Saturday, March 21, 2009

Bring Back Paul O'Neill!

Good Afternoon Folks

All is pretty quiet on the news front. I wanted to share this excellent video featuring former Treasury Secretary Paul O'Neill. Its time to replace Turbo Timmy with this guy.

I apologize for the audio delay on the video. I couldn't agree more with what Mr. O'Neill has to say here. We need to put a floor under this mess and it all begins with knowing what the losses are.

This is the type of leadership that is sorely lacking in Washington DC.

Here Here Mr. former Treasury Secretary!

Friday, March 20, 2009

Market Sells The Sticksave

Just some commentary today folks.

Well here we are day 2 after the Fed's spending binge. The market sold off for a second day in a row as the markets continue to digest Ben's shocking announcement this week.

I think you may be seeing here is a little buyers remorse from the bulls. The reason I say this is there is only one way to interpret the Fed's actions on Wednesday: Things are bad and getting much worse. There is no other reason for them to take such drastic actions.

I think many of the bulls are deciding to take profits now after a 20% bounce. The rally that began a few weeks ago was based on the premise that we should be coming out of the recession later this year or in early 2010. The rally really got its legs when the pigmen from Citi, BofA, and JPM all started glowing about how profitable things were since the beginning of the year. Yeah right! If things are so great then lets see a balance sheet!

The timing of all this was always very suspicious to me. I have no doubt that this was an orchestrated move that was probably instigated by the Fed. Seeing Ben Bernanke on 60 Minutes chirping about our remarkable "recovering" economy only confirmed it for me. This was nothing but a sham to increase confidence in our collapsing banking system. Gee what a surprise eh? NOT.... I stopped trusting these scumbags a long time ago.

Nonetheless, the market loved the news and was oversold so it resulted in a large bounce. If there is one thing I have learned: Never underestimate the optimism from the bulls no matter how bad things are. Their buying sprees can occur on the flip of a dime. Any small piece of news or intervention can spark these bear market rallies. Remember, this country basically had a 25 year run where stocks always went up. Habits are tough to break and the bullish sentiment among most investors will take time to change after such a long run.

Its going to take time for them to accept the new world in which we invest in. Stocks aren't going to double every 10 years like they used to.

I think the reality of this new world hit a lot of bulls this week. Ben's action's really pulled the rug out from under the bull case that we will see a late second half recovery. The Fed doesn't take such policy actions unless the economy is on the verge of a collapse and even the bulls understand this.

Despite the recent pullback, I still think you are going to see another push from the bulls before the market really breaks down. The reflation trade will be pumped and pumped everyday by CNBC. I am pretty sure this will result in further moves in the commodity and energy stocks. They have already soared since the Fed's actions. Oil now sits comfortably over $50 a barrel.

This reflation trade is a foolish bet in my opinion: The question you need to ask yourself when you think about reflation/inflation is this: Where will the demand for commodities come from if incomes are flat or declining and unemployment continues to rise? No jobs=less consumption. Less consumption results in less demand for resources.

This being said, I can see why many of the pundits are extremely concerned about inflation. There are many reasons to be fearful of this threat. We will have to create trillions of dollars as we try and fail to bailout America. The drop in the dollar alone will push dollar denominated commodities higher which will result in some inflation. The inflation trade short term is not a bad strategy because that's how the market will play it.

However, long term I still can't see how inflation takes hold. The deflationary death spiral aka Japan is still the most likely scenario in my view. I say this because inflation can only take hold when wages are increasing and people have jobs. We are seeing nothing of the sort during this downturn.

Wages are flat or decreasing and unemployment is soaring as our economy continues to shrivel. This big move in commidites will be a nice short but its too early in the cycle to go there at this point.

Is the dollar safe?

The one large risk that I see from a inflationary standpoint is the collapse of the US dollar. I could never have previously imagined this folks, but I think we now have to put it on the table.

The G-20 summit is going to be very interesting. I think the sentiment towards the US and our approach to our economic crisis is really beginning to worry the rest of the world. I expect us to take a lot of heat in London next week.

Their concern is warranted. Right now the whole world pretty much has all of their eggs in one basket economically. Decoupling turned out to be a joke. Most of worlds reserves sits in the US treasury market. China has already came out and stated that they are worried about their treasury holdings.

We better take these concerns seriously. For us to think that the world will continue to keep their assets in the US if we continue to spend and act irresponsibily would be a foolish conclusion. There have already been rumblings around China and Russia meeting to discuss some type of world currency alternative. This would have been considered tinfoil a few years ago. Nowadays I view it as a serious potential threat.

Whats scary here is the actions taken by the Fed this week make me think that we actually are arrogant enough to asssume that the world is going to sit there and take it as we continue and spend like drunken sailors. You know what happens when you ASSuME. Good luck with that approach Ben!

We need to start asking ourselves if the US dollar is actually safe? If it isn't then whats the alternative? What do we all do if the world decides to walk away from the US dollar and our treasuries?

I wish I had the answer for you folks. Buying gold is an alternative but I can't promise you that it will hold its value. Think about it: If the crap hits the fan, who can really afford to buy gold at $5,000 an ounce? The goldbugs all love to tell you that this will be the conclusion but how can you be so sure? This is why gold has always considered to be just a hedge: Its basically a wildcard. Many traders will tell you that "trading gold always end in tears". Could gold be worth 5k an ounce if Mad Max occurs? Sure, but at the same time it might only be worth using as a doorstop if some alternative currency is developed.

Bottom Line:

I think its time for all of us to start thinking outside the box. If the Fed and Treasury are hell bent on spending us into oblivion then we must begin to prepare for a possible collapse in the US dollar.

This is a serious risk in my view, and I plan on focusing more time on how we can all protect ourselves. Trading this market really doesn't matter if the dollar becomes worthless. On top of that, all of the interventions have made the market almost impossible to trade anyway. Word on the street is there were many professional bond traders that were completely wiped out in Chicago after the Fed announced their quantitative easing. A half a point move in treasuries is all it takes to wipeout someone completely out.

The Fed and the Treasury are hurting every investor with their constant meddling in the markets. The bulls and the bears are both taking it on the chin. If this crap continues investors are going to start walking away. I know I have for the most part. 85% of my assets are in cash. Anything that I own long is hedged with short positions.

Think about it: Without actual price discovery how do you trade? I mean how can any bond trader in Chicago feel confident in any trading positions when there is the constant risk that the Fed could step in and change the game at anytime? How will a stock trader be able to trade stocks if the mark to market accounting rules are changed and no one knows what any companies balance sheet really looks like?

The markets will eventually find themselves without buyers if the fraud and manipulation continue.

Transparency must come back or we are in deep trouble folks. The world will not continue to support our markets if we continue to run them like like a bunch of mobsters.

I will stay in cash for now but stay tuned for future posts around some alternatives because I am not sure cash is the place to be anymore. The government must ringfence our losses RIGHT NOW and immediately stop any future bailouts if it wishes to continue in its current form.

Anything less then this will result in social chaos by the end of the year.

Stay Tuned!

Thursday, March 19, 2009

Rosenberg's take on QE

I just wanted to share a great read from David Rosenberg.

One thing to note here is the the Nikkei rallied 20% over the course of the following two months after they announced their quantitative easing.

However, Rosenberg later points out that the market gave back the whole 20% move over the course of the following two months. We have already seen about a 20% rally from the lows so we now sit in a tough area trading wise.

Did we already see our bear market rally or is there another leg up before we give it back? This is a very tough call here. If the bubbleheads on Wall St buy into the idea that the Fed has saved us we could rally on. Never underestimate the stupidity of the bulls.

Remember, Bernanke never would have decided to buy treasuries if things were getting better. He obviuosly saw a ghost when he looked at the economic data. The regular "recession" playbook has failed so he must have concluded that drastic measures must be taken in order to try and save the economy.

Don't be fooled by this rally. Things are deteriorating. The Fed's drastic move proved it yesterday. An economic collapse is very much on the table. Gold soared over $70 today. John Paulson who I consider to be the best hedge fund manager out there just bought a large piece of a gold miner.

The smart money is diversifyfing because they are concerned that the dollar could collapse as a result of the Fed's actions.

Be very careful here and stay hedged if you are trading. Rosenberg is advising clients to stay in fixed income and I couldn't agree more.

Wednesday, March 18, 2009

The Fed's Last Bullet

Good Afternoon Folks


Its official! We are now officially Financing ourselves!

That's all I can say in response to the Fed's announcement that they will be purchasing US treasuries. Here is the big news from Bloomberg:

"March 18 (Bloomberg) -- The Federal Reserve opened a new front in its battle to bring down borrowing costs across the economy, pledging to buy as much as $300 billion of Treasuries and stepping up purchases of mortgage bonds.

The announcement following the Federal Open Market Committee meeting today in Washington spurred the biggest rally in longer- dated Treasuries in decades. Officials unanimously voted to expand the Fed’s balance sheet up to $1.15 trillion, and said they may broaden a program aimed at boosting consumer loans to include other assets, today’s statement showed.

With today’s move, the Fed has committed to buy or loan against everything from corporate debt, mortgages and consumer loans to government debt, after cutting its benchmark interest rate to zero failed to end the credit crunch. The unprecedented campaign comes after a worsening recession sent the unemployment rate up to a quarter-century high of 8.1 percent."

My Take:

I am still in shock that Ben actually pulled the trigger. 10 year treasury yields collapsed on the news:

So what does this all mean?

It means the world will never be the same. Let me start with the good news. This is the refinancing opportunity of a lifetime. If your job is stable and you have equity in your house, by all means refi!.

OK, back to the grim reality of this situation:

The fact that the Ben actually decided to actually risk going down this dangerous path tells me that the Fed has seen some type of economic ghost. The dollar collapsed on the news.

The risk of "unintended consequences" is extremely high here.

Think about it folks, WE ARE NOW OFFICIALLY FINANCING OURSELVES. What type of message do you think this sends to the countries that buy our debt? Gee, do you think they might be a little nervous about the value of their treasuries as they see us wallowing in trillions of dollars in debt? The Fed's balance sheet just grew by $1.15 trillion today alone and now totals more than $3 trillion dollars.

What the Fed announced today may very well lower the demand for treasuries going forward:

You see, US treasuries have always been considered to be the safest investment on Earth. Buyers around the world crowd into US treasuries when they are looking for a "safe haven" because they are extremely confident that they will be paid back. However, after Ben's desperate expansion of the Fed's balance sheet, Investor's now gotta be asking themselves: Is this still the case?

We need to ask ourselves a few other questions here:

1. Did the Treasury decide to buy their own debt because demand began to wane worldwide?

2. If this doesn't work, then what?

3. Will the banks pass on these lower rates to customers or will they try and pocket the difference in an attempt to bail themselves out?

4. How are we ever going to pay these trillions of dollars back?

5. Is the Treasury Market turning into the biggest bubble of them all? What happens if it bursts?

6. Will China and Japan continue to buy our debt OR decide that now is the time to SELL because the Fed is now buying?

7. Where does the Fed draw the line in terms of how many treasuries they will buy?

8. Do we risk a bond market dislocation as a result of all of this? How can a Chicago trader trade bonds when there is an 800lb gorilla in the room(the Fed) that could wipe him out at any second.

Bottom Line:

As you can see, there are many risks by going down this path of quantitative easing. There WILL be unintended consequences here folks. Its going to take some time for the market to digest all of this, but when it does: Look out!

In my opinion this is a huge mistake. We are basically trying to reflate a massive debt bubble. As I have said before, BUBBLES DON'T REFLATE.

What the Fed has essentially done here is used its balance sheet to replace the investment banks Ponzi like leverage. The problem with this theory is the consumers balance sheet remains DEleveraged. No one has the money or appetite for risk that's needed in order to take advantage of all of this cheap Ponzi lending.

As a result, this can't work. You can't reinflate one side without reinflating the other. Consumer's are still up to their neck in debt and losing their jobs. This hardly sets up a scenario where they want to borrow. If anything, they would prefer to throw any extra money they have under the mattress because they are terrified they may lose their job.

The economy has been destroyed, and today's desperate actions by Bernanke confirms this. The Fed is trying to temporarily use its balance sheet to "triage" a patient that's already dead.

Remember folks, we have seen this show before in Japan:

As you can see above, lending COLLAPSED after its bubble burst in the early '90's. No one had any appetite for risk after getting burned so badly as a result of their deflationary spiral. The same "quantitative easing" that we announced today was also attempted in Japan in the 1990's. You can see how well that worked out.

Bernanke's now officially out of bullets. Expect this policy to fail miserably just like it did in Japan. How does this all play out in the market? Tough call. Stocks at these levels are simply too risky for my taste. I could see them heading in either direction. Stocks retraced to close up 100 points after soaring nearly 220 points following the announcement.

The bulls will attempt to keep the momo going by playing the "reflation" trade following the Fed's spending orgy. Expect energy and commodity stocks to move higher if the market continues to bounce. I could also see a scenario here where the market asks itself "now what?" and then proceeds to sell off.

Remember, the market hates uncertainty. I don't see how things could get more uncertain with the Fed now officially involved in the treasury market.

Watch the 800 area on the S&P. If the market fails to move higher from these levels I will be inclined to jump in on the short side. IMO, Don't try and front run this freight train. Let the market sort this all out first before you get too bold.

Stay tuned folks and god help us all if this doesn't work.

Tuesday, March 17, 2009

Why Are We Building More Condos!!!?


That was the sound of my hand slapping my forehead in disbelief. Housing stocks jumped on the news that housing starts rose 22%:

"March 17 (Bloomberg) -- Housing starts in the U.S. unexpectedly snapped the longest streak of declines in 18 years in February, adding to signs that the pace of the economy’s decline may be easing.
Work began on 583,000 homes at an annual rate, a 22 percent rise from January, the Commerce Department said in Washington today. The jump was influenced by warmer weather and an 82 percent surge in starts on condominiums, apartments and townhouses that’s unlikely to be sustained, analysts said."

Quick Take:

What in the hell are these builders thinking? We have 11 months of housing inventory guys! There are empty condo buildings all over the frickin place. We don't need anymore capacity. All of these empty condos will end up being apartments so we don't need more apartment building either!

The question I have here is why are the banks allowing these builders to continue to build? They are all bleeding red and already can't sell what they have currently built. Are we so desperate for economic growth right now that we are willing to add capacity in areas of the economy that are in the middle of collapsing?

Hellooo!!!!! Anybody home? We just saw the largest housing bubble in American history burst! I am sure the banks can find better borrowers to lend to.

Note to builders: STOP BUILDING!!! If anything, we should be burning houses down right now instead of making new ones.

Rally On!

So why did stocks soar again today? Because ummm........ because ummmmm.... ahhhh... actually I gotta be honest, I have no frickin clue why stocks rose again today. Here is the explanation(if you can call it that) from Bloomberg:

"March 17 (Bloomberg) -- U.S. stocks advanced, erasing more than half the loss in the Standard & Poor’s 500 Index since President Barack Obama took office, on an unexpected rebound in homebuilding and speculation that the Federal Reserve will outline plans to bolster the economy.
Citigroup Inc. and JPMorgan Chase & Co. rose at least 7.7 percent as the KBW Bank Index extended its gain since March 6 to 46 percent. KB Home, the fourth-largest U.S. homebuilder, rallied 9.3 percent and Home Depot Inc. rose 6.7 percent as housing starts unexpectedly climbed 22 percent in February, the most since 1990. Apple Inc. added 4.4 percent to help lead technology shares higher after updating its iPhone software."

My Take:

The bull is back! Home building is back! Yeah Baby!(sarcasm off).

What in the hell are the bulls smoking? I wanna try some of that!

Seriously, you've got to be kidding me. There is no fundamental reason to like stocks right now. The rise in housing starts is bad because it will just add to bloated inventories. A smart banker once told me if you lend money to builders they will always build because its what they do.

The banks need to cut off the credit lines to the builders and force them to work down inventories and become profitable again.

I just laughed when I watched the market today. The talking heads on CNBC today reminded me of "the running of the bulls" in Spain. All you heard today was stocks are a screaming buy because the recession is going to end by the end of the year. Yeah right: SOLD TO YOU!

This rally reminds me a lot of the Bear Stearns rally: Lots of hope with no fundamentals. Its kinda funny because Bear Stearns happened almost the same exact time last year!

The problem today folks is things are very different now than they were a year ago: The economy is much worse today, and our debt levels gone through the roof to the tune of $11 trillion as a result of these bailouts.

Its amazing what a difference a year makes: Remember all of the outrage a year ago when the Treasury spent $29 billion fixing the Bear Stearns debacle? We wouldn't bat an eye if that happened today. Dollarwise, thats a drop in the bucket compared to today's bailout world. Hell, today we spend $29 billion a quarter now on companies like Freddie and AIG.

When you look at the reality of what we are spending its really disturbing:

Bottom Line:

As you can see, our debt obligations are soaring at a time in which our tax base is crumbling. When I look at this chart, all I can think of is how on earth are we ever going to pay for this?

I don't think anyone on this planet has the answer. The way I see it, this bailout spending is nothing but a giant economic experiment that's gotten completely out of control. Our lack of financial discipline in response to this crisis is going to haunt us down the road. The only way we will ever pay this off is buy slashing entitlements and living a much lower quality of life for several generations.

The government continues to try and spend spend spend its way into prosperity. This has been attempted many times throughout history and guess what? Its NEVER worked.

There is only one thing that's for certain once this spending binge is completed: We will all be debt slaves for the rest of our lives.

Raise cash!

Monday, March 16, 2009

AIG Feels The Heat

Hi all!

Just a few notes. I don't have a lot of time tonight.

Today was an interesting day. We had a pretty wicked reversal. We were up 160 points or so at one point during the session before closing in the red on all of the major indices.

The most interesting news of the day was Obama's tough talk around AIG and their ridiculous bonus payouts.

"March 16 (Bloomberg) -- American International Group Inc., barraged by criticism on how it’s using $173 billion of taxpayer money, faces demands from President Barack Obama to rescind or repay $165 million in bonuses.

AIG also may get a subpoena from Andrew Cuomo, New York State’s attorney general, who wants a list of everyone who received the bonuses. The payments were part of a $1 billion plan by AIG to reward employees for staying with the crippled New York-based company, once the world’s biggest insurer.

AIG has faced pressure to disclose more on its operations since the U.S. took a stake of almost 80 percent last year. Yesterday, AIG named at least 20 banks that received money to avoid losses after buying credit-default swaps from the insurer. The derivatives almost bankrupted AIG, and the bonuses Obama cited went to employees who created or sold them.

“It’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million,” said Obama at the White House speech today. “How do they justify this outrage to the taxpayers who are keeping the company afloat?”

Quick Take:

Has Obama finally had enough of Wall St's greed? I all know I have! The arrogance of these pigs is beyond belief. How dare you bonus yourselves after being bailed out to the tune of $165 billion. IMO Wall St's continued greed is whats going to end up taking them down in the long run.

Obama seemed flat out pissed today. Kudos to him for standing up to these fraudsters. I love AIG's explanation for the bonuses: We need to pay these bonuses in order to keep our talent.

Who in the hell wants to keep this type of "talent" around? They drove the company into the ground for Christs sake! Whats so insane is the derivatives traders that created the mess were supposed to get a piece of this bonus pool. These leeches should be working for $1 a week after almost taking down the financial system. Better yet, throw them all in jail. Bonuses? HA! You're kidding right?

Is the rally toast?

I am starting to ask myself this question. We have seen about a 16% rally on the S&P. This type of move is usually where you see bear market rallies begin to fade. This 750 area on the S&P seems to be setting up as a possible resistance area for the bulls.

I may add a few shorts tomorrow. I was hoping we would get up to 800 before jumping in. I am not sure we are going to get there after the news today. The news is beginning to really put pressure on this rally. Am Ex announced that credit card delinquencies rose in February. Alcoa cut their dividend after hours.

As I type, Reuters just announced this bomb after hours:

"NEW YORK (Reuters) - U.S. credit card defaults rose in February to their highest level in at least 20 years, with losses particularly severe at American Express Co (AXP.N) and Citigroup (C.N) amid a deepening recession.

AmEx, the largest U.S. charge card operator by sales volume, said its net charge-off rate -- debts companies believe they will never be able to collect -- rose to 8.70 percent in February from 8.30 percent in January.

The credit card company's shares wiped out early gains and ended down 3.3 percent as loan losses exceeded expectations. Moshe Orenbuch, an analyst at Credit Suisse, said American Express credit card losses were 10 basis points larger than forecast.

In addition, Citigroup Inc (C.N) -- one of the largest issuers of MasterCard cards -- disappointed analysts as its default rate soared to 9.33 percent in February, from 6.95 percent a month earlier, according to a report based on trusts representing a portion of securitized credit card debt."

Bottom Line

I think you may see some profit taking tomorrow. 16% is a nice gain, and I don't think the bulls are convinced this bear market is over.

There are also some rumors floating around that a huge company is going BK next week but I haven't been able to confirm anything.

One thing to take note of today. Commercial Real Estate really diverged from the financials all day today. This is the first time I have seen any significant divergence between the two. SRS soared almost 15%. Many of the commercial REIT's dropped 10% or more. It may be time to short some IYR. Some are pointing to HRE in Germany as a potential "Lehman" like CRE time bomb.

I am not ready to call this bounce dead, but I believe we are getting close. If Obama starts to hammering Wall St things could really get interesting.

Stay Tuned!