over the past 10 years. Stocks are not always the place to be folks despite what the pigmen tell you! The dollar cost averaging/stay in the market theory that they love to use can ruin your 401k.

A good financial advisor should be having you focus on preservation of capital. You want to try and preserve the money you have versus focusing on growth and returns.

If stocks drop 30%(which they already have) and you hide in fixed income and grow your money 3%, you are way ahead of the curve! Now its a little late in the game to move everything over now because stocks have dropped significantly. However, moving some money into fixed income would be a prudent move right now IMO. This is a nasty market folks.

This has happened before and bear markets can last a loooong time. Take a look at the most recent long term bear market that started in 1966 and lasted until 1982:

My Take:

As you can see, bear markets can be brutal and last for years. The Nikkei tumbled 4% last night which brought it back to around the 1984 levels. Imagine investing for 24 years in Japan and having zero returns!

Stocks don't always go up, and what we are beginning to learn is the pigmen took huge unwarranted risks to ensure that they did via leverage. This is great when the game is working and we are in a bull market. However, it can be devastating to the market when leverage reverses and your bets in the markets via leverage turn out to be bad ones like the AAA subprime mortgage bets.

When the bets turn bad, the leverage that allowed you to make so much money when the market was moving higher, forces you to take much higher losses as it goes back down.

Leverage can also wipe out a financial system. Too be honest I am afraid too see what the markets look like when all is said and done. We need to start focusing on solutions and stop throwing liquidity into the system. We are wasting hundreds of billions of dollars that will be needed down the line to take care of cleaning up this mess. Who knows, we may need this money to feed people that end up on the street because of this disaster.

Bottom Line:

Continue to play defense. There are a myriad of reasons as to why we are down today. Germany was forced to baikout HRE to the tune of $68 billion, commodities are free falling, and emerging markets have dropped the most in over 20 years.

I believe the biggest reason for the selloff today is psychological. I think Americans have lost confidence in the stock market. 60 Minutes had a great report on the credit crisis and why people should be scared. Quarterly 401k statements will be hitting mailboxes all over the country this week that will show huge losses. Many funds were down 10% in the quarter.

Large selloffs often occur when the masses lose confidence in Wall St. There is only so much pain an investor will endure until he finally tells his broker to sell! This is the biggest threat to stocks in the short term. We all know the fundementals are horrific. The lack of trust and confidence is the name of the game today.

What Wall. St. did is a tragedy. Retirements have been destroyed by their greed. Many baby boomers will now be forced to go back to work This will turn out to be the biggest fraud in American history when its all said and done.

The lawyers are going to have a field day with this. My god, the DOW is now down 550 points. I will be back on later with a recap following the carnage.

Don't be surprised if we are down 1000 points today.

Stay tuned.

Sunday, October 5, 2008

Hank and Ben Missed it

Good afternoon!

Just a little video today. I liked this timeline from CNN that shows how clueless Paulson was over the past year as this crisis developed. How on earth did Congress decide to give this guy $700 billion?