My Gosh
I go out for the evening to a holiday party and I comeback and see that the Fed has lost its mind.
We wow how the TARP and an new version of the TALF. I think the next bailout should be called BARF because that is what I feel like doing as I watch the taxpayer being forced to bailout America. Below are the two articles on the Fed's recent endeavors. I will have some thoughts below.
It appears that Congress has agreed to release the second $350 billion to the FED from the TARP.
"Dec. 19 (Bloomberg) -- U.S. House Financial Services Committee Chairman Barney Frank said Congress will release $350 billion from the bank-rescue package after lawmakers, President- elect Barack Obama and Treasury Secretary Henry Paulson agree to provide foreclosure relief and aid to automakers.
Frank, a Massachusetts Democrat, said he plans to introduce legislation with Senate Banking Committee Chairman Christopher Dodd to release remaining funds in the $700 billion package next month. The bill will include homeowner help and short-term loans for General Motors Corp. and Chrysler LLC, Frank said in a telephone interview today.
“We should have an agreement among Obama, Paulson and the congressional leadership to release the $350 billion with conditions on how it’s spent,” Frank said. “We need the second $350 billion, but it can only be done if there’s an agreement as to how to do it.”
Here is the announcement of the new TALF:
"Hedge funds will be allowed to borrow from the Federal Reserve for the first time under a landmark $200bn programme intended to support consumer credit.
The Fed said on Friday it would offer low-cost three-year funding to any US company investing in securitised consumer loans under the Term Asset-backed Securities Loan Facility (TALF). This includes hedge funds, which have never been able to borrow from the US central bank before, although the Fed may not permit hedge funds to use offshore vehicles to conduct the transactions.
The asset-backed securities to be funded under the programme are pools of credit card receivables, automobile loans and student loans.
The idea is to increase the supply of these loans and reduce borrowing rates by ensuring that the companies that make the loans can sell them on to investors who have guaranteed access to low-cost funding from the Fed.
The TALF is a key plank of the unorthodox strategy set out by the Fed last week as it cut interest rates virtually to zero. Washington insiders expect the programme will be dramatically expanded next year with further capital support from Treasury once the Obama administration takes office.
A senior official in the outgoing Bush administration told the Financial Times it could also be broadened to include new commercial and residential mortgage-backed securities."
Final Take:
I think my head is going to explode after reading these two articles! The Fed is going to turn me into a frickin mental patient. Is there anything that the Fed isn't going to bailout? The last line that I highlighted explains the move in SRS this week.
Is it just me or did did the Fed just hit the PANIC button this week? Its obvous things are spiraling out of control here folks as the debt bubble continues to spring leaks everywhere. The first $350 billion in the TARP lasted all of 3 months. Paulson had said previously that he wasn't going to request the second half of the TARP before the Obama administration took over. I guess that idea just flew out the window!
Bottom Line:
Things are falling apart at lightning speed again. In just one week the Fed and Treasury have dropped rates to zero and released the second half of the TARP. They also created a new bailout that allows hedge funds and any other US company to borrow from the Fed in an attempt to support consumer credit and potentially commercial lending. This is desperation folks, pure and simple.
Let me repeat: This is insane and again does not fix the problem! There is no demand to borrow. Americans are up to their eyeballs in debt and are struggling to payoff what they have already borrowed. They are also losing their jobs at an alarming rate as they attemot to pay it all off.
When is the Fed going to realize that WE DO NOT WANT TO BORROW ANYMORE! Stop wasting the taxpayers money in an attempt to re inflate a debt bubble that you cannot prevent from bursting.
At some point helicopter Ben must be stopped. It appears that the press has had enough of this crap as well. Naked Capitalism is reporting that Fox News is now suing the Treasury in an attempt to gain more information around the TARP and the AIG bailout.
Hooray for Fox. Bloomberg has also done the same. God I hope they succeed This must be stopped before they destroy this country force us to drown in our own debt.
In the meantime be very careful trading here. Fighting the Fed's balance sheet can be a costly game. "Don't fight the Fed" no matter how crazy they are in the short term. Some longs are going up on Monday. I will discuss them tomorrow. This is all going setup up the shorting opportunity of a lifetime down the road but we are not quite there yet.
It appears the bursting of the debt bubble is going to happen in the near future. When it does, find a strong steel table to hide under.
Saturday, December 20, 2008
Friday, December 19, 2008
Auto Bailout Fails to Ignite Stocks
Good Afternoon Folks!
I am going to be a little brief today due to some holiday plans. The bulls charged this morning taking stocks up 200 points as they cheered the auto bailout. Unfortunately, stocks couldn't hold onto the gains as continued worries around the recession took the DOW into negative territory by the close.
I thought the price action was interesting today. There is a huge tug of war going on between the bulls and the bears right now. Rallies are almost always sold into as traders take profits. On red days, we seem to see a lot fewer sellers. The volatility has really dropped off this week. The VIX dropped down to 45 today.
I think the lack of direction in the markets combined with horrific economic data has made many traders afraid to hit the buy button. The economic numbers really are frightening folks. Oil plummeted yet again today down into the $33 range! Staggering isn't it. Those $4/gallon gas days are becoming a distant memory aren't they?
This dramatic drop in oil is a big concern from an economic standpoint. Its a great barometer to measure how things are doing in the economy. I say this because oil is used everywhere folks: Auto's, manufacturing, airlines, transports. When there is absolutely no demand for oil it tells you something: Nothing is being made, driven or moved!
Auto Bailout
Here is the auto bailout story for those of you who missed it.
"Dec. 19 (Bloomberg) -- General Motors Corp. and Chrysler LLC will get $13.4 billion in emergency government loans in exchange for substantially restructuring their businesses, President George W. Bush announced.
Another $4 billion will be available to GM in February provided Congress releases the second half of the $700 billion Troubled Asset Relief Program fund originally set up to bail out financial institutions. The automakers have until March 31 to meet the conditions of the loans, including demonstrating they have a plan to become profitable, or be forced to repay."
Quick Take:
I am sure many of you are shocked that our government would bailout an industry. HA! YEAH RIGHT! It seems to be the only governmental response to any failure in the economy. Who needs bankruptcy's when you have Uncle Sam's wallet in your back pocket?
The one piece of language that I thought was interesting in the bailout was the fact that they need to have a plan for profitability by March of next year. HA! Good Luck With That! There is no demand or credit to buy auto's right now. Even if someone wanted to buy a car, it would be very difficult to get financing for it. The only business plan for profitability for these clowns that I see would be to shut down the BIG THREE for 5 years until the credit markets come back!
Gary Shilling's Prediction: 600 on the S&P 500 in 2009
I strongly advise that everyone takes a look at Gary Shilling's thoughts for next year. There is also a video interview with Gary on the page in the upper left hand corner.
Mr. Shilling has been spot on throughout this downturn and I think his call for next year is spot on. Make sure you listen to his thoughts on China at the end of the video. Folks, China scares the daylights out of me. Without us consuming I don't see how they can keep their economy together.
The potential for political instability and risk for an uprising that takes down their government is very high in my opinion. The export numbers out of China have fallen off a cliff, and the factories over there are closing up faster than investment banks on Wall St. If this occurs, they will lose the rising middle class that has fueled a lot of their growth.
Keep an eye on the Far East.
Bottom Line:
It was a surprisingly quiet day. I have done no trading the past couple days. I am content to stay mildly short. I may put on a few small speculative long trades on next week. The volumes should be low due to the holiday, and the bias tends to be bullish.
The bulls also got the auto bailout, so there are really no big shoes that could drop over the short term(Watch, now that I said that we will end up with a panic next week:))
If things are calm like they ended today, I think we might see some green days as Christmas approaches.
Stay Tuned!
I am going to be a little brief today due to some holiday plans. The bulls charged this morning taking stocks up 200 points as they cheered the auto bailout. Unfortunately, stocks couldn't hold onto the gains as continued worries around the recession took the DOW into negative territory by the close.
I thought the price action was interesting today. There is a huge tug of war going on between the bulls and the bears right now. Rallies are almost always sold into as traders take profits. On red days, we seem to see a lot fewer sellers. The volatility has really dropped off this week. The VIX dropped down to 45 today.
I think the lack of direction in the markets combined with horrific economic data has made many traders afraid to hit the buy button. The economic numbers really are frightening folks. Oil plummeted yet again today down into the $33 range! Staggering isn't it. Those $4/gallon gas days are becoming a distant memory aren't they?
This dramatic drop in oil is a big concern from an economic standpoint. Its a great barometer to measure how things are doing in the economy. I say this because oil is used everywhere folks: Auto's, manufacturing, airlines, transports. When there is absolutely no demand for oil it tells you something: Nothing is being made, driven or moved!
Auto Bailout
Here is the auto bailout story for those of you who missed it.
"Dec. 19 (Bloomberg) -- General Motors Corp. and Chrysler LLC will get $13.4 billion in emergency government loans in exchange for substantially restructuring their businesses, President George W. Bush announced.
Another $4 billion will be available to GM in February provided Congress releases the second half of the $700 billion Troubled Asset Relief Program fund originally set up to bail out financial institutions. The automakers have until March 31 to meet the conditions of the loans, including demonstrating they have a plan to become profitable, or be forced to repay."
Quick Take:
I am sure many of you are shocked that our government would bailout an industry. HA! YEAH RIGHT! It seems to be the only governmental response to any failure in the economy. Who needs bankruptcy's when you have Uncle Sam's wallet in your back pocket?
The one piece of language that I thought was interesting in the bailout was the fact that they need to have a plan for profitability by March of next year. HA! Good Luck With That! There is no demand or credit to buy auto's right now. Even if someone wanted to buy a car, it would be very difficult to get financing for it. The only business plan for profitability for these clowns that I see would be to shut down the BIG THREE for 5 years until the credit markets come back!
Gary Shilling's Prediction: 600 on the S&P 500 in 2009
I strongly advise that everyone takes a look at Gary Shilling's thoughts for next year. There is also a video interview with Gary on the page in the upper left hand corner.
Mr. Shilling has been spot on throughout this downturn and I think his call for next year is spot on. Make sure you listen to his thoughts on China at the end of the video. Folks, China scares the daylights out of me. Without us consuming I don't see how they can keep their economy together.
The potential for political instability and risk for an uprising that takes down their government is very high in my opinion. The export numbers out of China have fallen off a cliff, and the factories over there are closing up faster than investment banks on Wall St. If this occurs, they will lose the rising middle class that has fueled a lot of their growth.
Keep an eye on the Far East.
Bottom Line:
It was a surprisingly quiet day. I have done no trading the past couple days. I am content to stay mildly short. I may put on a few small speculative long trades on next week. The volumes should be low due to the holiday, and the bias tends to be bullish.
The bulls also got the auto bailout, so there are really no big shoes that could drop over the short term(Watch, now that I said that we will end up with a panic next week:))
If things are calm like they ended today, I think we might see some green days as Christmas approaches.
Stay Tuned!
Thursday, December 18, 2008
The Debt Bubble is Getting Really Heavy!
Good Afternoon Folks
Well that was interesting. Stocks were down about 2% as fears continue to mount around how severe this recession will be.
The GE news was really pressured the markets this afternoon:
"Dec. 18 (Bloomberg) -- General Electric Co., the biggest issuer of corporate bonds, has a one-in-three chance of losing its AAA credit rating in the next two years as earnings deteriorate, Standard & Poor’s said.
S&P cut the outlook on the company and that of its GE Capital finance arm to negative from stable. While the AAA ratings were left intact, S&P said in a statement today that it was concerned about cash flow and funding for the finance unit as global conditions worsen. GE Capital’s stand-alone rating, without parent support, would be A+, it said."
Quick Take:
This one was a shock to me. GE is supposed to be the "Taj Mahal" of corporate America. It was built into a corporate powerhouse by icon CEO Jack Welch. To see them face a 1 in 3 chance of losing their AAA rating is astonishing. The problem GE has is almost half of the companies revenues were generated by GE capital. As Wall St started to melt down, GE went down with the ship.
Folks, I am beginning to realize that almost everyone in the world got completely addicted to "cheap" money. It wasn't only Wall St. Everyone got into the game: Pension funds, college endowements, automotive finance, money markets. Our recent GDP growth in the last 10 years was almost solely based on creating debt. Once everyone filled themselves to the gills with it, the game was over.
Debts must be serviced via payments. When it can no longer be serviced it must be defaulted on. I will bring this chart up again folks. Look how out of hand borrowing got compared to GDP:
Quick Take:
The amount of debt we have created vs. GDP is unsustainable because we use GDP to pay back debt! Our debt load is now 300%+ of GDP. Our current "crack cocaine" debt party makes 1929's debt party look like more like a soda and pizza party for a bunch of 3rd graders!
This is unsustainable folks! The Fed is going to try and continue blowing up this bubble by selling homes at 4% interest rates. If you buy a home based on this new Ponzi scam you are crazy! Buying a home using this mortgage plan is too big a risk on such a large investment. I say this because the rules constantly change. You can rest assured that rates cannot stay this low for a sustainable period of time. Inflation could rear its ugly head at anytime which would force the Fed to raise rates. What if mortgage rates rise to 6% 5 years from now? The price of your home will go down the toilet!
Another risk you run is low interest rates do not guarantee that home prices will stop sliding. What if they continue to plummet as the economy continues to fall apart? Home prices continued to drop when Japan attempted the same thing. Buying at these levels with such risk is simply too dangerous. We still haven't seen the "unintended consequences" of what the Fed has just done. Maybe today's drop was the start of something. I guess we will know soon enough.
GEAB
I got the new GEAB report courtesy of Alex who is one of our readers. Thanks Alex! They are out with some more dire predictions. They have a great chart that shows you how insanely out of whack the stock market is versus its historical average:
Well that was interesting. Stocks were down about 2% as fears continue to mount around how severe this recession will be.
The GE news was really pressured the markets this afternoon:
"Dec. 18 (Bloomberg) -- General Electric Co., the biggest issuer of corporate bonds, has a one-in-three chance of losing its AAA credit rating in the next two years as earnings deteriorate, Standard & Poor’s said.
S&P cut the outlook on the company and that of its GE Capital finance arm to negative from stable. While the AAA ratings were left intact, S&P said in a statement today that it was concerned about cash flow and funding for the finance unit as global conditions worsen. GE Capital’s stand-alone rating, without parent support, would be A+, it said."
Quick Take:
This one was a shock to me. GE is supposed to be the "Taj Mahal" of corporate America. It was built into a corporate powerhouse by icon CEO Jack Welch. To see them face a 1 in 3 chance of losing their AAA rating is astonishing. The problem GE has is almost half of the companies revenues were generated by GE capital. As Wall St started to melt down, GE went down with the ship.
Folks, I am beginning to realize that almost everyone in the world got completely addicted to "cheap" money. It wasn't only Wall St. Everyone got into the game: Pension funds, college endowements, automotive finance, money markets. Our recent GDP growth in the last 10 years was almost solely based on creating debt. Once everyone filled themselves to the gills with it, the game was over.
Debts must be serviced via payments. When it can no longer be serviced it must be defaulted on. I will bring this chart up again folks. Look how out of hand borrowing got compared to GDP:
Quick Take:
The amount of debt we have created vs. GDP is unsustainable because we use GDP to pay back debt! Our debt load is now 300%+ of GDP. Our current "crack cocaine" debt party makes 1929's debt party look like more like a soda and pizza party for a bunch of 3rd graders!
This is unsustainable folks! The Fed is going to try and continue blowing up this bubble by selling homes at 4% interest rates. If you buy a home based on this new Ponzi scam you are crazy! Buying a home using this mortgage plan is too big a risk on such a large investment. I say this because the rules constantly change. You can rest assured that rates cannot stay this low for a sustainable period of time. Inflation could rear its ugly head at anytime which would force the Fed to raise rates. What if mortgage rates rise to 6% 5 years from now? The price of your home will go down the toilet!
Another risk you run is low interest rates do not guarantee that home prices will stop sliding. What if they continue to plummet as the economy continues to fall apart? Home prices continued to drop when Japan attempted the same thing. Buying at these levels with such risk is simply too dangerous. We still haven't seen the "unintended consequences" of what the Fed has just done. Maybe today's drop was the start of something. I guess we will know soon enough.
GEAB
I got the new GEAB report courtesy of Alex who is one of our readers. Thanks Alex! They are out with some more dire predictions. They have a great chart that shows you how insanely out of whack the stock market is versus its historical average:
More from the GEAB:
"LEAP/E2020 anticipates than the unfolding global systemic crisis will experience in March 2009 a new tipping point of similar magnitude to the September 2008 one. According to our team, at that period of the year, the general public will become aware of three major destabilizing processes at work in the global economy, i.e.:
• the length of the crisis
• the explosion of unemployment worldwide
• the risk of sudden collapse of all capital-based pension systems
A whole range of psychological factors will contribute to this tipping point: general awareness in Europe, America and Asia that the crisis has escaped from the control of every public authority, whether national or international; that it is severely affecting all regions of the world, even if some are more affected than others (see GEAB N°28); that it is directly hitting hundreds of millions of people in the “developed” world; and that it is only worsening as its consequences reveal throughout the real economy. National governments and international institutions only have three months left to prepare themselves to the next blow, one that could go along severe risks of social chaos. The countries which are not properly equipped to cope with a surge in unemployment and major risks on pensions will be seriously destabilized by this new public awareness.
Moreover no one should imagine that the improvement at the end of 2010 will correspond to a return of high growth. The recovery will take long. For instance, stock markets will take a decade to return to levels comparable to 2007, if they ever return to that. Remember that it took twenty years before Wall Street resumed its 1920 levels. Well, according to LEAP/E2020, the present crisis is deeper and longer than in the 1930s. The general public will gradually become aware of the long-term aspect of this crisis in the coming three months and this situation will immediately trigger two tendencies carrying with them socio-economic instability: fear of the future and enhanced criticism towards leaders.
Finally, among the various consequences of the crisis for dozens of millions of people in the US, Canada, UK, Japan, Netherlands and Denmark in particular (3), there is the fact that, from the end of the year 2008 onward, news about major losses on the part of the organizations in charge of managing the financial assets supposed to finance pensions will multiply. The OECD anticipates that pension funds will lose 4,000 billion USD in 2008 only (4). In the Netherlands (5) as well as in the United Kingdom (6), monitoring organizations recently blew the whistle asking for an emergency contribution reappraisal and a State intervention. In the United States, growing numbers of announcements call for contribution increases and benefit reductions (7).
All the trends described above are already at work. Their combination and the public becoming aware of the consequences they could entail, will result in the great collective psychological trauma of Spring 2009, when everyone will realize that we are all trapped into a crisis worse than in the 1930s and that there is no possible way out in the short-term. The impact on the world’s collective mentalities of people and policy-makers will be decisive and modify significantly the course of the crisis in its next stage. Based on greater disillusion and fewer beliefs, social and political instability will settle down worldwide."
Bottom Line:
Quite a startling report isn't it? The bottom line here folks is be prepared. Raise cash, pay off debt, and pullback on non discretionary spending. You are going to need the money later.
Everything I am now reading now suggests that 2009 will be a sight to behold. I am convinced its going to take a decade or more to get out of this. The Fed is out of bullets. They have taken rates to zero, and their balance sheet is starting to look as bloated as Rosie O'donnell stomach after Thanksgiving dinner.
O'bama will come out with a stimulus in January but it will be nothing but a short term fix. Building infrastructure is great, but when its done we are left with a bad economy with nice highways.
Watching the Fed delay the bursting of the bubble is excruciating to me. Its like watching a doctor holding a needle one inch from your arm and freeze. Give me the dam shot and lets move on from this! Do the math above folks.
The debt game is history and so in our economy.
Wednesday, December 17, 2008
Crisis of Confidence/The Last Bubble
Good evening Folks!
Stocks were down around 1% today after rising sharply yesterday after the Fed shocker. Ahhh....I don't even know where to begin.
Lets start with SRS since many are confused with the price action here. Here is whats going on. There are a few reason why SRS has dropped. I have two articles posted below that I would like all of you to read. The key trigger was a new tax law that was announced last week that basically allows REITS to pay dividends in stock versus cash. The government is trying to create liquidity out there folks and this was a nice win for the REITS that are now bleeding red and are short on cash.
Keep in mind folks, the Fed will pull whatever trigger they can in order to create this liquidity including even changing tax codes. Yesterday's Fed statement pretty much told you that they plan on doing whatever it takes to create liquidity and stimulate borrowing. HA! Like thats gonna work!
Here is the tax code story on the REITS:
"A real estate investment trust can pay its dividends with stock, says a new ruling released last week.
Robert Willens - CFO.com US
December 15, 2008
While cash hoarding may not be a conventional reaction to the holiday spirit of giving, it is likely a prudent move for some cash-strapped companies. That is especially true of real estate investment trusts, which may be better off paying out dividends in stock, rather than cash.
The National Association of Real Estate Investment Trusts (NAREIT) thought so too, and in response to the current liquidity crisis, was looking for ways to provide incentives to REIT shareholders to nudge them to take stock, rather than cash, out of the trusts. One incentive was to provide shareholders with a tax deduction. However, a tax code threshold — specifically having to do with a cash cap related to a dividend election option — would have to be reduced to sweeten the incentive.
As a result, NAREIT implored the Internal Revenue Service to lower the cash cap associated with the aggregate shareholder distribution to 5 percent. Last week, the IRS budged a little — albeit not as much as the trade association would have liked. In IRS Revenue Procedure 2008-68, the government delivered a cash preservation incentive to REITS that was in line with recent private letter rulings, and dropped the cap needed to qualify for the deduction from 20 percent to 10 percent."
Here is article #2 regarding SRS and the REITS
"15:07 Fitch reports liquidity of U.S. equity REITs weakening Fitch reports the liquidity of U.S. equity real estate investment trusts (REITs) is showing signs of drying up. With U.S. equity REITs situated at the nexus of a recessionary economy, weakening property fundamentals, near-frozen debt capital markets and weakened stock prices, the implications for liquidity are broad. While most REITs maintain liquidity surpluses, the number of REITs with liquidity shortfalls has increased. "We are more concerned about the refinancing and funding risks for companies with liquidity shortfalls, and such companies face potential ratings downgrades should funding markets not reopen." Moreover, with commercial real estate debt markets stressed and asset sale opportunities limited, REITs are now largely reliant on bank revolving lines of credit to fund near term maturities, which concerns Fitch as the banking system is significantly strained. While Fitch found that health care and self-storage REITs have improved their liquidity positions in recent months, each other sector has weaker liquidity on average. That being said, REITs' capital structures have not changed fundamentally during the current economic downturn, according to Fitch. Going forward into 2009, "management team focus on cash preservation and access to multiple sources of liquidity will remain an important aspect of Fitch's REIT ratings."
My Take:
Article one was a big reason why SRS has been flushed this week. Who knew a tax code change was coming on their divi payouts? The reality here is paying dividends in shares of stock versus dollars does nothing but dilute the share price of the stock. This is not a game that will end well.
My story hasn't changed regarding the oncoming disaster in commercial real estate. Article #2 pretty much tells you why there was a tax code change. These companies are barely keeping their heads above water and are on the verge of imploding. There survival is purely based on continuing access to credit, and we all know how bad the credit markets are right now.
Adding to SRS's problems is the perception that the Fed will provide the liquidity necessary to keep the credit game going in all real estate. This is why you also saw the financials hold up fairly well again today. Credit is back! The problem is nobody wants it!
There is a big problem here folks. THIS IS ALL AN ILLUSION. The Fed cannot continue to supply infinite credit to everyone. Its trying to create the illusion that they can because they are desperately attempting to restore confidence. Folks, confidence is DEAD. The Madoff $50 billion Ponzi scheme may have been the last nail in the coffin.
The mortgage aplication story says it all. Mortgage rates have been free falling as treasuries drop. So what did this do for mortgage applications? They rose a whopping 2.9% from already patheticly low levels.:
"Dec. 17 (Bloomberg) -- Mortgage applications in the U.S. increased 2.9 percent last week as more homeowners refinanced to take advantage of lower interest rates.
The Mortgage Bankers Association’s index of applications to buy a home or refinance a loan rose to 841.4 from a revised 817.7 a week earlier. The group’s refinancing index increased 6.5 percent, while the purchase gauge dropped 4.5 percent.
Declining mortgage rates, brought on by Federal Reserve actions to purchase mortgage-backed debt, are making it more attractive for existing loan holders to refinance. Even so, the faltering economy continues to discourage home purchases."
Final Take:
Why was there no substantial increase in mortgage applications despite historically low rates? BECAUSE THE ECONOMY IS IN SHAMBLES AND NO ONE TRUSTS THE SYSTEM. There is absolutely zero confidence out there folks. Nada...None..Zilch.
Imagine if rates had dropped to these levels during the housing bubble. There would have been a bing fest in refi's as the flippers and speculators ran wild! No one wants to buy a house now because you don't know what its worth because they keep changing the rules. What if you buy at 4% and the Fed is unable to continue to keep rates this low and rates move to 8%? You are asking to get screwed until the rules stop changing. Adding to the problem here is unemployment is rising as the economy falters. Who wants to make a 30 year commitment when they don't know if they will have a job next week!
The Fed continues to ignore the fact that no one wants credit right now and the FED CANNOT FORCE THEM TO. The fact that they dropped the FF rate to zero and promised to buy up MBS and treasuries in an attempt to re inflate the housing bubble is frightening. I feel like I am watching a train wreck in slow motion!
How could they be so stupid? Cheap money is what got us into this mess. How does creating even cheaper money fix it?
When a heroine addict loses control you don't fix the problem by giving him an even higher dose of HEROINE! My god the idiocy here is beyond belief.
Bottom Line:
SRS and treasuries are now ticking time bombs in my opinion. The price action on anything financial related could be positive short term as the Fed floods the financial system with money. How long does this BUBBLEFEST continue? I wish I knew.
What I do know is it cannot be sustained and the response by the Fed does not fix the problem around the economy. The actions taken here does nothing but kick the can down the road, and put us even deeper in the hole from a debt perspective.
This game can't go on forever because the Fed is essentially using our tax money to buy treasuries in order to fund itself. Its also highly dependent on the world demand for treasuries. There will be a point where the world says NO MAS and demand for treasuries will drop dramatically.
The Fed has a little problem in terms of creating demand for our debt: TREASURIES ARE NOW PAYING ZERO PERCENT! Whose to say there isn't a "run on the treasuries" akin to a "run on the bank"? Furthermore: Perhaps everyone that's in money markets will decide to put their money in a safe at home or underneath a mattress.
Why wouldn't you if you are losing money every month. Treasury based MM's funds will be forced to pay you nothing plus hit you with their normal fees. This means you will lose money every month on your nest egg! How long will investors put up with this? I know I won't! I am very close to telling the banks to go pound sand and take my money out of my CD's and sleep on top of them at night. Luckily I have a roomy mattress!
I can assure you I am not alone. The "unintended consequences" to these Fedactions are numerous, and I don't even think the Fed totally understands how the markets and investors are going to react to this.
I don't feel safe putting my money anywhere anymore. Making matters worse, nothing makes any fiscal sense because I get zero returns on anything thats considered to be safe. What starting to anger me now is I let the banks hold onto my money which then allows them to use it as capital to lend off of and make money.
Why in the hell should I allow them to make money off of my capital if they are paying me zero percent in return?
The safe is looking more and more like the safest option. The banks can go screw themselves as far as I am concerned.
Trading:
Real quick. I sold my Goldman calls this morning for a tidy profit. I plan on continuing to scale into SRS. I see this as a great buying opportunity. It took an extraordinary combination of tax changes and historic Fed moves in order to get us down to these levels.
This ponzi debt game cannot be sustained and the Fitch article tells you that the REITS are hanging on by a thread.
That being said you need to respect the Fed's balance sheet. They will throw everything they can at this real estate problem. Buying into any financial or real estate shares should be done in increments versus all at once.
There is a lot I didn't get to tonight. 1873 will have to wait until later this week.
Stay tuned!
Stocks were down around 1% today after rising sharply yesterday after the Fed shocker. Ahhh....I don't even know where to begin.
Lets start with SRS since many are confused with the price action here. Here is whats going on. There are a few reason why SRS has dropped. I have two articles posted below that I would like all of you to read. The key trigger was a new tax law that was announced last week that basically allows REITS to pay dividends in stock versus cash. The government is trying to create liquidity out there folks and this was a nice win for the REITS that are now bleeding red and are short on cash.
Keep in mind folks, the Fed will pull whatever trigger they can in order to create this liquidity including even changing tax codes. Yesterday's Fed statement pretty much told you that they plan on doing whatever it takes to create liquidity and stimulate borrowing. HA! Like thats gonna work!
Here is the tax code story on the REITS:
"A real estate investment trust can pay its dividends with stock, says a new ruling released last week.
Robert Willens - CFO.com US
December 15, 2008
While cash hoarding may not be a conventional reaction to the holiday spirit of giving, it is likely a prudent move for some cash-strapped companies. That is especially true of real estate investment trusts, which may be better off paying out dividends in stock, rather than cash.
The National Association of Real Estate Investment Trusts (NAREIT) thought so too, and in response to the current liquidity crisis, was looking for ways to provide incentives to REIT shareholders to nudge them to take stock, rather than cash, out of the trusts. One incentive was to provide shareholders with a tax deduction. However, a tax code threshold — specifically having to do with a cash cap related to a dividend election option — would have to be reduced to sweeten the incentive.
As a result, NAREIT implored the Internal Revenue Service to lower the cash cap associated with the aggregate shareholder distribution to 5 percent. Last week, the IRS budged a little — albeit not as much as the trade association would have liked. In IRS Revenue Procedure 2008-68, the government delivered a cash preservation incentive to REITS that was in line with recent private letter rulings, and dropped the cap needed to qualify for the deduction from 20 percent to 10 percent."
Here is article #2 regarding SRS and the REITS
"15:07 Fitch reports liquidity of U.S. equity REITs weakening Fitch reports the liquidity of U.S. equity real estate investment trusts (REITs) is showing signs of drying up. With U.S. equity REITs situated at the nexus of a recessionary economy, weakening property fundamentals, near-frozen debt capital markets and weakened stock prices, the implications for liquidity are broad. While most REITs maintain liquidity surpluses, the number of REITs with liquidity shortfalls has increased. "We are more concerned about the refinancing and funding risks for companies with liquidity shortfalls, and such companies face potential ratings downgrades should funding markets not reopen." Moreover, with commercial real estate debt markets stressed and asset sale opportunities limited, REITs are now largely reliant on bank revolving lines of credit to fund near term maturities, which concerns Fitch as the banking system is significantly strained. While Fitch found that health care and self-storage REITs have improved their liquidity positions in recent months, each other sector has weaker liquidity on average. That being said, REITs' capital structures have not changed fundamentally during the current economic downturn, according to Fitch. Going forward into 2009, "management team focus on cash preservation and access to multiple sources of liquidity will remain an important aspect of Fitch's REIT ratings."
My Take:
Article one was a big reason why SRS has been flushed this week. Who knew a tax code change was coming on their divi payouts? The reality here is paying dividends in shares of stock versus dollars does nothing but dilute the share price of the stock. This is not a game that will end well.
My story hasn't changed regarding the oncoming disaster in commercial real estate. Article #2 pretty much tells you why there was a tax code change. These companies are barely keeping their heads above water and are on the verge of imploding. There survival is purely based on continuing access to credit, and we all know how bad the credit markets are right now.
Adding to SRS's problems is the perception that the Fed will provide the liquidity necessary to keep the credit game going in all real estate. This is why you also saw the financials hold up fairly well again today. Credit is back! The problem is nobody wants it!
There is a big problem here folks. THIS IS ALL AN ILLUSION. The Fed cannot continue to supply infinite credit to everyone. Its trying to create the illusion that they can because they are desperately attempting to restore confidence. Folks, confidence is DEAD. The Madoff $50 billion Ponzi scheme may have been the last nail in the coffin.
The mortgage aplication story says it all. Mortgage rates have been free falling as treasuries drop. So what did this do for mortgage applications? They rose a whopping 2.9% from already patheticly low levels.:
"Dec. 17 (Bloomberg) -- Mortgage applications in the U.S. increased 2.9 percent last week as more homeowners refinanced to take advantage of lower interest rates.
The Mortgage Bankers Association’s index of applications to buy a home or refinance a loan rose to 841.4 from a revised 817.7 a week earlier. The group’s refinancing index increased 6.5 percent, while the purchase gauge dropped 4.5 percent.
Declining mortgage rates, brought on by Federal Reserve actions to purchase mortgage-backed debt, are making it more attractive for existing loan holders to refinance. Even so, the faltering economy continues to discourage home purchases."
Final Take:
Why was there no substantial increase in mortgage applications despite historically low rates? BECAUSE THE ECONOMY IS IN SHAMBLES AND NO ONE TRUSTS THE SYSTEM. There is absolutely zero confidence out there folks. Nada...None..Zilch.
Imagine if rates had dropped to these levels during the housing bubble. There would have been a bing fest in refi's as the flippers and speculators ran wild! No one wants to buy a house now because you don't know what its worth because they keep changing the rules. What if you buy at 4% and the Fed is unable to continue to keep rates this low and rates move to 8%? You are asking to get screwed until the rules stop changing. Adding to the problem here is unemployment is rising as the economy falters. Who wants to make a 30 year commitment when they don't know if they will have a job next week!
The Fed continues to ignore the fact that no one wants credit right now and the FED CANNOT FORCE THEM TO. The fact that they dropped the FF rate to zero and promised to buy up MBS and treasuries in an attempt to re inflate the housing bubble is frightening. I feel like I am watching a train wreck in slow motion!
How could they be so stupid? Cheap money is what got us into this mess. How does creating even cheaper money fix it?
When a heroine addict loses control you don't fix the problem by giving him an even higher dose of HEROINE! My god the idiocy here is beyond belief.
Bottom Line:
SRS and treasuries are now ticking time bombs in my opinion. The price action on anything financial related could be positive short term as the Fed floods the financial system with money. How long does this BUBBLEFEST continue? I wish I knew.
What I do know is it cannot be sustained and the response by the Fed does not fix the problem around the economy. The actions taken here does nothing but kick the can down the road, and put us even deeper in the hole from a debt perspective.
This game can't go on forever because the Fed is essentially using our tax money to buy treasuries in order to fund itself. Its also highly dependent on the world demand for treasuries. There will be a point where the world says NO MAS and demand for treasuries will drop dramatically.
The Fed has a little problem in terms of creating demand for our debt: TREASURIES ARE NOW PAYING ZERO PERCENT! Whose to say there isn't a "run on the treasuries" akin to a "run on the bank"? Furthermore: Perhaps everyone that's in money markets will decide to put their money in a safe at home or underneath a mattress.
Why wouldn't you if you are losing money every month. Treasury based MM's funds will be forced to pay you nothing plus hit you with their normal fees. This means you will lose money every month on your nest egg! How long will investors put up with this? I know I won't! I am very close to telling the banks to go pound sand and take my money out of my CD's and sleep on top of them at night. Luckily I have a roomy mattress!
I can assure you I am not alone. The "unintended consequences" to these Fedactions are numerous, and I don't even think the Fed totally understands how the markets and investors are going to react to this.
I don't feel safe putting my money anywhere anymore. Making matters worse, nothing makes any fiscal sense because I get zero returns on anything thats considered to be safe. What starting to anger me now is I let the banks hold onto my money which then allows them to use it as capital to lend off of and make money.
Why in the hell should I allow them to make money off of my capital if they are paying me zero percent in return?
The safe is looking more and more like the safest option. The banks can go screw themselves as far as I am concerned.
Trading:
Real quick. I sold my Goldman calls this morning for a tidy profit. I plan on continuing to scale into SRS. I see this as a great buying opportunity. It took an extraordinary combination of tax changes and historic Fed moves in order to get us down to these levels.
This ponzi debt game cannot be sustained and the Fitch article tells you that the REITS are hanging on by a thread.
That being said you need to respect the Fed's balance sheet. They will throw everything they can at this real estate problem. Buying into any financial or real estate shares should be done in increments versus all at once.
There is a lot I didn't get to tonight. 1873 will have to wait until later this week.
Stay tuned!
Tuesday, December 16, 2008
1873 all over agin?
I will have more tomorrow.
The Nikkei didn't buy this move by the Fed one bit. Their market is up a whopping 33 points as I speak.
Japan knows the deflation game all to well and this move today by the Fed was a desperate attempt to re inflate the economy. Japan attempted the same thing and failed miserably so why would they think things would play out any different here?
This is no longer 1929 folks. Its 1873 in the US all over again. Japan was the most recent version of the deflation game we are now witnessing here in the US. The last time it happened here was shortly after the Civil War.
Do not be fooled by the price action today. I have been doing a ton of research tonight, and I don't like what I see.
Unfortunately I see no safe place to put your money in this current economy. The treasury market has now become the land of "zero returns".
The Fed is not manipulating the treasury markets here folks. The smart money in the bond market is front running the Fed announcements in a desperate attempt to find safety. Earlier on I believed it was the Fed that was causing the huge drops in treasury yields.
I was wrong. Rick Santelli nailed it today when he asked his buddy the Wolfman who is a trader in Chicago this question: "What do you do when the 800lb gorilla(the Fed) in the room announces its going to make a move?"
Answer from the Wolfman: "You front run the gorilla."
So when the Fed announced they may do a quantitative easing or buy MBS, the smart money all flocks there before the Fed and waits to get paid.
Bill Gross who is one of the smartest guy on Wall St and the king of bonds now has 80% of the assets in his largest fund(total return) in MBS(mortgage backed securities). When asked why he explained they are paying 4-1/2%. The Fed announced last week that they planned on doing whatever it takes to get credit flowing agian and that included buying MBS. So if you are Bill Gross and you know the money is going to flow there, why not take 4-1/2% with a government guarantee when treasuries are now paying you nothing?
This front running is the story folks, and treasuries are eventually going to lose their luster in the eyes of foreign central bankers as this unfolds. When this happens(and I don't have a timeline here) its going to be ugly.
I will have much more tomorrow. We are in uncharted territory here everyone and I had to go back to 1873 in order to find anything close to what we are seeing in our markets today.
What I read during these times was frightening.
Stay tuned!
The Nikkei didn't buy this move by the Fed one bit. Their market is up a whopping 33 points as I speak.
Japan knows the deflation game all to well and this move today by the Fed was a desperate attempt to re inflate the economy. Japan attempted the same thing and failed miserably so why would they think things would play out any different here?
This is no longer 1929 folks. Its 1873 in the US all over again. Japan was the most recent version of the deflation game we are now witnessing here in the US. The last time it happened here was shortly after the Civil War.
Do not be fooled by the price action today. I have been doing a ton of research tonight, and I don't like what I see.
Unfortunately I see no safe place to put your money in this current economy. The treasury market has now become the land of "zero returns".
The Fed is not manipulating the treasury markets here folks. The smart money in the bond market is front running the Fed announcements in a desperate attempt to find safety. Earlier on I believed it was the Fed that was causing the huge drops in treasury yields.
I was wrong. Rick Santelli nailed it today when he asked his buddy the Wolfman who is a trader in Chicago this question: "What do you do when the 800lb gorilla(the Fed) in the room announces its going to make a move?"
Answer from the Wolfman: "You front run the gorilla."
So when the Fed announced they may do a quantitative easing or buy MBS, the smart money all flocks there before the Fed and waits to get paid.
Bill Gross who is one of the smartest guy on Wall St and the king of bonds now has 80% of the assets in his largest fund(total return) in MBS(mortgage backed securities). When asked why he explained they are paying 4-1/2%. The Fed announced last week that they planned on doing whatever it takes to get credit flowing agian and that included buying MBS. So if you are Bill Gross and you know the money is going to flow there, why not take 4-1/2% with a government guarantee when treasuries are now paying you nothing?
This front running is the story folks, and treasuries are eventually going to lose their luster in the eyes of foreign central bankers as this unfolds. When this happens(and I don't have a timeline here) its going to be ugly.
I will have much more tomorrow. We are in uncharted territory here everyone and I had to go back to 1873 in order to find anything close to what we are seeing in our markets today.
What I read during these times was frightening.
Stay tuned!
Monday, December 15, 2008
Its Awfully Quiet Out There!
Good Evening Folks
For the first time in months there is not a lot of news to discuss. I don't have much to say! Tomorrow will be a huge day as we hear Goldman Sachs earnings before the bell followed by Morgan Stanley. There is a lot of buzz around how large Goldman's loss will be.
It will be interesting to see how the market reacts to the results. Many bottom callers are out there screaming that stocks are now way undervalued after the 40%+ decline equities have taken this year. I of course think they are full of crap. Expect things to quiet down after tomorrows huge news day as the holidays arrive. Beware of the bulls during this quiet time!
FAZ and SRS worked well today.
I plan on being nimble with FAZ tomorrow. I will be closely watching how the futures react to the Goldman earnings. Either way, I will most likely get out of FAZ at the open. The reason I say this is if Goldman reports a disasterous quarter and we get a big drop at the open it will be time to take some profits. I am up nicely on the position and there is no sense in trying to be a pig whith the financials being as beaten down as they are. If Goldman beats, I am outta FAZ because the financials are going to take a moonshot.
I expect them to try and throw out the kitchen sink tomorrow. My guess is their losses will be a disasterous and the stock will get clobbered. IMO, this clobbering could create a nice entry point on the long side on Goldman. We will be heading into the holidays where trading volumes tend to get light. Rallies often occur is these situations, and many traders may attempt to take advantage of this and pick up Goldman if the stock gets clobbered at the open. Thanksgiving ring a bell anyone?
I can hear the "bubble buys" spinning the bad Goldman quarter already. "Its a kitchen sink quarter!..blah blah blah". If for some reason Goldman pulls a shocker and pulls of a miracle good quarter my FAZ shares will be renamed FIZ and I will get taken to the cleaners. Its a risk I am willing to take.
I plan on still holding SRS despite what happens tomorrow. I still think SRS will move much higher from here.
Gold continues to move as the dollar is beginning to show some weakness. I also think gold is moving higher because treasuries are paying squat right now.
Investors are desperate to find safe havens that actually pay returns better than the zero % seen in treasuries!
As a result, gold and commodities are starting to look much more attractive. If the dollar and treasury yields continue to drop I believe this is where the smart money will start flowing.
Here are the stocks on my radar on the long side as a result of the above trends:
DIG, gold, GDX, NUE, AA
Still short the financials and commercial real estate. Apple is on the radar but I am not ready to pull the trigger.
I will have a much more extensive update tomorrow or Wed. I may have to travel tomorrow on business so I might not get it up until Wed. Also, Don't forget we also have the Fed announcement tomorrow as well. ZERO RATES HERE WE COME!
Stay Tuned!
For the first time in months there is not a lot of news to discuss. I don't have much to say! Tomorrow will be a huge day as we hear Goldman Sachs earnings before the bell followed by Morgan Stanley. There is a lot of buzz around how large Goldman's loss will be.
It will be interesting to see how the market reacts to the results. Many bottom callers are out there screaming that stocks are now way undervalued after the 40%+ decline equities have taken this year. I of course think they are full of crap. Expect things to quiet down after tomorrows huge news day as the holidays arrive. Beware of the bulls during this quiet time!
FAZ and SRS worked well today.
I plan on being nimble with FAZ tomorrow. I will be closely watching how the futures react to the Goldman earnings. Either way, I will most likely get out of FAZ at the open. The reason I say this is if Goldman reports a disasterous quarter and we get a big drop at the open it will be time to take some profits. I am up nicely on the position and there is no sense in trying to be a pig whith the financials being as beaten down as they are. If Goldman beats, I am outta FAZ because the financials are going to take a moonshot.
I expect them to try and throw out the kitchen sink tomorrow. My guess is their losses will be a disasterous and the stock will get clobbered. IMO, this clobbering could create a nice entry point on the long side on Goldman. We will be heading into the holidays where trading volumes tend to get light. Rallies often occur is these situations, and many traders may attempt to take advantage of this and pick up Goldman if the stock gets clobbered at the open. Thanksgiving ring a bell anyone?
I can hear the "bubble buys" spinning the bad Goldman quarter already. "Its a kitchen sink quarter!..blah blah blah". If for some reason Goldman pulls a shocker and pulls of a miracle good quarter my FAZ shares will be renamed FIZ and I will get taken to the cleaners. Its a risk I am willing to take.
I plan on still holding SRS despite what happens tomorrow. I still think SRS will move much higher from here.
Gold continues to move as the dollar is beginning to show some weakness. I also think gold is moving higher because treasuries are paying squat right now.
Investors are desperate to find safe havens that actually pay returns better than the zero % seen in treasuries!
As a result, gold and commodities are starting to look much more attractive. If the dollar and treasury yields continue to drop I believe this is where the smart money will start flowing.
Here are the stocks on my radar on the long side as a result of the above trends:
DIG, gold, GDX, NUE, AA
Still short the financials and commercial real estate. Apple is on the radar but I am not ready to pull the trigger.
I will have a much more extensive update tomorrow or Wed. I may have to travel tomorrow on business so I might not get it up until Wed. Also, Don't forget we also have the Fed announcement tomorrow as well. ZERO RATES HERE WE COME!
Stay Tuned!
Sunday, December 14, 2008
Chart Day Today!
Hello All
I have a very important football game to watch today(Go Steelers!) so I will be brief.
I wanted to share a few graphs from Itulip that I picked up last night. Eric Janszen did a really nice job here. I will summarize my thoughts after the charts.
As you can see below, for the first time in history household debt is declining:
I have a very important football game to watch today(Go Steelers!) so I will be brief.
I wanted to share a few graphs from Itulip that I picked up last night. Eric Janszen did a really nice job here. I will summarize my thoughts after the charts.
As you can see below, for the first time in history household debt is declining:
At the same time wages are falling:
As for the Fed meeting this week. A rate cut isn't going to help us much considering the effective funds rate is already near zero:
Botton Line:
The first chart tells you that households are finally starting to payoff debt. This tells you the consumer is pulling back on spending and paying off debt. This will exacerbate the deflationary forces that are now hitting our economy. I was amazed that this was the first time we have ever paid down household debt in the countries history. This was bound to happen after spending like a drunken sailor for 25 years!
The second chart displays the drops in wages as the economy suffers. Any spike in inflation would be devastating as wages continue to drop. This will also be highly deflationary IMO because people can't pay higher prices for assets when their wages are dropping.
Whats frightening to me is inflation will be a problem down the road as a result of all of the bailouts. The Fed has dropped money out of helicopters to the tune of $8 trillion. This at some point is going to result in massive inflation. The Fed will then be forced to spike interest rates in order to bring it down. Rememeber 1982 when interest rates were 13% on a mortgage? Don't be at all surprised if we see the exact same thing a year or two from now. If this occurs, houses will be selling for 100k or less in many suburbs.
The third chart I just threw up there to show that the Fed rate is already at zero. Any rate decrease that could occur this week shouldn't effect the markets too much. The market rate is already below where the Fed is. We should be right there at zero with Japan in no time!
Add this all up and it spells deflation folks. Hold off buying any large assets like cars, houses, and flatscreen TV's. They will continue to spiral down in price.
Sadly, our economy will spiral down right along with it.
J
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