This Debt Bubble is Getting Heavy!

Good Evening Everyone

Well I feel a little better now that Merrill's Thain got fired today. The New York Attorney General is now investigating the bonuses that were purposely handed out a month early to Merrill employees. Its about time the cops woke up. I hope they enjoyed their 25 year nap!

It appears Mighty Merrill is going right down the tubes. CNBC reported today that Merrill's bonus pool was down only 6% versus 2007's payouts while Goldman's pool dropped 80% over the same period. Merrill is now a disgrace. You can put them right alongside Enron and MCI Worldcom as far as I am concerned. Whats amazing is $13 billion of their losses in the 4th quarter were from trades! I guess they bet the house long in early October before stocks took another tumble.

Stocks got off to a rough start today after the Microsoft shocker. All the major indices closed down 1-2%. Things continue to worsen folks. Not much to explain here. Google beat estimates after hours so tomorrow will be interesting. More on trades later.

Housing Continues to Slump

Bloomberg reported that housing prices have dropped the most in at least 18 years:

"Jan. 22 (Bloomberg) -- Home prices in the U.S. dropped the most in at least 18 years and builders broke ground on the fewest houses since record-keeping began as the recession deepened, government reports said today.

Prices in November declined 8.7 percent from a year earlier, the biggest drop in records going back to 1991, the Federal Housing Finance Agency said today in Washington. Housing starts fell 16 percent last month to an annual rate of 550,000, the lowest since the government started compiling statistics in 1959, the Commerce Department said.

“We are witnessing a severe recession, historic declines in housing prices, growing job loss and a concern that these negative trends are accelerating,” Timothy Geithner, President Barack Obama’s nominee for Treasury secretary, said in written responses to questions posted on the Senate Finance Committee Web site today."

Quick Take:

Anyone feel like buying a house? I'll pass!

Keep waiting folks, we are nowhere near the bottom. Don't get suckered into a house with these phony 4% interest rates unless you plan on living there for 30 years. Why? Because the massive printing of money that will be needed to fund all of these bailouts will eventually create massive inflation. Rates will then have to rise dramatically in order to quell inflation.

So how is that going to work out for you as a buyer if you buy now at 4% and try to sell 5 years from now when rates are at 8% or more? Ummm let me answer that for you: It will end very badly. If rates double down the road, your house would be worth at least 50% less than the price you would pay today using this artificially cheap money. These rates cannot be sustained folks. The risks involved buying a home right now are simply way too high. Keep renting.

Beware of Interventions!

I picked up a chart yesterday that I really liked:

Bottom Line:

I think this chart is extremely important when you look at where we are right now when it comes to the markets.

We basically have collapsed back to the lows that we reached in October/November. As you can see above, the interventions by the government dramatically increased when we got down to these levels and stared off the edge of the cliff. This must be taken into consideration when you are trading right now.

Obama just got into office and he will most likely attempt something dramatic as we again once again near the brink of a collapse. Obama is a smart guy and he knows that what he does in his first 100 days could define his presidency. He also realizes that whatever he does now could also be forgotten 4 years from now.

I expect him to take dramatic actions in the next few weeks in an attempt to turn this thing around. This could cause extreme volatility in the stock market. I took a lot of larger positions off today. I sold my XLF and FAZ over the last two days. I scalped a nice short on QID calls this afternoon. However, at the close, every position that I left on was very small except for SRS. I kept whats left of my C PUTS because I think Obama might take them out. I consider that a little lotto play. The only other trade that I have on are a few QQQQ calls.

My point here is its easy to get rammed by interventions at these levels so you must play small until we learn more. It doesn't matter whether you are long or short. Obama will fire a bazooka and its going to move the markets.

However, its hard to position trade until we know what he fires. If he does the "bad bank/good bank" thing and puts the banks bad assets on the gov's balance sheet and keeps the shareholders whole it will appear to be a win/win and the markets will likely roar. What people don't realize is the treasury market will blow up if he attempts to do this. Shorting treasuries will be a great play there.

On the flip side he could take out the common shareholders of the large banks and nationalize them which could cause a crash in equities. Either way, you could empty your account attempting to front run this and end up on the wrong side of the trade. I think the better play here is to be patient and counter punch because I think we move higher on the news.

Remember, Obama is now the Messiah, and when he comes out with a massive market "sticksave", the herd will cheer and most likely gobble up stocks. This will create a great a sweet shorting opportunity if he blows his head off with his bazooka(there is know way outta this mess folks so rest assured he will blow his head off). Shorting bailout bounces has proved to be a highly profitable trade over the last year and this one may be the sweetest of all.

The bottom line here is we are nearing a climax. The debt bubble is about to pop and Obama can't stop it but he's going to try. In my opinion its time to be reactive versus proactive.

Either way you play it please be careful. If Merrill can lose $13 billion trading so can you.