Saturday, April 4, 2009

SRS Warning/Market Bottoms

Good Afternoon Folks!

All is quiet on the news front so I thought I would share a couple of things that I picked up.

The first one is around the ETF's. I recommend that everyone reads this Morningstar article around these trading vehicles. Many of the bears jumped into the double and triple inverses like SRS(double short commercial real estate). If you held long term you made a big mistake. You can count me as one of the suckers here. I have had some SRS for about 6 months.

Take a look at the long term performance of SRS versus the IYR(long real estate) and the URE(double long real estate):

Quick Take:

Many bears got caught up in the idea of having the opportunity to double short sectors like commercial real estate. The problem with SRS is it only promises a one day return that doubles what the IYR does on each particular day. So as you can see above, if you jumped into SRS at a time when the IYR was crashing like it did last October, SRS delivered spectacular results as long as you sold.

However if you continued to hold it, the double leverage will kill you at times when the IYR recovers because it guarantees you will do twice as bad on any particular day. When you add this all up: Holding leveraged ETF's are not productive long term because nothing other than Lehman Bros. ever goes straight down!

The long term results here are shocking: The performance of SRS is about the same as going long commercial real estate via the IYR! Both resulted in about a 50% loss.

The bottom line here is ETF's like SRS are trading vehicles that should only be held for very short periods of time(Days) when you think commercial real estate may take an immediate plunge. If you want to short commercial real estate long term, you are much better off shorting the IYR via PUTS.

Market Bottoms

I came across this chart online and I thought it was great. Calling a market bottom is a fools game. Many of the bulls like Cramer are out there claiming that the bottom is in. I say bull****.

As you can see above, bear market rallies can be both viscous and extremely dangerous because they can easily suck investors back and then proceed to crush them a second time as the market heads lower. This happened repeatedly during the 1930's!

Take a good hard look at the first large bounce after the 1929 crash. There was a 50+% rally from 190 up to about 300 on the DOW. Everyone thought the bull was back and happy days were here once again! Oooops...Bad Idea! By the end of the following year, the market gave it all back and closed around 85.

History usually repeats itself folks. This IMO is the first real bounce that we have seen since the Sept/Oct crash. This current rally has been based on zero fundamentals. Its a bounce based on hope that things will get better combined with massive government interventions. The bounces seen in the '30's were based on the same things. These are not fundamental reasons to get back into the market.

You jump back into the market when you see strong economic fundamentals like job growth and affordable housing. I currently see nothing that resembles this.

The government and Wall St are going to do everything they can to suck you back into this market because they are desperate. IMO Don't be a sucker! Jump in when you see signs of a recovery. Investing based on hope is a great way to blow up your 401k.

If you want to get speculative and go long the market, test the waters with a small piece of your portfolio.

Until next time!

Friday, April 3, 2009

"Delusional" Market Rolls On!

Happy Friday to all!

Well Folks,

We saw another bullfest on Wall St. as stocks continued to move higher albeit mildly. So why did we move higher? Who knows? We all know sometimes the market beats to its own drum. The data continues to worsen so its not based on fundamentals.

For now, the bulls have successfully created a feeding frenzy based on speculation that the economy has bottomed. Combine this mania with a few interventions from the government and you create the perfect makings of a strong bear market rally.

Stocks popped late in the day as news spread that the "uptick rule" appears to be coming back:

"April 3 (Bloomberg) -- The U.S. Securities and Exchange Commission is considering dictating when traders can bet that stocks will fall, after lawmakers said short-sellers fueled the financial crisis by driving down shares, according to two people familiar with the matter.

The agency may offer two proposals April 8 that would place more stringent limits on bearish bets than a plan backed by four U.S. stock exchanges, according to the people, who declined to be identified because the proposals remain under discussion at the agency. Since taking over in January, SEC Chairman Mary Schapiro has faced pressure from Congress to reinstate the so- called uptick rule, which required traders to wait for a price increase before executing short sales."

Quick Take:

After this potential sticksave you need to ask yourself: Are there any left? I actually don't have a problem with reinstating this rule in some form. Some companies were destroyed as a result of being power driven down to zero by groups of short sellers.

However, blaming the shorts for this debacle is flat out ridiculous. Point the gun at Wall St and their risk managers if you are looking to blame someone. One negative to reinstating this is you pull even more liquidity out of the market. You may not like the shorts if you are a bull, but they did put money into the market.

One of the main problems this market has is a lack of liquidity. Forcing some of the shorts out of the game only makes this problem worse.

Why the bulls have it wrong

This recent move in my view is based on the bulls using the classic "recession playbook" that has been successful every time over the past 25 years. The playbook says buy stocks as the economy bottoms. The problem here is this isn't your average recession! This is an economic collapse. No one on Wall St today has ever invested in this type of market.

The bulls have attempted to play the same "recession playbook" several times throughout this crisis and they have been taken out to the woodshed and shot every time they have tried it.

How do they know the economy has bottomed? The statistics say the exact opposite. Things are worsening folks.

The jobs number today is a perfect example:

The government announced today that unemployment soared to 8.5%. This is the highest unemployment rate since 1983. Anyone seeing signs of a bottom here folks? Yeah, me either. All I see is a parabolic move to the upside on unemployment as our economy continues to shred jobs at lightning speed.

I mean these numbers show you how different an animal this recession is compared to anything else that's been seen in recent history. I mean look above and compare the unemployment rate to the tech bubble. The tech bubble along with '73/74 are the two worst recessions seen in recent times.

When you compare this collpase to the tech bubble from an unemployment perspective it makes the the tech wreck look like a bull market!

The tech recession at its worst saw the unemployment rate briefly touch 6% before pulling back. The tech wreck jobless claims peaked at a rate of 250k to 300k a month. When you compare this to our current jobless claims rate its not even close! We are currently running jobless claim rates of 600-700k per month. This is more than twice what was seen during the tech collapse which one of the worst recessions in recent memory.

Remember folks, the economy is all about jobs and consumption. People can't spend if they aren't working. They also can't make their debt payments.

Ben's Quantitative Easing Disaster

The Fed will be having nightmares tonight after watching the 10 year soar today:

Final Take:

This isn't what the Fed had in mind folks: Yields are soaring on the 10 year. When the Fed's QE policy was announced, rates on the 10 year dropped from 3% down to 2.5%. As you can see we have given almost all of it back. We closed today around 2.9%

This is what happens when our government spends trillions of dollars that they don't have attempting to bailout America. Money is getting more expensive to borrow because our deficit is soaring at an alarming rate. Consider this to be a shot across the bow from the bond market. This may prompt the Fed to do one of two things:

Option #1 is they will ramp up their balance sheet and spend billions on treasuries in order to keep rates low. Option #2 is they could create a market sell off by pulling liquidity from the market which then scares private money into the bond market which results in the same effect as option #1: Treasury demand increases.

Option two has been done before many times so be wary if you are on the long side.

Bottom Line:

I stayed short into the weekend on the S&P and treasuries. The latter trade worked nice today as the 10 year soared.

Chasing this rally here appears to be suicide in my eyes. The fundamentals remain weak, and the jobs report is flat out frightening.

I continue to see the perfect storm for a deflationary collapse aka Japan in the 1990's. The risk reward on the short side appears to be much better at these levels after watching the credit market today in combination with another horrible jobs report.

I am still placing small bets and scaling into this rally. The one thing that we all know is the market can stay irrational for a lot longer then most traders can stay solvent. I will continue to respect this move to the upside and continue to scale in short.

SRS dropped into the 30's today as the REIT's continue to stay alive via creative financing. CRE is still a mess fundamentally and getting worse. Office vacancy rates just hit 15% according to the WSJ. Need I say more? I am looking at June PUT's on the IYR instead of SRS for future CRE plays. I haven't pulled the trigger yet but I plan on picking some up on Monday. Some of the OTM's PUTS on the IYR are now under a buck.

Happy Friday!

Thursday, April 2, 2009

Banking Stress Increases/AIG

Good Afternoon Folks

What an interesting day today. All of the major indices soared around 3% today as FASB caved into corporate pressure and decided to change the mark to market accounting standards. Stocks were further fueled by the announcement that the G-20 pledged an additional $1 trillion towards fighting the economic crisis. Here is the FASB news:

"April 2 (Bloomberg) -- The Financial Accounting Standards Board, pressured by U.S. lawmakers and financial companies, voted to relax fair-value accounting rules that Citigroup Inc. and Wells Fargo & Co. say don’t work when markets are inactive.

Changes to fair-value, or mark-to-market accounting, approved by FASB today allow companies to use “significant” judgment in gauging prices of some investments on their books, including mortgage-backed securities. Analysts say the measure may reduce banks’ writedowns and boost net income. Firms could apply the changes to first-quarter results."

Quick Take:

The scariest part of the FASB ruling is it gives the companies holding the toxic assets the right to mark these assets at whatever price they feel represents true market value. If thats not asking for trouble I don't know what is. Get ready for Enron part 2,3,4,5,6, and 7. This is what happens when you give the keys to the bank to a group of criminals.

The market loved it of course. Why wouldn't they? The fraud has officially been allowed to roll on. Good job FASB! Great Work! NOT!

AIG Scandal

I am not sure if this will get legs but if it does watch out. A highly influential, well respected banking consultant group called Institutional Risk Analytics(IRA) came out with a scathing report around AIG. They basically called this company a complete fraud and accused the Treasury(via the bailout) and all of the major banking institutions of all being in on the scam.

The IRA call AIG the Bernard Madoff of the banking world. Here is the article and its shocking claims:

"In an effort to resolve this conundrum, over the past several months The IRA has interviewed a number of forensic experts, insurance regulators and members of the law enforcement community focused on financial fraud. The picture we have assembled is frightening and suggests that, far from just AIG, much of the insurance industry has been drawn into the world of financial engineering and has thus become part of the problem. Below we present our preliminary findings and invite your comments.

One of the first things we learned about the insurance world is that the concept of "shifting risk" for a variety of business and regulatory reasons has been ongoing in the insurance world for decades. Finite insurance and other scams have been at least visible to the investment community for years and have been documented in the media, but what is less understood is that firms like AIG took the risk shifting shell game to a whole new level long before the firm's entry into the CDS market.

In fact, our investigation suggests that by the time AIG had entered the CDS fray in a serious way more than five years ago, the firm was already doomed. No longer able to prop up its earnings using reinsurance because of growing scrutiny from state insurance regulators and federal law enforcement agencies, AIG's foray into CDS was really the grand finale. AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks. No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.

As with the phony reinsurance contracts that AIG and other insurers wrote for decades, when AIG wrote hundreds of billions of dollars in CDS contracts, neither AIG nor the counterparties believed that the CDS would ever be paid. Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts.

The significance of this for the US bailout of AIG is profound. If our surmise is correct, the position of Feb Chairman Ben Bernanke and Treasury Secretary Tim Geithner that the AIG credit default contracts are "valid legal contracts" is ridiculous and reveals a level of ignorance by the Fed and Treasury about the true goings on inside AIG and the reinsurance industry that is truly staggering."

The article concludes:

"Are the CDS Contracts of AIG Really Valid?

The key point is that neither the public, the Fed nor the Treasury seem to understand is that the CDS contracts written by AIG with these various non-insurers around the world were shams - with no correlation between "fees" paid and the risk assumed. These were not valid contracts as Fed Chairman Ben Bernanke, Treasury Secretary Geithner and Economic policy guru Larry Summers claim, but rather acts of criminal fraud meant to manipulate the capital positions and earnings of financial companies around the world.

Indeed, our sources as well as press reports suggest that the CDS contracts written by AIG may have included side letters, often in the form of emails rather than formal letters, that essentially violated the ISDA agreements and show that the true, economic reality of these contracts was fraud plain and simple. Unfortunately, by not moving to seize AIG immediately last year when the scandal broke, the Fed and Treasury may have given the AIG managers time to destroy much of the evidence of criminal wrongdoing.

Only when we understand how AIG came to be involved in CDS and the fact that this seemingly illegal activity was simply an extension of the reinsurance/side letter shell game scam that AIG, Gen Re and others conducted for many years before will we understand what needs to be done with AIG, namely liquidation. Seen in this context, the payments made to AIG by the Fed and Treasury, which were then passed-through to dealers such as Goldman Sachs (NYSE:GS), can only be viewed as an illegal taking that must be reversed once the US Trustee for the Federal Bankruptcy Court for the Southern District of New York is in control of AIG's operations."

Quick Take:

Hopefully Congress starts digging into this. AIG is a complete fraud and the bailout by the Treasury smells just as bad. The IRA is a serious organization folks. they are major players in DC. The accusations above are shocking and could potentially bring down this whole deck of cards.

Bank Stress Rising

I wanted to share the IRA's most recent graph that measures bank stress:

Quick Take:

The IRA's stress index uses a variety of measures to gauge how health a bank is. Here is an example of what metrics they use to rate a bank's stress(PNC Bank is the example here). The IRA analyzes everything from a banks capital position to its percentage of loan defaults in order to come up with a a stress score which is used to calculate a rating for each bank.

As you can see by the chart above, bank stress in general is soaring according to the IRA. Gee how funny... Didn't Citi, BofA, and JP Morgan all tell us how great things are recently? HA! Bull****! Look above. These asshats come out and tell us Jan and Feb were great and then come out a few weeks later and admit that March was slow. What a bunch of lying thieves. Something tells me the IRA's stress test will show even more stress in the first quarter. I will be following this very closely going forward.

The Bad Loans Continue

One more graph and I will call it a day. Perhaps things got better for the banks in January by doing more bad loans?:

Final Take:

This is from the Fed and its obviously something they're watching closely as they desperately try to fuel more lending from the banks. Looking above, it appears that the banks have dropped their lending standards since the near meltdown in October on certain products like subprime and prime loans. Whats also interesting here is that they still have no desire to do more commercial business/consumer loans.

My head is now banging off my desk as I write this. My conclusion here is they are beginning to do bad loans again. Could it be that since the Fed is guaranteeing all of this garbage they said to themselves "what the hell lets do more bad subprime loans!". Thats the way I read it. These lending standards should be tightening not loosening! This is what got us into this mess in the first place!!!!!

Isn't it also interesting that the lending standards dropped just a few months after getting massive capital injections by the Treasury? My guess is the pigmen are being pressured by the Fed/Treasury to lower their lending standards in order to stabilize the housing market.

BWAAAAAA! Idiots. The Fed/Treasury is obsessed with trying to keep this bubble inflated. Its not gonna work fellas! These loans will fail just like the others did. This debt bubble has popped. Give it up already!

Bottom Line:

I picked up some shorts on the bounce today ahead of the jobs number. I bought some SDS and TBT which short the S&P and treasuries respectively. The bond auctions today were ugly, and one of the primary dealers announced that they wanted out of the process. Perhaps they realize bidding against the Fed in treasuries isn't a profitable way of doing business? Yields actually rose in one of the auctions that the Fed bought into via their QE program. This is exact opposite effect that the Fed wants. Ooops Ben! Perhaps they don't wanna play your game?

In my eyes ladies and gentleman this is all a giant cluster****. I don't believe a word from anyone on CNBC claiming that they are seeing signs of an economic recovery, I don't believe any of the bank speak, and I don't believe a word of what the government is saying to us around this crisis. Job losses are worsening, the economic fundamentals remain horrible, and the government continues to dig itself deeper and deeper into debt. This will not end well.

Feel free to buy into this rally. I'll pass thanks. IMO this is a ticking time bomb that could go off at any second.

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!

Tuesday, March 31, 2009

Gloom and Doom Tuesday

Alrighty Folks

Its a gloom and doom time!

Get ready to watch some videos! Let me start by saying that I do not share all of the views of the following people highlighted here. However, I think its time that we start taking some of these more radical thoughts more seriously because I am extremely concerned that we are all watching our country literally go down the drain.

The first video here is titled "Geithner's Oligarchs". This is a must watch in my view. It features economist and risk managing consultant WILLIAM ENGDAHL. Dr. Engdahl does a nice job explaining why Turbo Timmy's plan will fail and end up costing the taxpayers billions. Essentially William explains that this is basically another backdoor bailout for the pigmen:

The second video below is a little more hard core but I gotta admit: I loved it! It features a guy by the name of Max Keiser and his rants on here are classic! His take home message: The "financial terrorists" must be stopped!:

Lastly, here is a video from trends forecaster economist Gerald Celente. This guy makes Peter Schiff sound like a bull! Gerald is predicting an economic collapse in the United states:

Bottom Line:

Two years ago I would have considered a lot of this to be tinfoil. Not anymore in my eyes folks. Washington and Wall St have lost their minds as far as I am concerned. Its becoming increasingly obvious that Wall St owns Washington. They are officially in bed together.

The current policies including the recovery plan do nothing but throw billions of dollars into the pigmen's pockets at our expense. The increasing threat of the oligarchs(elites) taking over this country must be taken seriously. If we allow this to happen it threatens the great way of life that this country now offers.

Capitalism and the free markets will no longer exist if this fraud rolls on. We are headed down a very dangerous path where the elite will take care of each other while the rest of us live like peasants. America will look much more like a third world country in this new reality.


I am starting to think that the market sentiment is starting to change. This bounce looks to be about over. Today's close was very bearish. We were up 170 points for most of the afternoon before selling off late in the day. I placed a few shorts on at the close.

We have continued to selloff in the after hours. The ES is down about 8 points. I am starting to become more bearish in the near term for a variety of reasons:

The banks are now admitting March has been humbling, anger around Wall St among the public is rising, and earnings and the jobs report start rolling out this week. Case/Shiller report was horrible today and reinforced that housing is in the toilet.

On top of all this, GM and Chrysler are likely heading into BK. Obama is going to take some serious heat at the G-20 by the economic powers of the world. Its pretty obvious that none of them are comfortable with our reaction to this economic crisis.

Can you blame them? Everyone knows that our policies including the recovery plan do nothing but stuff the banks with money at the expense of the taxpayers. The Fed/Treasury are doing nothing in terms of addressing the real problem which is a broke jobless consumer. Until the money starts flowing to the public instead of the bankers, this economic crisis is only going to worsen.

Adding to our troubles is the fact that the credit market continues to deteriorate. Everyone now basically keeps their fingers crossed and prays each time we have a bond auction now hoping that it doesn't fail

There has been quite a battle here between the bulls and the bears at the 800 level on the S&P. This war has been going on basically since last November. We had one run down to 666 but it quickly reversed.

My trading thesis has changed a bit. I thought there was a good chance that we would see one more wave up to S&P 900 before headed south. This still could happen for two reasons: The uptick rule change, and the potential changes in mark to market. Both of these could easily get us to 900 if the market buys it. I personally think its somewhat priced in. I would expect that any M2M rules changes would be mild because the risk of having hundreds of Enron's on Wall St is simply too high. We all know they can't be trusted!

I am no longer confident that we get to 900 given the news. If we break strongly below 800 here I believe we will break through the 666 low from a few weeks ago. We may see some resistance once we get there but I don't think it holds.

My longer term low for this bear market is now 450 on the S&P. I expect we see these levels before the end of the year.

If Washington's horrible policies do not change, we could head lower.

Lets hope we get some "real" change in Washington before we end up destroying ourselves.

Monday, March 30, 2009

Reflation Fantasy

Good Afternoon Folks!

I was going to mainly talk about the automotive debacle today but I have decided to change my mind after picking up some new data.

My take on the GM/Chrysler saga is its about time! Obama finally grew a set and said NO to corporate America. We don't have the money to continue these ridiculous bailouts and perhaps the government is finally realizing this. Kudos to Obama on this one.

Now I realize this is a sensitive issue with some you especially if you are from the Midwest. Whats happened to our car industry is tragic. However, we are running out of money fast folks and its time to make tough decisions.

What I want to know is when do the bank CEO's start getting fired? Why do they get to stay in power? Why is Ken Lewis still the CEO of Bank of America after costing the taxpayer tens of billions of dollars? This is what makes me livid. GM and Chrysler are asking for pennies compared to what AIG has cost us. Why isn't AIG being forced into BK!? This is the largest black hole of them all!

I have no problem offering loans to the automotive companies as long as their restructuring plans makes fiscal sense. The problem is they continue to hemorrhage money despite their drastic cutbacks. Our government should not be in the business of subsidizing companies that lose billions of dollars every quarter.

Putting them into bankruptcy is the only solution here IMO. GM can't get their cost structure in line right now because the bondholders and unions have too much leverage without them being in BK.

This is going to be a long ugly process but I think its the best decision given the circumstances. Lets be clear about one thing here: This 30-60 day short term BK idea that's being floated around by The White House is nothing but a pipedream. The bankruptcy process is a long one and cannot be done in a month or two. There are simply too many issues that need to be decided on especially given how large these companies are.

It will be interesting to see how this all plays out.

Reflation Trade: In your dreams

Alright lets get back to the macro side of this whole economic mess. It appears the reflation trade is about to fall apart. I had suggested about a month ago that the reflation trade would be the play once the pigmen were successfully able to spin the belief that an "economic recovery" was just around the corner. I know I know...Silly bulls!

I had mentioned that shorting commodities would be a nice opportunity once the bulls realized that the economy is going nowhere as demand falls off a cliff.. $50 was the magic number I was looking for on oil.

Many on the street are screaming about inflation concerns as we begin to start dropping money out of helicopters. This will be a problem down the road but right now folks I just don't see it.

Deflation is still the biggest concern as far as I am concerned because wages are collapsing. The Fed is throwing money out of helicopters, but its going to the banks not the consumer. The banks are then hoarding it in an attempt to fix their balance sheets. This means its not getting out into the real economy. Wages must rise in order to see long term inflation and as you can see below its just not happening.

Wages and income from assets continue to freefall:

At the same time: Personal savings is soaring

Final Take:

In order for inflation to take hold people need to have the ability to pay increased prices. As you can see in the first chart, both incomes and incomes from assets have completely collapsed. If prices begin to rise as incomes collapse, demand will simply disappear. When this occurs commodities will drop in price as a result. Its econ 101: Supply and Demand! A perfect example of this was last year when oil went to $147 a barrell. Two months later oil dropped to $40 because demand fell off a cliff.

The one thing that I hadn't really thought about too much before seeing this chart was the whole fixed income dropoff as a result of the nearzero interest rates. You can thank the Fed for collapsing income from assets. Income from assets includes all types of fixed income from things like munies, treasuries, and bank CD's. All of them fluctuate based on the interest rates set by the Fed.

Of course who is the big winner with zero rates? The banks because they don't have to pay as much interest on capital like CD's. Who loses? Retirees and anyone else who is in fixed income. Gee...Banks win and the taxpayer loses...What a shocker eh? Yeah right.

So what we have here is a double whammy on wages. People are making less at their jobs and earning less on what they have saved. On top of that, if you look at the second chart you can also see that the savings rate has soared in the past year. This is another deflationary pressure on prices.

Bottom Line:

So to sum it all up: Consumers are making less money at their jobs, hoarding cash even though they are making less, and earning less on what they have saved. On top of all this, they are also drowning in debt! This combination makes the argument for deflation a very powerful one.

I mean jeeez....Can you say consumer collapse? Can one of the bulls please explain to me how a consumer based economy recovers in this type of scenario? Reflation my ass!

Inflation could be a threat down the road as supply and production drop dramatically. This will eventually make assets more scarce and thus susceptible to price inflation. This is 1-2 years down the road IMO because there is such a glut of supply everywhere.

The reality for now is there are tankers of oil that are sitting in ports with nowhere to go because demand has collapsed as a result of the economy beingdeader than a doornail. Oil has moved from $30-50 on the reflation trade. I think its way overdone here.

USO is a great ETF that you can use to short oil if you want to make a play on weak demand.

Ugly day today in the markets. Lets see what kinda follow through we see tomorrow.

Sunday, March 29, 2009

Debt Explosion!

Good Evening Folks

Just a few thoughts tonight. I wanted to share a chart a from Karl Denninger's The Market Ticker:

My Take:

Hello Houston: Do you think we might have a debt problem? As you can see above, our debt level is now over 350% of our GDP. This crisis now dwarfs the 1929 debt party.

Whats concerning here is government debt now makes up 33% of the debt bubble and it appears they have no intentions of stopping anytime soon. Somebody please explain to me how this is going to fix the economy? Last I heard, you can't spend yourself into prosperity! Don't think that China isn't reading the same graph. you think they might be nervous about their treasury holdings after doing so?

The other interesting thing that I noticed after reading this graph is household debt has now far surpassed the 1929 debt levels. I guess this shouldn't be a surprise. I mean hell, the banks did a great job of talking everyone into turning their house into an ATM machine via home equity loans.

All of this financially innovated housing "wealth" is now almost completely gone after the housing crash. The consumer is now stuck with the tab wondering how in the hell are they going to pay it back after watching their so called "home equity" become worthless.

Guys and Gals, this is no big deal though: I mean the consumer only represents 70% of the economy. We should be able to get right back to strong economic growth next year!(Sarcasm off).

What I want to know is what weed are the pigmen on CNBC are smoking. I mean almost all of them see a recovery by 2010.

How in the **** is that going to happen with the banks, the consumer, and the government all wallowing in debt up to their eyeballs? One day the government and the banks are going to open up their wallet and find that its empty. The consumer has already had this "come to Jesus" moment. Consumer spending has disappeared over the last 6 months as a result. Find a desk to hide under when the other two realize the same thing.

I gotta admit its hard to sleep at night when I see graphs like the one above. What most Americans never realized during the previous boom was home equity does not equal money. Its only real money when you sell the house. The second mistake that they made was assuming home prices always go up. This assumption combined with unregulated loose bank lending resulted in reckless spending on everything from flatscreen TV's to Hummers in the driveway.

When you think about it, all the wealth that people thought they had via their home never really existed. It was nothing more than a mirage that was sold to the public by Wall St and their reckless predatory lending. We took the bait hook line and sinker.

Now the moneys all gone folks and its not coming back.

The government MUST start thinking about how they plan on eliminating this debt. The debt either needs to be paid back or defaulted on via BK. We run the risk of blowing ourselves up if we don't have a reality check and begin to start forcing this debt to be wiped out and cleared. The US won't see any sustained economic growth if we continue down the bailout path because household debt is at all time highs.

This is a consumer driven economy. Without them we're screwed.

Wake up Obama! Pretending that we can fix this problem with heavy government spending via bailouts and pork filled stumulus plans puts us on the highway to hell!

I mean ask yourselves one simple question. You have watched the government spend $10 trillion dollars on bailouts, guarantess, and stimulus in reaction to this crisis: Do you think any of it has worked?

I think all of you know my answer here. The Ponzi government spending is only going to guarantee one thing: Our grandchildren will be stuck paying the tab.