The $5 Trillion Dollar Bet

Did any of you know that you just made a $5 trillion bet?  You didn't place the bet yourself of course because it was made for you without you consent.   You can call your politicians and thank them for betting your financial future if you wish:

"The FASB's new accounting rules 166 and 167 on the use of off-balance sheet accounting for securitized debt issues took effect at the beginning of 2010 for financial institutions with a calendar year fiscal year. From a data user's perspective, earlier this year, they were reflected in changes to commercial bank balance sheet data, and last week, with the release of the Q1 Flow-of-Funds data, we saw their impact more broadly on banks, GSEs and the special purpose vehicles (SPVs) these rulings were intended to reform.

It has been routine practice for issuers of securitized debt to "spin" the specific loans and the securities issues off the institutions' balance sheets to a subsidiary set up for the express purpose, an SPV. As FASB's notice explains, this SPV procedure is helpful for financing a narrowly defined project without putting an entire firm at risk. However, the original intention of the SPVs was not to distort the institution's underlying risk profile over a protracted period, which had in fact been happening, as investors found to their dismay during the recent financial crisis. These new rules basically cause the securitized debt issuers to move assets and associated securities liabilities back to their balance sheets.

The following chart shows the dramatic impact of the rule changes on the biggest item.  First, in the mortgage sector, 1-4 family mortgages that are held at "agency- and GSE-backed mortgage pools" plunged from $5.27 trillion at the end of 2009 to just $983 billion on March 31. By contrast, the direct mortgage holdings of the agencies themselves surged from $438 billion at year-end to $4.75 trillion on March 31."

My take:

Don't you just love this move?  FASB changes the accounting rules for 2010 which is a good thing.  The problem is they are about 2 years too late.  As you can see above, the banks have already successfully passed the risk...errr should I say the losses onto the American taxpayer.  The numbers above are stunning.

The banks are basically telling the Fed: "Sure we'll continue to do bad loans as long as they are put on your balance sheet!".

FHA is so screwed.  You might as well call them Fannie or Freddie Part Deux!  Keep in mind that FHA loans are now currently being done with 3% down and a 620 credit score.

This is basically a formula for disaster.  The Fed's response to the housing bubble is essentially to try and build an even bigger bubble EXCEPT this time the risk is on the taxpayer instead of the banks!

If this doesn't make your blood boil than I don't know what will.  This Ponzi scheme must be stopped because we are the ones that will be left with the losses.  The GSE's now hold close to $5 trillion in debt on it's balance sheet.  

WE lose if this $5 trillion dollar financial bet goes bad, and by the looks of jobless claims it appears that that's likely to be the case:

The jobless claims were flat out awful:

Claims are now starting to climb once again.  This chart really puts things into perspective.  The job losses at the PEAK of the 2001 recession were at the levels we are currently seeing now.

Let's not forget that we are now almost three years into this recession.  Imagine what this number would look like if we included the people who have lost their UE benefits after 99 weeks.

The reality here is we are losing jobs at severe recessionary numbers and the data is beginning to show that the economic trends are beginning to worsen.

Ummm...I thought we were in the middle of a recovery?  If you believe in "jobless recoveries" then I guess we are.  

Of course if you believe in "jobless recoveries" then you must also believe in the Easter Bunny so please excuse me if I decide to ignore your views.   I wouldn't be surprised at all to see a negative jobs print in June.

The "jobless recovery" combined with the tax credit expiration is now starting to really weigh on housing.   Housing starts sinking faster than a barbell in a swimming pool:

This tells you that the builders are forecasting grim sales moving forward.  It's about time they turned off the bulldozers. 

I mean why build houses when you have millions of homes that are either empty or filled with squatters who have stopped paying their mortgage?

The Bottom Line

Things are going from bad to worse.  The recent economic trends are pointing towards another slowdown.  I wouldn't be surprised to us fall back into a recession within the next year.

Things will not improve until we stop throwing money out of helicopters.  We are trying to fix our economy by essentially making the same bad bets that forced us to almost collapse in 2008. 

This approach is like trying to cure an alcoholic by giving him even more alcohol.  When will this insanity end!?  In bankruptcy I suppose.

As the jobs situation worsens you can expect the housing market to roll over.

I hope you are feeling lucky because that $5 trillion wager that was made for you doesn't look too good.  If this was a horse race you would be coming around the final turn in last place 20 lengths behind the leader.

When its all said and done it will be our future generations that will be stuck with the trillions of losses. 

Where are the founding fathers when you need them?

Disclosure:  No new positions taken at the time of publication.

Day Trading Bubble Part 2? Buyer Beware

Somebody please wake me up when the market faces the music.

It looks like it's going to be a long hot summer. It's pretty hard to interpret anything when it comes to the stock market right now. The volume is light and the weather is getting warm.

There was no follow through on yesterday's rally. We continue to trade in a range, and I don't see too much conviction by either the bears or the bulls.

Things could get interesting later in the week as we near options expiration on Friday.

This will follow more than likely the gloomy news we will get on Thursday as jobless claims will probably show that we are still in the upper -400k range.

None of this matters for now of course. The bad news continues to be ignored by the market.

Folks, when the market starts trading like this I frankly have no interest in getting involved because there are no fundamentals behind it.

These are tough times for investors because on one the hand you have several potential catastrophic economic fuses that could take down the entire market at any time if any of them are lit.

On the other hand, you need to also respect the fact that the bulls are emboldened after a 70% move on the DOW since last March. We all know the saying: The market can stay irrational longer than you can stay solvent!
These are certainly unprecedented times for investing. We are currently living in an environment where you can't make any money in without taking enormous risk.

If you are a fundamental investor, these are the times where you simply must show a lot of patience and sit on the sidelines until the fundamentals matter.

It may be painful to watch if stocks move significantly higher(which I seriously doubt), however, they are only profits if you sell which most will fail to do.

If you were lucky enough to get out of the DOW near 14,000 like I was then the market is still chasing you. There is no need to jump into the tank and play with the sharks if you were lucky enough to avoid this meltdown.

If you got clobbered, you can try and daytrade yourself to fortunes but it rarely works. Please read the article below if you disagree.

"Delusions of Grandeur" are back in vogue according to Henry Blodget:

"Apparently, day trading is back.. The New York Times says so. So it must be.

And that's fine for those who understand that day trading is a nearly sure-fire way to do worse in the market than you would if you owned a low-cost tax-efficient index fund.

Because the vast majority of day traders will do worse than index funds. Even though they're spending all day trading.

Of course, a big chunk of those day traders won't know they're doing worse than index funds. Because they'll look only at their gross trading returns. In so doing, they will ignore:

Brokerage commissions

Taxes (~50% on short-term gains)

Research costs

The opportunity cost of the hours and hours they spend trading (which could be spent doing something else.

Academics like Brad Barber and Terrance Odean have studied the investment performance of day traders in detail. Not surprisingly, it's ghastly. Here's more from the NYT:

The great mass of studies point to the same conclusion: trading is hazardous to your wealth.... The losers far outnumber the winners...

The authors sifted through tens of millions of trades, from 1992 to 2006, and found that 80 percent of active traders lost money.

“More importantly, we found that if you were to look at the past performance of these traders, only 1 percent of them could be called predictably profitable,” says a co-author, Brad M. Barber, a finance professor at the University of California, Davis. Everyone else, it seems, was on a short-term winning streak. Even those who did modestly well found their that profits were wiped out, and then some, by transaction fees like commissions and taxes.

“It’s not impossible to make money actively trading,” Mr. Barber continues. “There are slivers of people out there who are quite good. And everyone thinks they will be in that group of 1 percent."

My Take:

Think about the data above and take a serious look at yourself and how you invest. For every 100 traders you see posting on trading websites, only 1 of them is making money.

This is a fools game folks. The only people making money on day trading are the so called "professionals" that sell their advice to you via newsletters and websites.

Before i continue don't get me wrong: Longer term technicals do matter and they must be paid attention to. However, trying to do this on a daily basis over the long term is virtually impossible.


Let me also be the first to admit admit that I love to gamble and play with a few trades as much as the next guy. However, I would never consider trading my retirement. Nest eggs are built to be protected not gambled!


The Bottom Line

Day trading should have been left to die with the remnants of the tech bubble. All of the speculators that are running into stocks right now are 90% long and they are once again making the market irrational.

In the end they will be the bagholders just like their predecessors were.

The "top" for day trading came during the E-Trade sponsored U2 Super Bowl concert that happened right as the NASDAQ was in the middle of crashing back in early 2002:



This fad needs to die the way bell bottoms did in the early '80's.

One more quick thing before I end the day:

We saw horrible earnings from Best Buy and Fed Ex this week and the market barely blinked. Two years ago earnings misses like this would have triggered a 300 point declines on the news.

Folks, these are two of the largest bell weather stocks when it comes to measuring the health of the consumer. Best Buy missed badly and Fed Ex's guidance was bleak compared to previous estimates. This news follows Friday's awful consumer spending report for May.

Needless to say: Things look bleak when it comes to the consumer and that's not good when 70% of our countries GDP is consumer based.

I will say this again: When it comes to the market you now need to ignore the "noise" and focus on the economic data and the fundamentals. the economy is rapidly detiorating and investors are not paying attention. This credit bubble will end with many in tears just like all other bubbles do.

I didn't even get a chance to get into Spain's deepening debt troubles today. I will save that one for a later post.

Until next time!

Disclosure: Now new positions at the time of publication.

Investors Flee into Treasuries as Global Debt Concerns Intensify

What an interesting day today.

Let's start with the short term bond market auctions today. The 3 and 6 month treasury sales recieved record bids as investors continue their flight to safety.

Yields have collapsed as a result. Translation here folks: Wall St. is scared to death!

Here is the info from the AP:

"Rates on Treasuries hit lowest level since JanuaryWASHINGTON (AP) -- Interest rates on short-term Treasury billsfell in Monday's auction to the lowest levels since late January.

The Treasury Department auctioned $27 billion in three-monthbills at a discount rate of 0.065 percent, down from 0.130 percentlast week. Another $27 billion in six-month bills was auctioned ata discount rate of 0.150 percent, down from 0.210 percent lastweek.

The three-month rate was the lowest since these bills averaged0.055 percent on Jan. 25. The six-month rate was the lowest sincethey averaged 0.135 percent, also on Jan. 25."

Take a look at what the IRX(13 week treasury bill has done over the past few weeks:


My Take:

The risk trade is now off. Investors would rather sit in treasuries at zero yield right now instead of sitting is risky assets like stocks as fears of debt contagion continue to worsen.

Greece's debt took a beatdown from Moody's today:

"*MOODY'S DOWNGRADES GREECE TO BA1 FROM A3, STABLE OUTLOOK
By Bill Koenig

June 14 (Bloomberg) -- Moody’s Investors Service said itdowngraded Greece’s government bond ratings by four levels toBa1 from A3. The outlook is stable, Moody’s said."

Ouch! That's gonna leave a mark! A four notch drop to Ba1 essentially means that Greece's debt are now "junk bonds".

So much for the Greece bailout! It will be interesting to see what the EU does in response to this rapidly detiorating situation.

I think reality is slowly beginning to set in that both the political will and the money is simply not there to bail out all of the PIIGS. It's an all or none scenario. You can't just bail out Greece and let the others die.

Since this is the case, I am sure the EU is thinking: Why should we bail out Greece then if we can't "save" them all?

Personally I think Greece is toast. When you start getting "junk" ratings on your bonds the game is over.

This is why the short end of the bond market here in the US is now collapsing.

The rally this morning failed miserably when the Greece news hit the wires. This was a critical failed rally because we bounced up right below the 200 day moving average on the S&P for a 3rd time and failed.

This is extremely bearish in my view.

The Bottom Line

The fact that the market couldn't rally on a day where the Euro rose sharply is a big concern for the markets. In recent weeks we have seen the markets rise when the US dollar sold off. This has investors puzzled.

Last week the economic data in the US was flat out awful: We saw weak monthly consumer data, a 44% rise in foreclosures in May, and a continued collapse in mortgage applications.

This weakness is now starting to weigh on the dollar as the economy shows signs that it might be contracting versus showing signs of recovery and continued growth.

Investors are now scared and confused and don't know where to put money to work as both Europe and the USA appear to be on the edge of falling off a cliff economically.

Since the Asian economies are so dependant on the developed world's consumers, investors really don't want to buy equities over there either.

As a result, the money is flowing into short term treasuries as investors run for cover as they prepare to ride out the economic "Storm of the Century".

Let's see if the bulls try and make another charge at 200 day moving average of 1107. If we fail and head south S&P 900 will be right around the corner.

Disclosure: Now new positions at the time of publication.