Flat at the Close

Hello Folks!

Ugly! Ugly! Ugly!

Stocks collapsed today as economic conditions around the world continue to deteriorate. My personal take on today's waterfall is more about whats going on in Europe versus what is happening in the US.

Folks, its bad here, but its considerably worse everywhere else in the world. This makes the US dollar highly desirable because we are screwed but the world is screwed worse! As a result, many world currencies have become extremely vulnerable. The troubles we saw in our market today began last night when we had a worldwide currency collapse versus the dollar last night.:

"Feb. 17 (Bloomberg) -- The euro fell below $1.26 for the first time since early December after Moody’s Investors Service said it may cut the ratings of several banks with units in eastern Europe, adding to concern financial turmoil will deepen.

The dollar and yen gained against most of their major counterparts as stock markets fell, making the U.S. and Japanese currencies more attractive as havens. Poland’s zloty traded near a record low versus the euro as Deputy Prime Minister Grzegorz Schetyna said the weakening of the currency is dangerous.

“The Moody’s report has rehashed concerns about Eastern Europe, which is definitely weighing on the euro,” said Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut. “The banking system is at risk. There’s more reason to be bearish on the euro.”

The euro declined 1.5 percent to $1.2606 at 4:01 p.m. in New York, from $1.2801 yesterday, touching $1.2563, the lowest since Dec. 4. The euro will trade at $1.25 in three months, according to UBS. Europe’s currency slid 1 percent to 116.33 yen from 117.46. The dollar rose 0.6 percent to 92.30 yen from 91.73, after touching 92.75, the highest since Jan. 8."

Quick Take:

You aren't supposed to see currency moves like this! At one point last night the Euro had fallen over 1.1% versus the dollar. Moves like this usually take weeks to occur in any stable market. Consider this to be an ominous warning that there are deep problems over in Europe. The big fear around our Euro banking buddies lies around all of the bad lending that was done to Eastern Europe. Supposedly, close to $2 trillion was lent to the old Eastern Block.

The concern here is many of these countries economies are broke and their currencies are collapsing. Many likely do not have the money to pay back the loans. From what I have read, the concern among the European banks revolves around $400 billion inrollover payments that are due to be paid by Eastern Europe over the course of the next year.

The ability for these countries to pay back these loans is slim to none when you realize that some of these countries are taking bailouts from the IMF in order to just pay the bills. Hungary and the Ukraine have both received emergency funding from the IMF.

Reality check:

How can we expect these countries pay back these loans at a time in which they cannot even fund their own day to day operations?

Whats even more disturbing is the amount of money that these banks lent out. The Daily Telegraph out of the UK published a startling commentary around the amount of assets that the Western European banks hold. Apparantly, these assets have swelled to $41 TRILLION DOLLARS:

"The breakfast meeting discussed how EU governments should deal with, in other words pay for, the "toxic" banking assets that triggered the economic crisis.

As discussed here on Monday, the European Commission warned that government attempts to buy up or underwrite "impaired" assets could plunge the EU into a deeper crisis, one that threatens the Union.

Everyone is terrified that a second bank bailout will push up government borrowing at a time when bond markets have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain, to pay it back.

"Estimates of total expected asset write-downs suggest that the budgetary costs - actual and contingent - of asset relief could be very large both in absolute terms and relative to GDP in member states," a confidential EC document, seen by The Daily Telegraph, cautioned.

"It is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems."

Updated: Figures evaluating the 41.2 trillion euro of assets held on EU bank balance sheets are eye watering."

Final take:

These numbers are mind numbing. Our whole mortgage market adds up to only about $10 trillion dollars. The banks across the pond lent like a group of Bear Stearns Bankson Steroids!

What's interesting here is this commentary from the Telegraph has changed in the past week. The article had previously stated that there was an EU document that supposedly had expressed concern that as much as $16.3 trillion(Euro's) of these assets may go bad before its all said and done. That's $25 trillion dollars folks!

That number really wouldn't surprise me when you look at the massive 50-1+ leverage that was used from a borrowing perspective. Post collapse, this leverage is now gone and so is the borrowing power behind it. As a result, Europe's losses could have a pricetag of $25 trillion! This represent about a 44% drop in the value of these assets which seems to be about right when you look at what has happened to our deflationary asset spiral.

Housing over here is down 30% in value and the losses have shown no signs of stopping. I am sure the total losses here in the US will be closer to 50% when it all said and done. Whats startling about the piece above is the total dollar value($41 trillion) of the assets that are involved.

Bottom Line:

Lets talk a little trading. I decided to cover all of my shorts in my trading account. I still own a good amount BEARX and a little SRS in my retirement accounts. However, these are longer term holds that I plan on keeping until I believe this crisis is over and the market has seen its lows. We have a long ways to go before this occurs!

Short term I decided to cover all of my shorts in my trading account. This is nothing more than profit taking. I pretty much caught the whole move over the last week and a half. Being piggish historically has been very costly for me, and we have a huge news day tomorrow so I decided to get out of the way.

Fundamentally I think nothing has changed. My concern here revolves around Obama's speech. Obama's policies may not be the best, but he is a very bright politician and I believe he learned a lot from last week's Geithner debacle.

You can be sure that that he will not make the same lack of clarity mistake that Geithner did. I expect a clear definitive plan to be laid out tomorrow. Is it going to work? Of course not but that's beside the point.

First, let me be clear here and say that I hope he does find an answer to this bad asset problem.
This whole situation is getting extremely dire and we are nearing the breaking point. The world economies are now all covered in lighter fluid. One small spark here or abroad could very well take down the financial system. Eastern Europe has me EXTREMELY concerned BTW. This match could strike at any second.

If this happens longs and shorts won't matter folks so lets hope we find solutions to this problem.

Anyway, getting back to my Obama point, if Obama's plan looks OK to the naked eye than we could see a sharp bounce tomorrow. Its a dangerous setup for the shorts: Many of them have all piled in here expecting a retest of the 741 S&P lows. We almost set a new low on the DOW today which should increase short interest.. We missed a new low by less than one point!

The shorts have jumped in here because technically we should retest or break the 741 lows now that we have closed under 800 on the S&P(we closed today at 789 btw).

The problem with this short play is the technicals have meant very little over the last few weeks due to all of the interventions. Almost every technical site on the net had called for a multi month bounce before we retested. Technically I totally agreed with them. However, the recent trend is interventions(good or bad) trump technicals. This was clearly evident over the past week and a half. I know many good traders that got stuck going long last week.

I could be wrong here, but I think Obama makes a successful pitch tomorrow and stocks will bounce as a result. This guy is one of the best orators I have ever seen and this cannot be underestimated. I mean this dude can out sell Willie Lohman! People want to believe there is hope, and I think the prez delivers tomorrow.

Either way I will be flat heading into the news. I may take some positions once I get a chance to see his proposal.

Stay Tuned!