Saturday, December 6, 2008

The Beginning of the End

Good Afternoon Folks!

I hope everyone is having a nice weekend. I did some research today and learned a lot more about why the market moved higher yesterday.

It appears the Fed has followed through on its threat to buy GSE debt that doesn't exist at ridiculously low yields in the treasury market in a desperate attempt to lower mortgage rates.

Here is the information from the Fed:

My Take:

As you can see this announcement on the Fed purchases came out around 2pm which is right about the time the market started to moonshot into the close.

The market took this as a huge positive because this will result in lower lending rates. This is why you say SRS plummet yesterday. Anything commercial or housing related rallied hard on the announcement by the Fed because it will result in lower borrowing rates for the mortgage market.

The problem here folks is its setting a dangerous precedent that cannot be sustained. First of all, this is very slick form of printing by the Fed. The money is not sterlized meaning the money was not raised by selling treasuries. Essentially the Fed is borrowing from itself(using taxpayer dollars) and buying debt in the credit markets that doesn't exist. This is an end game folks.

The Fed would never stoop to such measures unless things got real real bad. There are other problems in doing something so drastic. This could potentially be a death blow to the mortgage industry. Who needs them doing loans at 5-1/2% when the Fed will be popping out 4-1/2% loans. These actions could result in the Fed being the only lending game in town doing 4-1/2% loans for homebuyers.

This why you saw the insurers like The Hartford double yesterday. The lower rates will be very helpful the insurance companies.

Bottom Line:

This is why you saw your bull run yesterday. In my view this is a giant disaster down the road. You can't continue to create money in an attempt to prop up your debt markets. The market appears to moving higher based on the Fed actions.

Sometimes I think I need to stop doing research. The more I read the more I realize how screwed we really are.

In the short run, this could keep the markets moving higher for awhile. Stay away from shorting anything housing or commercial related. This is going to set up some incredible entry points for SRS down the road.

I have no short positions other than BEARX right now. However, once this bullfest loses steam, I will be all over SRS and other shorts. I believe you might be able to pick SRS up in the 60's if the Fed continues this buying spree over the next several weeks.

Ben warned us in a speech earlier this week that he was going to do this. He has backed up his words. There will be a day down the road when the Fed no longer has the resources to do this.

I don't know when this blows up folks.

When it does, the world will never be the same.

Friday, December 5, 2008

Don't fight the Tape!

Just a quicky tonight folks.

I will be socializing so I don't have much time.

Interesting day today wasn't it? Kinda played out like I said but I must admit I am surprised it did after seeing a -530k print on the jobs report.

I had been noticing that the market was starting to ignore bad news earlier in the week after Monday. Lets face it folks, there is no fundamental reason to like this market. However, market retraces after huge selloffs are not uncommon. In fact, they should be expected.

The market traded very technically today. The bulls were able to successfully protect the 815 level on the S&P. Once we bounced off of there I figured we might end up positive for the day.

Bear rallies always rear their ugly heads in every great bear market. We saw a a huge correction in 1929 before once again touching new lows in the 1930's. I still hold the thesis that we could very well see a nice bull run through the holidays.

That's not to say we won't get creamed here or there for a day like we did on Monday. It would be silly to assume we go straight up from here.

Bottom Line:

Take notice when stocks begin to shrug off bad news and move higher. I saw a ton of this kinda price action this week. Goldman was a classic example of this after announcing it will report a loss.

This is where I am focusing in the short term folks. There will be plenty of bad news in the oncoming weeks that will allow us to see if this type of price action is a trend. If this "denial" by the bubbleheads continues, we could see a nice run on the long side because the bulls will start to gain some confidence.

Also ask yourself this question: If a -530K monthly job loss report can't push the market lower what can?

I will have more on this tomorrow. I need to run for now.

Thursday, December 4, 2008

Its All about Jobs Tomorrow!

Hello all!

Just a few comments today. Before I get started I wanted to share a great clip from CNBC today that featured Hugh Hendry from Electica Asset Management. Hugh's fund is currently up 40% this year. According to Hugh, stocks won't get back to the highs until 2025!

I thought this was great analysis from Hugh. There is currently a huge disconnect between the credit markets and the equity markets. The credit market is basically pricing in a deflationary depression folks. We are seeing 50 year lows on yields in treasuries. Short term treasuries are now paying .005% yields! Investors in the credit markets could care less about the returns on their money. They want safety! Meanwhile, the bubbleheads on the equity side are out there screaming that the bottom is in.

I have always said since day one on here that the traders in the credit markets run circles around the traders in the stock market. Always stick with the bond boys. Until these two are on the same page in terms of where the market is headed, I wouldn't go near stocks!

Bottom Line:

The market continues to bounce around like a pinball. The big three were in Washington again begging for money. I wouldn't give them a dime until they slash costs and prove they can make money. Detroit autoworkers get paid $72 per hour including benefits. The autoworkers in the southern US that make the japanese cars make $44 per hour including benefits.

Uhh hello! Houston we have a problem! The big three will never make money as long as there is this type of gap in costs between the two.

The Market

Its all about the jobs number tomorrow folks! I am going to make a small play on this news. This is a risky one and I will have a stop on it.

My guess here is the bulls already know this number will be awful. If the jobs number comes in at or a little below expectations I plan on buying a small position in SSO which is long the S&P 500 AFTER the gap down in reaction to a jobs report that is guaranteed to be ugly.

If the jobs number comes in way below expectations then this trade is off the table. I will have a tight stop on this if I place it because the market has been acting goofy. I also plan on selling on any bounce.

My guess here is the bulls will be prepared for the number tomorrow. Lets see what happens.

Wednesday, December 3, 2008

Hey Bulls: This Recession is Different

Good Afternoon Folks!

Stocks rallied over 2% today as the bulls continued to buy "fools gold". The denial by these bubbleheads simply amazes me.

Ironically, the buying spree that we have seen since Monday has been spurred by the announcement that we have been in a recession since December of 2007.

Why do I say this? Because all of the bubbleheads proceeded to take out the "recession" playbook after hearing this news. Bill Miller of Legg Mason pulled out the playbook today right on Que.

FYI: The playbook tells investors that you should buy stocks towards the end of the recession because the stock market always bottoms and moves higher before the economy gets out of the downturn.

articles like the one below continue to compare this to mild downturns:

"The economy jolted into reverse in the summer as consumers slashed their spending by the most in 28 years.

Many believe the economy will continue to shrink through the rest of this year and into the first quarter of next year. At 12 months and counting, the current recession is longer than the 10-month average length of recessions since World War II. The record for the longest recession in the postwar period is 16 months, which was reached in the 1973-75 and 1981-82 downturns."

My Take:

This type of article is disastrous for your average bull. I say this because they will all jump into stocks assuming we will be out of this shortly because we have already been in recession for a longer period of time than '73-75 and '81-'82. What they need to start realizing is this isn't a '73/'74 type event. This is a once in a century event that can only be compared to events like The Great Depression or the deflation spiral that occurred in Japan.

The bulls have gotten killed every time they have pulled out the playbook. They need to throw this book right out the window! Buying stocks thinking we will be out of this in 6 months is a fools game. What catalyst is there for getting out of this? There are no more tech/housing bubbles to blowup. I have yet to read one credible theory that makes me believe that the economy is about to make a dramatic turn.

In fact, the more I read the more "dire" I think things are!

Its time for the bulls to pull out a new playbook from the library. Its a book titled "The 20 year deflationary collapse". There are several versions available based on historic economic collapses from all around the world.

The bubbleheads need to start to realize that the market will not be moving higher anytime soon. The bulls continue to buy because they are so afraid of missing the next monster move that will bring us back to the highs. Guess what folks? Its not gonna happen. There will be some bounces going forward from time to time but it won't be anything that can be sustained.

DOW 14,000 was nothing but a fantasy. Our economy never grew to this level based on fundamentals. It was done by creating massive amounts of debt using 40-1 lending leverage. This lending leverage is now gone. Its now been replaced by 12-1 lending average. This changes the whole game folks! The bulls need to realize that stocks were not fairly valued at 14,000. They were extremely overvalued at these levels like the NASDAQ was at 5,000.

The assumption the bulls are now making is the market is "way undervalued" because we are 50% from the highs and the recession is about to end. Not so fast bubbleheads! Maybe you need to start assuming that stocks are now fairly valued since the leverage has been taken out of the system. Bill Gross stated this morning that DOW 5000 may be the new DOW 14000.

Bottom Line:

Its time that everyone starts to realize that the last 25 years was nothing but an anomaly that was created via financial innovation. Investors need to give up on the idea that we are heading anywhere near the highs that were set last year.

I think that some of the volatility you are seeing in the markets is the result of the average investor being totally confused. They are becoming filled with panic because nothing is working like its supposed to. What worked for 30 years no longer works anymore. The playbooks are broken.

Sadly, it appears that the bulls have not given up hope. We already know this because we have not seen capitulation yet. There is one more bullet left in the gun!

The recession call has now given them another excuse to use the last playbook and buy stocks. Let them run with it and the proceed to watch them fall off a cliff. As I have warned earlier, this could last until the end of the year. I will begin to start scaling into short positions as this rally fades. I picked up a little SRS but I decided to play small here. There is no reason to fight the tape and the bulls ability to ignore bad news recently is something to take notice of.

For example, the fact that the market shrugged off the ADP -250k jobs report today was pretty impressive. Lets see how the bulls react to the big jobs report on Friday. We all know this is going to be horrible. If the bulls stick to the recession playbook, the buying could continue. Be careful shorting into this report.

As always, keep an eye on the credit markets!

The fact that the 10-year in the credit markets is yielding 2.6% shows you how scared most investors are. When in doubt by treasuries. At least your money is safe there.

That's about the only playbook that is working right now.

Tuesday, December 2, 2008

The Volatility Continues

Good Afternoon Folks!

It was another quiet day in the markets. HA! Yeah right! Are you going insane attempting to trade this roller coaster psychotic market? I bet many of you are looking forward to a few days where I start a post with the words "quiet day".

The volatility continued today as the markets rallied hard into the close based on hopes of an automotive bailout and some positive comments from GE. The major indices closed up over 3% following a very volatile session.

Today was a perfect example of why I hate trading the current market. There was absolutely no clear direction today. Stocks zigged and zagged all day reacting to any news that hit the wires. I felt like I was watching a tug of war between the bulls and the bears. About a half hour going into the close, I thought we could close violently in either direction. The bulls ending up winning this one.

The reason I don't like the market right now is because the bulls and the bears both have a reasonably strong case at these levels. It was easy to short the market when the DOW was up around 13-14,000. If you did your research, it was like shooting fish in a barrel. The financials, homebuilders, and technology were all way overvalued and were easy targets to short.

The bulls were able to stage some minor rallies during the 49% drop on the S&P with some assistance from the Fed(Bear Stearns rally ring a bell?). They also had their "bubble stage" on CNBC that allowed them to fill the airwaves with a bunch of stooges screaming "stocks are cheap!" "the bottom is in!" "buy buy buy". In the end it was to no avail as the market continued to plummet.

However, now that we are 50% from the highs, things are considerably tougher from a trading standpoint short term. Whats tough here is both sides feel they have strong arguments. The bulls case is we are 50% from the highs, stocks are undervalued, and we are way overdue for a sustained bounce. The bear case is we have just entered into a severe recession, stocks are still overvalued, and the credit markets are beginning to price in a severe deflation/depression scenario.

Speaking of the credit markets, AAA spreads are once again blowing out:

This is a bad sign folks. The spreads came in last week when the Treasury announced it was going to buy $600 billion of this AAA MBS garbage. Nice job Hank! That helped for about two days! We are once again nearing the highs from a spread perspective. Remember folks, A sh*t sandwich is still a sh*t sandwich no matter how many the Fed takes off your hands. Buying $600 billion of Sh*t sandwiches doesn't help much when there are trillions of sh*t sandwiches that are still stuck on the banks balance sheet!

Back to the bull/bear case:

So now here we are basically 50% from the highs. Each side has a fairly legitimate short term case. This makes going long or short a tough call as we head into Christmas which is usually bullish. Adding to the confusion of this scenario is the massive amount of hedge fund selling that we are witnessing in order to satisfy redemption calls.

I was listening to a CEO of a large commodity company yesterday, and he was explaining that they were seeing massive selling of their stock by hedge funds on a daily basis. The reason the hedge funds are continuing to sell stocks that they would most likely like to hold is because they have no choice. Many of them have very few options because a lot of their assets are stuck in the AAA sh*t sandwiches that I described above. Right now, there is no market for these assets so they can't sell them.

As a result, they are forced to sell good assets like blue chip stocks and commodities in order to satisfy margin calls. This is why you see stocks that are ridiculously cheap with valuations that make no sense. Its forced selling. You need to take note of this before you start buying these types of companies. There could be more margin calls which could take these stocks lower.

Bottom Line:

I hate the stock market right now! Its turning more and more into a casino with each trading session. I see nothing but pure speculation. I just have to shake my head as I watch insolvent banks like Citibank move up 30% in a day.

My guess is that you are going to see a lot of chop that lasts all the way through New Years. If you invest over the next four weeks, I wouldn't hesitate to take profits because they could get wiped out the next day.

I personally have my eye on SRS. I see commercial real estate falling apart after the Christmas selling season turns out to be a disaster. I expect several dozen retailers to go under after the holidays. Many of them stayed alive hoping that a huge holiday season could save their year. We all know that the consumer is toast and this isn't going to happen. Its going to be a Grinch Christmas!

Commercial real estate will then feel the pinch from the Grinch as these retailers go bust and stop paying rent. Making matters worse is the fact that the retailers they find to replace the companies that go under will be paying lower rents as the consumer led recession continues to deepen.

I am looking to pull the trigger on SRS at around 120. Its sitting at around 133 right now. One more green day should put it in my zone.

As for the long term outlook nothing has changed folks. The bears will take charge once the horrendous numbers from the holiday are released and the recession continues to worsen.

In the short term, play small and take profits.

Monday, December 1, 2008

Stocks Collapse as the US Recession is Confirmed

Good Afternoon Folks!

I hope everyone had a great holiday.


What a day today in the markets. Stocks are absolutely getting killed today folks! The major averages are all down around 6-7% as I speak. I must admit I didn't expect this kind of dump today. The move is based upon several pieces of news that hit the wires today. Folks, these are serious times. I am really concerned over the price action today.

Lets get right into it. We headed into today with a new research report from superstar analyst Meredith Whitney. If you have followed me for any length of time, you all realize that I believe Meredith is the most brilliant research analyst when it comes to the financial firms.

She appears to have gotten even more bearish since her last research note, and has really changed her tune due to the severity of the crisis we now find ourselves in. I must say I didn't think it was possible for her to become more bearish. Here is the link to her research note:

"As an analyst, it is my job to do fundamental research and call it as I see it, and my bailiwick is financials. My outlook has been negative for over a year and, technically, I have been “right” on my calls. Seeing massive capital destruction has brought me no pleasure, but unfortunately I see little on the horizon that would change my outlook. In fact, after observing the US economy so derailed, I feel that I must act as a citizen of this great country to attempt to offer solutions to this economic train wreck we are all involved in.

First, I am more bearish today than I have been in the past 18 months. In so far as the market has impacted on the economy, capital destruction has been so intense that multi-trillions in capital raised by institutions through both private and public capital has gone to plug holes and not stabilise the effects of shrinking liquidity to corporations and consumers. More than $3,000bn (€2,365bn, £1,955bn) of available credit has been expunged from the markets and therefore corporate and consumer borrowers so far this year.

First, re-regionalise lending. Since the early 1990s, key bank products, mortgages and credit card lending were rapidly consolidated nationally. Banking went from “knowing your customer” or local lending, to relying on what have proven to be unreliable FICO credit scores and centralised underwriting. The government should now motivate local lenders (many of which have clean balance sheets) to re-widen their product offering to include credit cards and encourage the mega banks to provide servicing and processing facilities to banks that sold off these capabilities years ago.

Second, expand the Federal Deposit Insurance Corporation’s guarantee for bank debt. Banks need to know they can access reasonably priced credit for an extended period to continue to extend new credit lines. Any semi-conscious bank management team knows that capital and liquidity are precious and therefore is hoarding both.

Third, delay the introduction of accounting rule FAS 140 until 2011 or 2012. These moves to bring off-balance-sheet assets back on balance sheet for the sake of transparency are a mirage. The primary assets that will come back on to balance sheets are credit card loans. Frankly, there is more transparency in off-balance-sheet master trust data than in on-balance-sheet accrual accounting. Banks cannot afford it now and it will further constrain credit.

Fourth, amend the proposal on Unfair and Deceptive Lending Practices that is set to be adopted in 2010. The proposal includes one major change that will lead to a severe unintended consequence – pulling credit from consumers. Restricting lenders’ ability to reprice an unsecured loan will cause them to stop lending or to lend less. This change could cut over $2,000bn in unused credit card lines, or over 40 per cent of unused credit lines. With so many Americans relying on their credit cards as a major source of liquidity, it would be equivalent to a major pay cut.

This is no time for partisanship. The situation is too dire. These changes are ones I would never have imagined endorsing a year ago, but these are extraordinary times."

My Take:

Meredith has completely changed her tune. Note in her fourth point that she expects credit availability to drop by $2 trillion dollars if this new rule is implemented in 2010. This would absolutely punish the consumer. Imagine being a consumer and having a $2000 balance on a card with $3000 of credit availability. Your thinking ok, I have a little room to spend. If this rule takes effect, overnight your credit limit could drop to 2k as the banks reign in credit availablity. Overnight your spending power could drop to zero unless you have cash to spend.

The consumer is already hanging by a thread. Take away their borrowing power via credit cards and the consumer will be down for the count.

What surprised me the most after reading this report is the fact that Meredith is actually asking for less transparency. Its obvious that Meredith that she is saying this because she is scared to death and worried about the solvency of the system. She realizes now is not the time to continue and pound the financials. The situation is "dire" in her eyes because she knows they are all insolvent and about to go down in flames. We all must begin to focus on solutions and saving our financial system. I applaud her change of tune.

Lets be honest folks, none of us want to wake up one morning and find out that our ATM card won't work because the banks are shut down.

Recession Confirmed

What a surprise: We have been in a recession since December of 2007! NOT!:

"WASHINGTON (Reuters) - The economy slipped into recession in December 2007, the nation's business cycle arbiter declared on Monday, and the downturn could be the worst since World War Two.

The National Bureau of Economic Research said its business cycle dating committee members met by conference call on Friday and concluded that the economic expansion that started in November 2001 had ended. The previous period of economic expansion, which ended in 2001, lasted 10 years.

The current recession, which many economists expect to persist through the middle of next year, is already the third-longest since the Great Depression, behind only the 16-month slumps of the mid-1970s and early 1980s.

"I think that we've got a ways to go, that this is going to be probably a deep and long recession," Jeffrey Frankel, a Harvard University economist who sits on the NBER's committee, told CNBC. "It could be the worst post-War recession. We don't know yet."

Quick Take:

This is now the third longest recession since The Great Depression. Anyone care to guess how long this lasts? I am afraid to answer this question. I love how this country denies that its in a recession until after the fact.

Forget December 2007, in my view, the recession started during the Tech Crash back in 2000.

I think that when history looks back at this period, the housing bubble will turn out to be nothing more than a temporary bear market rally in the middle of one of the longest secular bear markets in the history of our economy. I genuinely believe that this bear market could last decades. History has shown us that the bear markets are as spectacular as the bull market that preceded it. The last 25 years was the greatest bull run in history.

As a result, the oncoming bear market's brutality will need to match the intensity of the epic bull market that just ended in order to successfully wring out all of the excesses of living beyond our means.

The market in my eyes is like a mental patient with bipolar disorder. There are periods of time where the market gets completely manic and shoots to the moon. We all know that these manic episodes are bad and cannot be sustained. When a bipolar patient reaches this euphoria, its almost always followed by a serious depression. Bipolar patients must take their medicine in order to prevent these bouts of depression and help keep their lives in proper balance. The stock market needs the same thing after its own bout of mania. The bear markets are the medicine the stock market must take in order to prevent depressions and remain stable.

My point here is huge bear markets are healthy for our economy. They help us "revert to the mean" and remain balanced. They also remind us that "keeping up with the Jones" is not what life is about. They also allow us to build character as we all help one another as millions of family and friends struggle to survive after losing their job or house.

Bear markets also remind us that family and morals are much more important than owning a McMansion with two Hummers in the driveway. Its the simple things that make all of us happy. Perhaps we needed something like this to remind us of this.

Just turn on reality TV if you want to see how far we have lost our way when it comes to what is important in life. The "Paris Hilton" era is over folks and I personally look forward to it.

Bottom Line:

Back to the markets. A few other things to take notice of today. The China manufacturing data was a huge negative catalyst today:

"Dec. 1 (Bloomberg) -- China’s manufacturing shrank by the most on record and export orders plunged, adding to evidence that recessions in the U.S., Europe and Japan are dragging down the world’s fastest-growing major economy.

The Purchasing Managers’ Index fell to a seasonally adjusted 38.8 in November from 44.6 in October, the China Federation of Logistics and Purchasing said today in an e- mailed statement. A second PMI, released by CLSA Asia-Pacific Markets, also showed a record contraction."

China manufacturing is collapsing folks and this is not good. Art Cashin thought this was the most important news story of the day. This is news because for several reasons. Their government is not very stable, and an economic collapse could trigger government instability. This has geo-political ramifications. Secondly, they are a huge consumer of both US goods and treasuries. If they collapse its going to make our situation that much worse.

A second thing to take note of: The 10-year continues to collapse!:

"Dec. 1 (Bloomberg) -- Treasuries rose, pushing yields to record lows, as Federal Reserve Chairman Ben S. Bernanke said the central bank may purchase Treasuries and target long-term interest rates to combat the deepening recession.

Bonds rallied for a fourth day, sending yields on two-, 10- and 30-year debt to the lowest since the Treasury began regular sales of the securities. Bernanke said he has “obviously limited” room to lower interest rates further and may use less conventional policies, such as buying Treasury securities. The panel of economists charged with dating business cycles said the U.S. entered a recession in December 2007.

“Cash and Treasuries are king,” said Barr Segal, a managing director at Los Angeles-based TCW Group Inc., who oversees $90 billion in fixed-income assets. Bernanke “wants everybody to know he has more options. Some are more effective than others.”

Final Take:

We are witnessing historic drops in the yields on treasuries. This is a giant deflation/depression indicator folks. This is the most massive rush to cash that I have ever seen. I believe everyone is now diving into treasuries. This includes investors, banks, and the Fed. I am speechless as I watch this move in the credit markets.

Whats frightening is the lower interest rates have done nothing to spur borrowing. Consumers continue to refuse to borrow, and banks refuse to lend because everyone is panicked that the economy is going to collapse. Houses continue to sit vacant despite the fact that mortgage rates have plummeted.

This is what happens when you are in a deflationary death spiral.


Held onto my shorts into the close. I am tightly hedged short. I don't like this market at all folks. Days like today remind me that now is a good time for cash. I plan on moving all cash positions into treasuries this week. The FDIC will be a nightmare if the banking system collapses. Your money will be safe, but it may take you weeks to get it back if your bank goes under.

I strongly advise that you put cash positions into short term treasuries. Forget about the yields folks. Right now, you want to preserve capital and have it available in case we have an economic meltdown. Treasuries are the safest place to put your money, and it is the most easily retrieved if TSHTF.