Saturday, April 25, 2009

Recession Over? Nope!

Hi All

Just a brief note today. The New York Times Fred Norris wrote a great piece on the recession today that compares our current economic downturn with other recessions.

Lets take a look:

My Take:

Note that the numbers above include the data for March 2009. Its pretty obvious here that the economy is showing no signs of recovery. The overall index shows that the economy continues to fall like a rock.

We have pretty much officially blown away the '82 recession at this point. My guess is by the summer we will have blown right past the brutal '73/74 recession. The market is pricing stocks for a recovery later this year. This is not surprising considering the massive amounts of stimulus thats been thrown at it by the Fed and Treasury.

Whats interesting is Fred notes that the wage decrease is deceptive because it includes the cost of benefits like health which have been rising at an alarming rate. If benefits were taken out of the wage number the drop would be considerably more significant.

The bottom line here is this folks:



The significant bounce we have seen in the markets is a result of many different factors in my opinion. The massive stimulus that's been thrown at the economy by the government is one big reason. We all must realize that this is temporary relief and cannot be sustained.

There has also been a lot of noise around the blogoshpere that blames a lot of this bounce on massive buy orders at the larger trading desks on Wall St like Goldman Sachs.

This appears to be significantly moving the markets because the number of investors in equities are more scarce and thus the market is less liquid. The theory is the big boys can manipulate the market higher with massive buy orders.

This could potentially trigger more buying by many of the large quants. Many of them were caught short when this bounce began.

As a result: when the market moves higher, the quants are forced to buy massive amounts of stocks as a hedge against their short positions. Some of these quants are huge(up to $100 billion) so when they are caught on the wrong side of a trade and they are forced to buy equities as a hedge, this can force the markets even higher because the positions they must take on the long side to properly hedge are HUGE!

The bottom line here is in an illiquid market, equities pretty much turn into a casino because the trading volume is so thin. This makes the market highly susceptible to manipulation. When the market moves higher huge quants and mutual funds must buy and move with it.

My fear here is this is not sustainable. Corporate earnings are collapsing and equities do not accurately reflect this in my opinion. The market will eventually get this right and correct and we all must be wary that the same thing that triggered this "snowball effect" move to the upside could easily occur on the down side. Selling could force more selling due etc. etc. We saw this back in September and October of last year.

However, we all must greatly respect the feeding frenzy that occurs when stocks move sharply higher like this. This is why you must scale into positions on the short side.

Remember, the market can always stay irrational longer than you can stay solvent. I personally want nothing to do with this market right now because every move to the upside and downside is so exacerbated. This market action tells you that its not healthy.

Trading the market with large positions at this point is similar to going on a suicide mission. If you get caught in the wrong direction your investments could easily get slaughtered.

I refuse to invest in something that makes no sense and I can't understand. I will play around with minuscule positions on the short side simply because I think the market is overpriced. If they go to zero based on things I cannot control its no big deal because the positions are so tiny.

The bottom line here is sitting on the sidelines and hoarding cash sounds like the most intelligent thing to do at this point.

Friday, April 24, 2009

Wall St's Denial Continues

Gooooood Afternoooon Everyone!!!

Ahhh.... Its great to be back on my keyboard after being off for a week. I hope everyone is doing well!

As I catch up on the news I see nothing has changed! Wall St keeps buying stocks and waiting for those "green shoots" to start growing. Meanwhile, back here in reality, I sit here in amazement as I watch our economy literally fall off a cliff.

Stocks rose sharply today as the Fed announced the banking stress test methods for our nations top 19 banks. The intent here by the Fed was to create more transparency by explaining exactly how they planned on testing the banks and their ability to handle future losses.

After taking a look at the Fed's "stress test" I was extremely disappointed by how "wimpy" it was. Hell I took tougher tests in the 4th grade!

This process was a joke and the economic scenario's they used to gauge the strengths of our banks were a total cakewalk.

Lets take a look at the two economic scenarios that they used: The first one was the Fed's expected baseline economic outlook. The second scenario was the "more averse" or "really really bad" scenario(Really bad? Ha! Wait until you see the numbers). The two key measures used were GDP and unemployment.

Here are the two GDP scenario's that were used:

Now lets take a look at the two unemployment scenario's:

My Take:

Awwwwww!!!! The poor banks. They must be so stressed out after such a tough test. I advise each of you to walk outside and find a banker today and give them a big hug. They need one after having to go through such a difficult time. If there is a doctor among my readers could you please write each banker a script of Xanax? I am sure they need something to help them relax after having to go through something so so terrible.(sarcasm off)

I know I know...All of you would probably like to go out and punch a banker in the face versus giving them a hug!

Sigh.....What can I say here folks? Look at the charts. They are a complete joke. GDP growth by the 4th quarter? They actually expect to still see growth by Q4 in the "more dire" scenario? Good luck with that one.

Take a look at the peak unemployment rate of 10.3% in the "dire scenario". 10.3? Ha! Are you kidding me? They must have not included California and Michigan in their methods because both states are over 11% unemployment already! Michigan is already over 12%!

Whats funny is I am sure all 19 of the large banks have loans in each of these states. So the "dire" scenario used in the stress tests includes looking at banks that have loans in states were the unemployment rate is already higher than the Fed's "bad" case scenario. Ummmm...Behind the curve here guys?

Whats even funnier when you look at the Fed's expected baseline peak unemployment number of 8.8%. Uhhhh...Did anyone tell Ben that we are at 8.5% RIGHT NOW? Did anyone also explain to him that the jobless claims number continues to sit at over -600k each week? -400k is considered to be recessionary folks. The claims number tells you that unemployment continues to soar. These numbers are a joke.

Why on earth do they expect unemployment to level off here in the 8% range? What huge catalyst does the Fed see that makes them think that will prevent economy from continuing to shred more jobs? Are AAA securities gonna make a big comeback? Lets get those ratings agencies back up and running! We need some more fraud in order to get the GDP positive positive by the 4th quarter. We need to bring back the credit bubble so that we can level off unemployment!(scarcasm off again..sorry can't help it!)

The reality here from a jobs perspective here is its just flat out ugly: Companies are laying off thousands of people each week. When was the last time you heard of a company hiring thousands? GM announced this week that they plan on shutting down the majority of their plants for 9 weeks this summer. Yikes! Whats scary here is who knows if GM will still be alive when those workers are scheduled to come back? If they are it will most likely be after a BK filing. If thats the case expect many of these workers to not be back after the plant shutdown.

What I want to know is did the Fed include a Chrysler and GM bankruptcy when they were putting together their "baseline forecast" on unemployment?

This "stress" test was a goddamn joke. This does not lead to more transparency folks. Its nothing but a continuation of the "hide the sausage" policy that the politicians and Wall St continue to ram down our throats.

I sometimes ask myself: How do they get away with it? Why do they continue to try and pull the wool over our eyes? Do they not realize that millions of Americans are beginning to figure that they are being fed a big pile of shit in the news every morning? Do they think we are too stupid to understand the problem? Are they that f*cking arrogant?

In my opinion: YES!!!

Guess what you arrogant morons: We are on to you. Bloggers like Mish, Denninger, and other "credible" news sources see right through your tangled web of lies, fraud, and manipulation. Glenn Beck gets it. Others in the main stream are quickly getting caught up.

Bottom Line:

The market has turned into complete headcase as it tries to figure out where we are in this whole mess. We saw violent swings in each direction this week because no one can make sense of whats going on. When the government takes over the financial system its pretty much impossible to value stocks.

Any trading done here should be done with money that you can afford to lose. The 10 year continues to flirt with the 3% level:

As you can see above, we continue to bounce off of the 3% area. I think the bond traders get nervous to take yields above 3% because they are afraid the Fed might come in via QE and pull the rug out from underneath them. As a result they seem a bit paralyzed for now. Let me repeat: FOR NOW!.

The amount of treasury supply that hits the bond market next week is mind boggling. Focus on the 10 year over the next few weeks! This is the most important piece of data IMO short term. We are sitting at CRITICAL levels, and the massive treasury auctions in the oncoming weeks will be critical to the Fed and their moves going forward.

This could have a huge effect on equities.

Stay Tuned!