The Credit Spreads say it ALL

Good Afternoon!

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

First, lets take a look at AAA debt spreads:

Quick Take:

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

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

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

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

Lets take a look at "Garbage debt" spreads:

Final Take:

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

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

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

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

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

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

Bottom Line:

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

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

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

So far, its not looking good.

The Treasury Bailout Fiasco

Good Afternoon Folks!

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

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

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

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

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

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

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

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

Quick Take:

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

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

Hank's Bailout Spree Continues

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

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

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

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

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

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

Final Take:

R.I.P. National City.

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

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

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

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

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

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

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

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

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

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

Bottom Line:

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

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

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

Made a Few Trades Today

Be careful today folks.(11:29AM)

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

I think we could flush today or Monday.

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

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

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

The Debt Bubble Fantasy

Good Evening Everyone!

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

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

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

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

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

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

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

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

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

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

The debt bubble dream world

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

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

My Take:

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

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

Bottom Line:

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

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

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

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

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

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

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

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

Stay Tuned!

Vacation Time!

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

Have a great start to the week!

Jeff

Hey Wall St: Give back Your Bubble Bonuses

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

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





On a political note

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

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

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

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

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

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

Bottom Line

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