Saturday, January 24, 2009

Could German Debt Replace US Treasuries as the new "Safe Haven"?

Hello Everyone!

I hope everyone is enjoying their weekend. I just wanted to share a couple of great reads that I picked up.

Prudent Bear's Martin Hutchinson makes a compelling argument for buying German debt over US Treasuries.

The second article is from Bloomberg. 30 year treasuries posted their largest weekly loss since the crash of 1987.

Quick Take:

As you can see in the second article, yields on the 30 year rose 43 basis points for the week as we get ready to sell our soul in treasuries in order to pay for these ridiculous bailouts.

Is this the beginning of a longer term trend where interest rates begin to soar because world demand for our debt is dropping off or is it just a one week blip?

Time will tell but it does raise my eyebrows. Remember we have seen this story before and it wasn't that long ago. Clinton came into office in the early '90's with a massive government spending program that included national healthcare. The bond market vigilantes came out of hiding shortly after and took rates significantly higher which forced Clinton to back off on his spending.

Now today we are in extraordinary times today so Obama will have much more leeway in terms of spending. However, there will be a point at which the bond market says "enough is enough".

Lets keep an eye on the bond market as Obama's economic stimulus gets prepared to take its first run through Congress. If the bond market doesn't like how its being spent, we could see yields rise and interest rates soar.

Friday, January 23, 2009

Market Update

Hello Folks

Just a quick post. Today was a fairly quiet day considering all of the pressures that continue to mount regarding our collapsing economy. The DOW closed down around 1/2% while the NASDAQ and S&P both closed mildly higher.

There has been a lot of discussion around the DOW and its value as a measurement on Wall St. Many of the financials that have collapsed under $10 are part of the DOW index. Citigroup and Bank of America are two that come to mind. GE is another company on the DOW that you could throw into this group considering its morphed into a financial hybrid. Many of these companies will be forced out of this index as a result of their low share prices.

The talking heads on CNBC and elsewhere have been reporting that if you marked the financials that are now on the DOW down to zero, the index would only lose around 300 points.

As a result, the DOW has become a very inaccurate tool when it comes to gauging the health of the markets. I would focus on the S&P if you are looking to see how the market is moving in general. Today's divergence on the DOW from the other indices is a great example of what I am talking about.

Got Gold?

This was the story of the day. The bullion surged up to almost $900 an ounce. Congratulations to all the goldbugs!

This move has been fueled by the potential collapse of the UK in combination with fears that the world economy is about to collapse.

Merrill's David Rosenburg's latest discusses gold and is a must read. Here is the link. Note his take on the bullion. The gold supply is shrinking as the money supply is rapidly increasing around the world. This is econ101 here folks: Supply versus demand + fear means gold should work nicely here in the near term.

Bottom Line

We really didn't learn much today. It was a tug of war between the bulls and the bears all day. The economic news continues to be horrific. Aflac was downgraded by S&P late today. I am beginning to wonder if this is the next area of destruction. The insurers all carry a boatload of level 2 and level 3 assets just like the banks did. We all know how that played out. We are now just starting to seriously pick up the rocks and look for the cockroaches.

I expect we will learn that almost every nook and cranny of the financial sector was infected by debt bubble disease.

From a trading perspective, I can see the market breaking in either direction. The consensus seems to be 50/50. Some think we soar to new highs as we ride the Obama wave while others think we break lower as the economy collapses. I have been leaning towards a bounce, but I am starting to question this.

I say this because the market had every reason to rally today. Google earnings beat estimates last night and GE met estimates this morning. Despite the positive news, the futures sold off to -200 today at the open as the world markets were taken a beating. The fact that we rallied all the way back but couldn't take stocks higher in the afternoon must have be discouraging for the bulls.

I see no confidence out there folks. I am afraid the collapses overseas may prevent our markets from moving higher. There is a lot of fear out there. Look at gold! If treasuries start to sell off and yields begin to get attractive then the equity markets could take a beating. Why? Because if you can get 5% yields or higher in treasuries then why bother dealing with the cesspool that we like to call Wall St?

A treasury selloff is a distinct possibility if the rhetoric between Obama's administration and China continues. The weakness in the economies around the world should also weaken further demand for treasuries. Keep your eye on the yields folks. I actually picked up some TBT today.

That's about it for the day everybody. My guess is we head south on Monday. The futures sold off fairly hard after hours. That is usually not a good sign. I am still hedged short.

Have a nice weekend!

Thursday, January 22, 2009

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.

Wednesday, January 21, 2009

Merrill Lynch Robs the Taxpayer

Good Evening All

I hope everyone had a nice evening! Well, the fraud continues folks. If this isn't pure stealing at the expense of the taxpayer than I don't know what is:

"Merrill Lynch took the unusual step of accelerating bonus payments by a month last year, doling out billions of dollars to employees just three days before the closing of its sale to Bank of America.

The timing is notable because the money was paid as Merrill’s losses were mounting and Ken Lewis, BofA’s chief executive, was seeking additional funds from the government’s troubled asset recovery programme to help close the deal.

Merrill and BofA shareholders voted to approve the takeover on December 5. Three days later, Merrill’s compensation committee approved the bonuses, which were paid on December 29. In past years, Merrill had paid bonuses later – usually late January or early February, according to company officials.

Within days of the compensation committee meeting, BofA officials said they became aware that Merrill’s fourth-quarter losses would be greater than expected and began talks with the US Treasury on securing additional Tarp money.

Last week, BofA said it would be receiving $20bn in Tarp money, in addition to the $25bn that had been earmarked for it and Merrill last year. It was then revealed that Merrill had suffered a $21.5bn operating loss in the fourth quarter.

Despite the magnitude of the losses, Merrill had set aside $15bn for 2008 compensation, a sum that was only 6 per cent lower than the total in 2007, when the investment bank’s losses were smaller.

The bulk of $15bn in compensation was paid out as salary and benefits throughout the course of the year. A person familiar with the matter estimated that about $3bn to $4bn was paid out in bonuses in December.

Nancy Bush, an analyst with NAB Research, described the size of the 2008 Merrill bonus payments as “ridiculous”.

BofA said: “Merrill Lynch was an independent company until January 1 2009. John Thain (Merrill’s chief executive) decided to pay year-end incentives in December as opposed to their normal date in January. BofA was informed of his decision.”

BofA declined to specify when Mr Thain informed the bank of his decision.
A source familiar with the matter says Mr Thain, in the weeks leading up to the December 8 compensation committee meeting, had been weighing the possibility of requesting a bonus of at least $10m for himself before ultimately deciding against such a move."

Quick Take:

I don't know where to begin. If this act of greed doesn't infuriate you then I don't know what will. Please take note that Mighty Merrill lost $21.5 billion during the 4th quarter when they decided to reward themselves with billions in compensation a month earlier than usual. This is pure stealing folks. 3 days later they sold out to BofA.

How convenient Merrill. I am telling you folks the bankers are out of control. This kinda crap must be stopped immediately or no one will ever trust any financial company ever again. Can you imagine if you or I did such a thing? We would most likely be sued or put in jail if we attempted something so fraudulent. Merrill might as well have come to my house, grabbed my wallet, and taken the money themselves.

Why do these criminals get a free pass? Whats it going to take before our government takes a stand and says enough already?

Bottom Line:

The greed and fraud that occurred over the past several years is unprecedented. Its going to take years for us to heal from these wounds. Why are the rich continuously allowed to steal from the poor? This is Robin Hood in reverse!

Its time for our government representatives to look out for their constituencies and say no to this criminal behaviour!

I want to vomit when I read something like this.

Allowing Merrill to reward themselves with billions of dollars in bonuses a month early on purpose after losing over $20 billion in one quarter is just plain sickening.

We are left to pay the tab America. Where does it end?

Tuesday, January 20, 2009

Banking Panic!

Hello All

Sorry but I must be brief tonight. I have lots of work to do, but wanted to put a quick piece up given the amazing events today.

Today's 4% selloff was all about the banking sector. There was a virtual selling panic among all the financials as the continued lack of transparency forced all of the financial babies to be thrown out with the bath water. PNC lost over 40% of its value even though its a solid bank that did zero subprime loans.

This is what happens when the government won't let investors see the balance sheets! We need clarity here or all of these stocks are going to zero. I have to laugh at these greedy arrogant bankers,. They all thought they were so slick as they cooked their books.

They all assumed the Fed would swoop in and save the day and bailout their balance sheets without punishment. The bankers all figured their greed and insane risk taking would all be forgiven by their fellow banking buddies at the Fed without repercussions.

Ooops! Bad bet! Chalk this one up with all the other bad bets you made this year! It appears all of you clowns overplayed your hand just like Dickie Fuld did. Enjoy your ineveitable nationalization. In the future, don't mind the guy behind you . Its just a banking regulator breathing down your neck making sure you aren't committing fraud. That is if you are lucky enough to not get fired by the government first!

The arrogance and stupidity among the banks is beyond belief.

Some examples:

- BofA's Ken Lewis ridiculous overpayment for the acquisition of worthless toxic assets like Countrywide and Merrill Lynch.

- Wells Fargo acquisition of Wachovia and their horrifyingly bad lending portfolio.

- JP Morgan's acquisition of WAMU's worthless balance sheet.

What were these butt holes thinking? In my opinion, all of these "financial whizzes" simply got way too full of themselves just like Dickie at Lehman. When your holding 2,7 off suit in No limit hold-em poker you fold. These morons thought they could continuosly take limitless risk and go "all in" on every financial hand without any repercussions! They apparently thought the Fed had given them a limitless "get out of bail free" card. Well guess what folks? They are about to learn that that card was limitless to a point.

The reality of the situation here is their power and greed fooled them into thinking that they were unstoppable. If they all went to a psychologist they would be diagnosed with a classic case of narcissism. As the Romans learned thousands of years ago: No one is unbeatable. Go to the grave and ask Hitler and Napoleon how that theory worked out for them.

Its pretty simple: None of these CEO's would have gotten into this disaster this deep if they hadn't been blinded by pure greed.

There is one thing that really bothers me most about the fallout of this whole fiasco: I haven't seen one instance of remorse from any of the bankers on Wall St. Not one! I have yet to hear one "I'm sorry" or "I made a mistake" from any of these guys.

The only reaction I have seen from the pigmen so far is a string of suicides as these bunch of narcissistic asshats now realize that they must sell their jets and live like the rest of us. Its no shocker these whimps all took the easy way out. Don't get me wrong, my heart goes out to their families but you gotta admit it speaks volumes in terms of their lack of character.

I hope all of these large banks go to zero and get taken over by the government. From what I can see, there isn't a decent human being among the banking bunch. Lets fire them all and replace them with decent people who want to make money by using sound banking. Lets get rid of the banking crooks that became obsessed with milking as much money as they could from every US citizen.

The world of finance should be ashamed of themselves.

Bottom Line:

I don't know how this ends folks. FAZ was up $25 on the day closing at $88. Unfortunately, I was not home to take profits. I plan on doing so tomorrow. I will do the same with my XLF PUTS and I will most likely sell my Citi PUTS as well.

Could this freefall continue? Yup. Some of these stocks are going to zero due to nationalization because the government will have no choice. Citi and BofA are a mess. However, staying short doesn't make much sense at these levels. There is little meat left on these bones and if they aren't nationalized you could get rammed on the long side.

I made a few moves this morning. I sold my TBT and took profits anticipating a dive into treasuries due to the selloff. I also added some SRS this morning at around $62. I held my small long QQQQ call position as a hedge. I gotta say folks, today was a very sad day for me despite the fact that it was a very profitable one. I would pick a healthy banking system over some trading profits without even thinking about it.

As for TA, we broke through critical support today. The 740 low on the S&P is now back in play, and if we break that then god help us. The risks to the upside must also be respected because we are extremely oversold. Obama will also begin coming out with his agenda beginning tomorrow. I expect swift government intervention. Never underestimate the power of hope on the long side.

At this point, IMO hope is about all we got. Lets all "hope" that Obama can pull off a miracle and turn this thing around.

I am 100% behind you Obama. I hope you have the strength to make the tough choices. I hope you have the character to withstand the criticism when we are forced to say no to many bailouts.
I hope that you realize that both time and money are running out.

Monday, January 19, 2009

RBS Pummeled as Nationalization Looms

Good Afternoon Folks!

Well, now we know why our financial stocks crumbled last week. RBS stock dropped a whopping 66% after the UK government announced it was forced to pump additional capital into the bank. The government now owns 70% of this piece of garbage:

"Gordon Brown on Monday unveiled a second bank rescue package including powers for the Bank of England to lend up to £50bn directly to businesses, as he accused the Royal Bank of Scotland of taking ”irresponsible risks” as the bank’s shares collapsed.

His comments came as RBS on Monday warned it could report an annual loss of up to £28bn, following the mis-timed acquisition of ABN Amro, the Dutch lender it acquired as part of a €71bn (£63bn) hostile break-up bid in 2007.

The outburst from Mr Brown came as the Treasury agreed to replace the £5bn in RBS preference shares held by the government since the October bailout with ordinary stock. This will increase government ownership to almost 70 per cent.

Shares in RBS fell 20.1p or nearly 60 per cent to 14.6p, valuing the bank’s capital at less than £6bn, as investors feared the bank may be fully nationalised.

The scheme, which will be detailed more fully by the end of February, will allow banks to buy government protection for eligible assets by paying a fee, which will be agreed case by case. The fee is most likely to be paid through the issue of preference shares to the government, but the Treasury said it would consider taking cash.

The banks will remain responsible for a “first loss” amount, similar to an excess in a normal insurance claim, and will also remain liable for about 10 per cent of the residual loss. The government insisted on this clause to make sure the banks had an incentive “to endeavour to keep losses to a minimum.”

The assets can be denominated in any currency. Those most likely to participate in the scheme are portfolios of commercial and residential property loans; structured credit assets, including certain asset-backed securities; and other corporate and leveraged loans. The scheme is expected to continue for at least five years.

Similar schemes are expected to be set up in other countries, and the government said it would hold discussions with its international partners to co-ordinate them. Details of a similar scheme being considered by the US government are expected to emerge in the coming days, while other countries are expected to follow."

My Take:

Now this is interesting folks. It appears that the UK really starting to get pissed as they slowly get their hands around exactly what these banks did. These institutions took more risks than Evil Knievel!

I listened to Gordon Brown's announcement this morning. He was not a happy camper. In my eyes the nationalization risks just rose substantially for many banks around the globe.

Everyone is beginning to realize that nationalization may be the only way to permanently clean up these banks and exterminate the cockroaches that created this mess. If this happens the common stock goes to zero folks. I expect a violent reaction to the downside in the financials in next week.

Now I see why Citi and BofA scrambled to get earnings out on Friday. They knew this disaster was about to be announced. Traders were obviously front running this news as they violently dumped the financials all last week. Don't you love how we the people are always the last to know?

IMO, Owning shares in any large bank right now is suicidal! I will be interesting to see what the markets do tomorrow. Its Obama's big day so they might give stocks a pass.

Stay Tuned!

Sunday, January 18, 2009

Is This How It Plays Out?

Good Afternoon All!

I wanted to share a chart that I picked up from a trader on a subscription service that I belong to. I am not sure if the low on this chart is accurate, but I totally agree with the psychological aspect as to how this downturn will play out. Markets are all about confidence and once that is lost there are several psychological stages that investors must go through before the bull market ever comes back:

Quick Take:

There are many traders including myself that see the same type of scenario. I am not sure if we get down to 350 on the S&P but its a distinct possibility in my view if our government continues to go down the path that they have chosen.

I personally think the low on the S&P will bottom out at around 400-500. From a psychological stage perspective I think this chart is dead on. Remember folks, we haven't seen any real panic selling yet in the stock market. We haven't even had a 1000 point down day on the DOW since this correction got started.

I think we are now in the denial stage as the chart suggests. Once the Obama stimulus plan fails, panic and capitulation will be right around the corner.

One positive here is hope will eventually arrive after we take our medicine.

We will recover from this. However, a lot of pain must be taken before we get there.