Wednesday, April 1, 2009

Nassim Taleb/Market Update

Good Afternoon Folks!

I wanted to start off today with a video from Nassim Taleb. I suggest that you go out and read his book entitled "Black Swan". Nassim in my opinion is the best thinker out there when it comes to understanding this financial crisis.

His advice below on what to do with your money going forward is the best advice that I have heard so far. There is nothing wrong with cash! Stocks should be a smaller speculative piece of your portfolio.


Market Update:

All of the major indices rose sharply once again today. We continue to hover around the 800 level on the S&P. The bulls and the bears continue to duke it out here. The bulls are desperately fighting to hold 800 area (2002 lows) on the S&P because there is very little resistance to bounce off of underneath it.

In fact if you look at the charts, there is virtually no resistance on the S&P until around the 475-500 area which is right when the tech bubble started taking off:

As you can see above, there is nothing but air between 800 and 475 on the S&P. We have seen a classic double top. This chart scares both the bears and the bulls because if we manage to hold 800 then the bulls have a nice argument that we have put in a bottom(Personally I think that's a pipedream but that's besides the point).

However, if we break decisively below 800 for a second time, the bears have a compelling argument that we must test the 1995 475-500 area before possibly finding a bottom. I am solidly in this camp and praying that 475 holds because we will see Financial Armageddon if it doesn't.

So what pushed us higher today?

Personally, I think its all about the FASB mark to market meeting tomorrow:

"WASHINGTON, April 1 (Reuters) - The U.S. audit watchdog will evaluate accounting rulemakers' final mark-to-market rule changes to determine whether the watchdog in turn will need to issue new guidance to auditors, a Public Company Accounting Oversight Board spokeswoman said on Wednesday. The Financial Accounting Standards Board, which sets U.S. accounting rules, is meeting on Thursday to fine-tune proposals that will give banks more flexibility to value their toxic assets in the current illiquid markets. However, banks will not use FASB's new guidance to value their hard-to-price assets if there is a chance that their auditors will not agree with the banks' valuation, industry groups have said. Business groups and at least one senior Democratic lawmaker have been pressuring the PCAOB to get in line with any of FASB's changes. "The PCAOB will evaluate the FASB's final accounting guidance to determine whether any conforming amendments to the auditing standards will be necessary or whether other guidance would be helpful," said PCAOB spokeswoman Colleen Brennan."

My Quick Take:

This is a can of worms that we don't need to be opening right now folks. However, it doesn't take a rocket scientist to figure out what will happen tomorrow. You know that FASB is going to cave into the corporate pressure and change some of the accounting standards. This of course leaves us with the potential risk of having hundreds of "Enrons" lined up down Wall St.

What these clowns need to realize is transparency is a must in order to turn this whole thing around. Allowing companies to cook the books will have the exact opposite effect that we are looking for!!! We need to restore confidence! More games do nothing but further destroy it.

Whats ironic here is there are rumblings that Geithner's recovery plan may be blown to pieces if the M2M rules are dramatically changed. I totally agree.

I mean think about it:

If you are a bank and you are allowed to hold assets on your books without taking the proper losses via new accounting: Why would you want to sell them at a huge discount if you are not penalized by holding them on the books without taking a loss? If you sell them via Geithner's TALF you are guaranteeing a large loss on your sale of assets because private money will only buy them at a huge discount.

Most banks will most likely say "no thanks" and hold onto the assets hoping that the market comes back which would then allow them to pare their losses on their holdings. OOOOPS! Sorry Timmy! It looks like the FASB boys are about to shove it up your *** tomorrow.

Lets see how this all develops. I think this FASB announcement could very well be a "sell the news" type event.

The Economic Collapse Continues

I wanted to finish today with some more data around our economic collapse:

The ADP jobs Report was horrific:

"April 1 (Bloomberg) -- Companies in the U.S. cut an estimated 742,000 workers in March, pointing to no relief in sight for the labor market amid the longest recession in seven decades, a private report based on payroll data showed today.

The ADP report was forecast to show a decline of 663,000 jobs, according to the median estimate of 30 economists in a Bloomberg News survey. Projections were for decreases ranging from 525,000 to 750,000."

Expect the jobs report to be really bad on Friday based on the ADP data.

We also got some nasty foreclosure data out of Fannie/Freddie via the WSJ:

"07:52 FNM Fannie Mae, Freddie are pressured as homeowners fall behind - WSJ (0.70 ) WSJ reports the rapid rise in the number of borrowers skipping their mortgage payments is putting renewed pressure on the financial reserves of Fannie Mae and Freddie Mac. Fannie (FNM) and Freddie (FRE), which own or guarantee nearly $5 trillion, or half, of the nation's mortgages, have seen their serious delinquency rates -- mortgage payments 90 days or more past due -- shoot to records in the past few months. It isn't just the levels that are worrying but the speed at which homeowners are falling behind on their monthly payments. This week, Fannie reported that 2.77% of the single-family loans held in its $785 billion investment portfolio were delinquent in January. That's a 0.35 percentage point increase from the month before, the largest such increase since the co started tallying the data in 1998. This is more than double the 1.06% a year earlier. Freddie's level stands at 2.13%."

Bottom Line:

The Fannie/Freddie data is just flat out ugly. 90 day delinquencies have more than doubled from a year ago up to 2.13%. Gee...Do you think this might have something to do with the fact that Americans are losing jobs at a 650k per month clip?

Because Americans have so little savings, its only a matter of days before a homeowner stops paying the mortgage if he/she loses their job. Whats the delinquency number going to look like 6 months from now when several more million lose their jobs?

What cracks me up is the banks say they are ready to pay their TARP money back? HA! You might want to hold onto that guys. I think your going to need it as millions of homeowners walk away from their bloated mortgage payments as they continue to lose their jobs.

The incessant pumping my bubblevision and the pigmen has to just make you laugh sometimes.

CNBC was jumping for joy when they announced a 2% increase in home sales today. When you dig into the release, you realize that the West Coast saw a noticeable dropoff in sales. This is concerning because California is where home sales first started to recover after seeing 50% price drops.

What this tells me is their housing recovery was not sustainable. Should we be surprised with the jobs outlook deteriorating like it is? This does not bode well for the future.

With jobs falling like flies and the banks unwilling to lend, I put the chances of a sustainable housing recovery at slim to none.

Until Tomorrow!


Jeff said...

Gee what a shocker.

Treasury announced after hours just threw another $46 billion of our taxpayer dollars into Fannie and Freddie.

Shut down these god damn black holes!!! God this is so frustrating!!!!

What are we going to toss $50 billion every other month to these cockroaches. Thats the second massive injection this year.

When does it ever end!!!!!!!

April 1 (Bloomberg) -- The U.S. Treasury injected $46 billion in emergency funds into government-controlled mortgage-finance companies Fannie Mae and Freddie Mac.

The Treasury payout yesterday included a $15.2 billion investment in Fannie’s preferred stock and a $30.8 billion purchase of Freddie’s preferred shares, the companies said in separate filings to the Securities and Exchange Commission today. The companies must pay a minimum dividend of 10 percent.

The Obama administration and Congress have been leaning on the government-sponsored enterprises to help lower mortgage rates and loosen lending requirements even as the two suffer record losses on their existing mortgage investments. Regulators put the two into conservatorship in September, and the Treasury has agreed to invest as much as $200 billion into each company as needed when their assets fall below the value of liabilities

Both companies said in recent securities filings that they will need more aid and that the $400 billion Treasury lifeline may not be enough to stay afloat this year."

Peter said...

Taleb is always a great interview, thanks for having to watch that crappy channel for me. Although listening to Huffington makes waterboarding seem like a vacation.

I love the way he put investing in cash, you would have a 100% return in relation to the S&P.

Thanks for posting.

Jeff said...


I hear ya.

I can't stand watching CNBC either but every once in awhile you catch something worthwhile.

I loved the cash comparison too. I think down the road investors will get real tired of the volaitility in the market.

Fixed income will be back with a vengeance.

JoeMI said...

Regarding the rising delinquency rates: I think there has been a shift in mentality for most people. It used to be "pay the mortgage at all cost." Now it's - well, my neighbors are walking away, why not me. Rather than working to pay, even if laid off, people just stop paying, knowing that it will probably be a year before they are evicted. Heck, I've even told friends and family that if I'm paid off I'll immediately stop paying debt bills. There's just no moral reason to any more.

Jeff said...


I totally agree.

The banks are in no rush to get families out of foreclosures.

They are already up to their neck in inventories. I think they would prefer to have someone in their taking care of the place.

I don't think they have any desire to recognize the loss either.

I would consider doing the same if I lost my job. The banks got their bailout while the taxpayers got nothing.

I guess perhaps we give ourselves our own bailout by not paying the bills.

I am disgusted watching the markets today. We are going to spend ourselves right off a cliff.

The mark to market rule change is another disaster waiting in the wings. I wonder how many Enrons we end up with after this change.

This country is destroying itself. Its very sad.