Wall St Runs For Cover

Hello All

Just a few thoughts about today's dump.

There really was no catalyst for today's move other than pure FEAR:

- FEAR over the upcoming banking regulations and its effects.
- FEAR of a sovereign default in Europe.
- FEAR that Europe's issues will stop the economic recovery in its tracks.
- FEAR over of more job losses as continuing claims unexpectedly rose.
- FEAR around our own trillion dollar deficits. Are we the next Greece?
- FEAR of the rising libor rate as banks begin not trusting one another.
- FEAR that the housing slump is worsening.

I could go on and on but I will end it here.

The bottom line folks is Wall St is reducing their risk and taking profits because they are afraid that things are not turning around.

Viscous selling like this also tend to trigger forced liquidations which only adds fuel to the downward pressures on the stock market.

I get afraid when I see huge selling on days where there is no real catalyst. In fact, I have been rattled ever since that 1000 point drop a few weeks ago. Even though this mess was cleaned up in a matter of minutes, it told me that the markets were not healthy.

I have been talking about all of the "FEAR's" that I listed above for months but the bulls didn't want to hear it. Stocks were rising and the speculators and HFT's just rode the wave.

Folks, there never was an economic recovery. Basically the Fed replaced us as the consumer hoping that we it would stimulate an economic boom that could grow us out of our mind boggling trillion dollar deficits.

This has worked the past 20 years but it didn't work this time because we just completed the greatest financial orgy of all time. We all know the bigger the party the worse the hangover right?

You can't stimulate new economic growth when the debts from the last boom haven't been paid off. Where did they think the consumption was going to come from when millions of people are living in homes that they cannot afford?

The whole country including the government is in debt up to their eyeballs! You cannot stimulate a recovery under such conditions. It's fiscally impossible. That's why this recovery was guaranteed to fail.

The only way to unwind this unmitigated disaster is to wring out the excesses from the previous boom.

This means that insolvent banks must fail. Companies that were bailed out must also fail if they are unable to turn it around.

Mortgage backed securities that are marked at "pipe dream" prices must be sold off at a price in which investors are willing to pay. If this process of marking to market takes down more banks then let it happen.

Continuing to play "hide the sausage" is not working! We MUST take the losses from the Ponzi debt bubble no matter how bad they are. If this puts us into a depression then so be it. It's going to happen anyway so we might as well get it over with.

I am tired of kicking the can! It's been 3 years since this recession officially started and NOTHING has improved! The private sector is in shambles. We continue to shred jobs on a weekly basis. Jobless claims came in at -475,000. How in the hell can anyone think we are in the midst of a recovery with numbers like this!

This country is heading straight off a cliff if we continue down this same path.

The Bottom Line

Futures are in the red after hours. Let's hope we get some kind of a bounce tomorrow. Confidence in this market is rapidly deteriorating and the situation is getting very dangerous.

There is nothing but hot air in between where we are now and the lows from 2009 for the most part IMO. I am not saying we get there but the potential is certainly there to do so.

Let's hope that this banking reform has legs. The way the market is acting I am guessing that it does. The lobbyists from Wall St appear to walking away with their tales between there legs after being told no. This has never happened before so I will believe it when I see it.

Lets hope the government is finally realizing that being held hostage by the banking system is not a very effective way to fix an economy. I hope they told the bankers to take their AIG and shove it where the sun don't shine!

The bottom line here is the fundamentals that were supposed to be the beginnings of an economic recovery have pretty much fallen apart:

- Europe is essentially going to be forced to implement severe austerity in many countries which is going to badly damage global growth.

- China is trying to slow down their growth which is also going to hurt the world economy. Their stock market is in shambles. Even worse: Their export economy is going to take a beatdown now that Europe and the USA are falling apart.

- Continued problems in the USA as a result of high unemployment and a collapsing private sector will also deeply impact the hopes for an economic recovery..

When you add this all up you have the perfect conditions for a global depression.

What scares me the most this go around is the USA doesn't have the financial resources to respond like they did in 2008. They pissed away trillions of dollars throwing money out of helicopters in a failed attempt to bail us out of the last collapse. We won't have this luxury this go around.

This go around the Fed will have fewer tools in the toolbox to respond. Ben has said he will not print: I guess we will see about that one.

My advice? Start working on building a bunker! Just kidding(sort of). If you are in cash stay there. Sell off your longs on any bounce. Got gold? Hedge it with a short position. Deflation is now a serious risk. Do not buy anything that you do not need. Most importantly: Payoff your debts.

There is an economic hurricane on the horizon and you need to begin preparing for it.

Disclosure: Sold 50% of my position in SLV.

Housing Recovery? Where?

I hope all of you home sellers got out while you still could. As you can see below, mortgage applications have fallen off a cliff since the tax credit ended:

Quick Take

I warned about this within the last week and the numbers are uglier than I expected. Applications fell 14% the week after the tax credit ended and then fell an additional 27% the following week. These are the worst numbers since 1997 according to Reuters.

Flippers Beware! The mini housing recovery is toast.

Here is a little advice for the sellers out there: If you couldn't sell your house during the tax credit period than I suggest you seriously re-evaluate where you are pricing it at and then drop it. You don't want to be the last person on the block selling in a situation like this because it's going to get bloody out there.

Without the tax credit the housing developers and sellers now face the grim reality of trying to sell to a market that has close to 20% U6 unemployment. They also have to deal with the severe "hangover effect" thats been created by the stimulus that inhaled most of the first time home buyers as well as the rest of the low end of the market.

What we are now left with in housing are millions of empty homes that are priced where no one can afford to buy them in a market where there is no demand. You also have builders with huge inventories that are starting to get pressured by the banks who are really ansty about getting paid back after funding the largest housing bubble in the history of this country.

If this isn't "The Perfect Storm" then I don't know what is.

If you are just putting a house on the market I suggest that you undercut your competition. The run for the exits is going to be fast and furious once the reality sets in that there are no buyers, and I expect prices to start to fall off a cliff again by the end of the summer.

Remember, the banks have been easy on the builders this go around when it comes to getting paid back because they understand how tough the economic conditions are out there. The Fed knows it too and they have made it easy on both parties via lax accounting standards in order to get this mess "cleaned up".

The problem here is this cannot go on forever. At some point the music has to stop and bills need to be paid. With banking reform right around the corner I expect that things are about to change.

There will be an inflection point where the builders are going to be forced to reduce prices over and over until they sell in order to avoid being forced into BK by the banks. I believe the end of the tax credit will be the spark that lights off The Final Housing Time Bomb that finally gets us to the bottom.

Expect to see a lot of pain when it does.

When this capitulation begins it's going to destroy whats left of the housing market. Bubbles always pop and so far the reduction in housing prices has been far too orderly.

If you are a buyer sit on the sidelines because demand is about to fall off a cliff without the tax credit.

This will eventually smoke out the sellers and builders and force them to capitulate all at once because no one will want to be the guy left holding the bag once it starts to unwind.

Is the Euro about to become a Peso? European Debt Crisis Intensifies...

It was another chaotic day on Wall St as stocks tumbled once again as concerns around the debt crisis in Europe continued to worsen.

The big news of the day was when Germany rocked the markets by announcing a ban on naked shorting selling of CDS swaps:

"BERLIN, May 18 (Reuters) - Germany plans to ban naked short-selling on stocks and euro government bonds, German all-news network N-TV reported on Tuesday.

German coalition sources told Reuters earlier that Finance Minister Wolfgang Schaeuble plans to ban short-selling from midnight.

Economy Minister Rainer Bruederele told Reuters that it was possible the short-selling ban would be quickly enacted.

No other details were immediately available."

Quick Take:

Germany basically just pulled the rug out from underneath the banks with this shocker. Essentially what the big banks were doing were shorting the sovereign debt of countries like Greece via CDS swaps.

The problem with these swaps is the lack of transparency.

Naked short selling via a CDS swap essentially turns the equity markets into a version of the "Wild Wild West" because you can basically short a countries sovereign debt via these swaps without providing any liquidity in return like you would shorting a stock on the NYSE.

There is no real liquidity in these CDS swap short positions because you don't provide any transparent collateral against the short position that you are taking in case you are wrong.

What makes short selling different in the stock market is you need to borrow the shares that you want to short in order to take a position against them. This provides liquidity to the market. Without providing any real liquidity you put the system at risk.

Just take a look at the 1000 point drop two weeks ago if you want to see an example of illiquid markets.

The CDS game needs to be done transparently or it needs to be eliminated. Without transparency its a blatant form of FRAUD. The scariest part of this derivatives system is the sheer size of the market: It's in the hundreds of trillions of dollars!

These CDS short positions on Sovereign debt are making Europe's problems much worse. They have forced the credit spreads of countries like Greece to soar which puts them at severe risk of default because their borrowing costs rise to the point where the government cannot afford to service the debt.

If this type of ganster "pile on" style investing is allowed to continue it poses a serious threat to the global economic system. We saw the damage these instruments can do during our own meltdown in 2008.

The Bottom Line

I applaud Germany and Europe for taking a stand against the banksters. This CDS ban goes into effect at midnight. The Euro is selling off hard after the announcement. It will be interesting to see how the market digests this tomorrow.

This move smells of panic which is why the reaction has been so negative early on IMO. I think the market is thinking that this change puts the banks in a world of hurt because they use these markets to hedge positions, and they are also a very profitable part of their business.

However, in the long run, this was the right thing to do because it is it goes along way towards cleaning up the fraudulent financial system.

It also could potentially take a lot of pressure off of the PIIGS in the long run. In the short run this could get ugly because the market will interpret this short banning move as being desperate.

The bottom line of all of these games is clear: The bankers need to be stopped, and the derivative game needs to be regulated before they blow us all to high heaven.

The bullish trend of the market appears to be toast at this juncture. The bulls keep trying to pretend Europe and it's problems will just "go away" and try and to take this market higher and they are starting to learn a painful lessson:

Time after time in the past few weeks the bulls are getting repeatedly buried as the "buy the dips" theory rapidly becomes an unprofitable one.

Once Wall St begins to understand the threat that the European debt crisis poses to worldwide economic growth could really force the market to unwind.

The sovereign debt contagion is much more of a risk to the financial system than the subprime debt crisis ever was IMO.

Now that Germany has pulled the trigger at a time when we are considering more regulations over here in the USA we have created a new risk:

Banking regulation! This will now become another worry for the markets and we all know how much the market hates uncertianty.

Unfortunately, I have many more fears other than just uncertianty:

If we refuse to follow in Germany's footsteps and stop the naked shorting of CDS then who is to say the bankers won't come over here and do the same thing to us here in the USA or Japan?

It's pretty obvious that Wall St doesn't care who they destroy if they can make a buck. They have already fleeced the taxpayers once with their games in 2008. I see no reason why they wouldn't fleece us again. The serious question is who becomes the next target?

Can you imagine what would happen to treasuries if the bankers and their financial weapons of mass destruction decide to target us next?

Be careful out there folks. This minefield is becoming increasingly dangerous. Enter at your own risk.

Disclosure: Sold 50% of my TBT position looking for better entry points as a result of the European debt crisis.

Debt Panic Right Around the Corner?

After seeing the futures tonight(Sunday) I thought I would hop on with a warning. Please be very careful out there and prepare your IRA's for a potential financial panic over the next few weeks.

Europe is setting up for an absolutely horrifying opening. The futures of the major stock market in Europe are all down about 3-4% across the board. The dollar is soaring vs. the Euro and gold is rising once again. US futures are down 13 handles which is nothing to sneeze at. The British Pound is getting absolutely crushed versus the USD.

It's becoming pretty obvious that the trillion dollar bailout basically did nothing to settle the markets. PIMCO(the smartest guys in the room IMO) came out with a warning on Saturday that the bailout might be backfiring. Here is the article from the FT:

“We think it is too risky to buy Greece and Portugal,” said the head of one of the largest US asset managers. “The chance of restructuring is too high. When there is default risk, you scale your exposure differently. There is no value. But even if there was value, our investors still don’t want us to invest.”
Ramin Toloui, a senior portfolio manager at Pimco, said the European Central Bank’s decision to buy government debt could be backfiring. Instead of encouraging private investors to keep their government debt, the programme might be leading to more sales, he said."

Bloomberg is out tonight talking about a large rise in Libor rates due to a lack of trust in the system:

May 17 (Bloomberg) -- Money markets are showing rising levels of mistrust between Europe’s banks on concern an almost $1 trillion bailout package won’t prevent a sovereign debt default that might trigger a breakup of the euro.

Royal Bank of Scotland Group Plc and Barclays Plc led financial firms punished by rising borrowing costs, British Bankers’ Association data show.

The cost to hedge against losses on European bank bonds is 63 percent higher than a month earlier. Investment-grade corporate debt sales in the region plummeted 88 percent last week to $1.2 billion from the prior period, according to data compiled by Bloomberg.

The rate banks say they charge each other for three-month loans in dollars is the highest in nine months, even after a government-led rescue designed to prevent Greece from defaulting on its debt and a new financial crisis.

The euro is trading at its weakest level versus the dollar since the aftermath of Lehman Brothers Holdings Inc.’s collapse, and stocks tumbled.Bank lending “conveys a lack of trust in the system,” said Robert Baur, chief global economist at Des Moines, Iowa- based Principal Global Investors, which manages $222 billion. “Banks are a little reluctant to lend overnight as they don’t know the full extent of what is on the bank balance sheets.”

The three-month London interbank offered rate in dollars, or Libor, rose to 0.445 percent last week, the highest level since August, from 0.428 percent on May 7 and 0.252 at the end of February, according to the British Bankers’ Association."

My Take:

Gee does any of this look familiar? 2008 anyone? Europe is on the verge of a financial meltdown folks. What scares me most about their debt crisis is that they don't have the resources that we have over here to try and stop it.

They can't inflate the Euro and there are 16 different countries that are involved here which makes it very difficult to react swiftly because you need to get everyone on the same page.

When the banks stop lending to each other you need to really take notice. The rising Libor rate is another really bad sign. Remember, the European banks leveraged up even worse than our banks did. Some were reported to be leveraged up to 60-1. Bear Stearns was at about 34-1 when they went under.

The worst part about this crisis for me is I really don't see a solution here. I am sure the banks are afraid to lend to each other because they don't know how much PIIGS exposure each other has.

This could begin to unwind very rapidly folk,s and don't think for a second that we won't be effected over here if it does. The financial world is very intertwined globally at this point which makes us all vulnerable if Europe can't find a way to contain this funding crisis.

I haven't felt like this since 2008 from a fear standpoint. Bill Fleckenstein's "Lord of the Dark Matter" source had a great quote about this crisis: "the issue in Europe is not "Too Big to Fail" its "Too Big to Bail."

Europe can bailout Greece, but it cannot afford to bail out the rest of the PIIGS. Spreads on all of the PIIGS debt are blowing out once again which means a default of one of these countries is quite possible. There was also talk this weekend of a possible downgrade of France by our credit ratings agencies!

The problem with rising interest rates is it forces a countries borrowing costs to soar. Here is an example of what could happen here(and is beginning to happen right now over there) in the US if we get called out on our deficits like Greece has. Hat tip to Casey Research.com for the chart.

My Take:

As you can see above, the cost to finance our debt will soar from $400 billion today up to a whopping $1.8 trillion by 2020 if rates rise just 1% a year based on our overwhelming debt load.

This type of funding problem is what's currently happening to the PIIGS in Europe. When you don't have the money to fund your deficits you are pretty much screwed and eventually you will be forced to default on your debt. The way I see it, a default by one or more of the PIIGS is not out of the question is in the very near future.

If a default occurs, the question will then be who's next? This is where things can fall apart in a hurry. The potential of a stock market crash would not be out of the realm of possibility here folks if a default occured.

The United States debt problems have really benefited by the blowup in Europe because its forced the bond vigilantes to focus on the European funding issues versus our own. We are also getting a nice boost in our debt markets as Europe continues to flock to US Treasuries as a flight to safety from Euro.

However, don't think for a second that the same debt crisis will not hit the US eventually. It's a matter of if not when. We have successfully kicked the can down the road for now.

The Bottom Line

It's time to play some serious defense with your portfolios. I was hoping for a bounce tomorrow because I want to get short.

Europe is seriously starting to unwind here, and I am really concerned that it's starting to spiral out of control. If the banks get toasted in Europe due to one or more of the PIIGS defaulting then Wall St is screwed as well. This whole rally has been nothing but an illusion that was orchestrated perfectly thanks to the political and financial elite.

Debts to not go away and they get larger and larger the more you ignore them. The whole world Ponzied up and now the bills are due.

Everyone just wants to throw these debt skeletons away in the closet and forget about them and take the DOW back up to 14,000. The problem is it doesn't work that way. The debt problems as a result of our global Ponzifest keep rearing their ugly head because the issue of paying them back hasn't been addressed or solved.

The US did nothing but transfer our debts from the private sector over to the public sector which is of course the taxpayer. This has changed who's responsible for it but its stils sitting there rotting as I type.

If Europe rolls over then the US and Japan are next. Sit back and enjoy the fireworks. It appears all hell may break loose on Monday.

Disclosure: No new positions at the time of publication.