Friday, August 20, 2010

Market Drops as Double Dip Concerns Deepen

Investors continued to avoid stocks as they become increasingly "sick of the market" according to Marketwatch:

"Some investors are saying, "I'm outta here," says Michael Farr, president and chief investment officer of Farr, Miller & Washington. "I'm hearing scary things from investors," he says. "They're sick of the market. They don't want to invest any more. They're pulling their money out of stocks and putting them in bonds." But in doing so, they're settling for a high-priced market with the lowest returns "in my memory."

Quick Take:

As most of you know I spoke a lot about this yesterday.  It was nice to see the MSM pick up on investor sentiment.

Mutual Funds have now seen outflows for 15 consecutive months as a combination of fear and unemployment begins to force the masses to start changing their 401k strategies. 

In the case of unemployment, we are beginning to see an alarming trend where we see desperate investors begin making hardship withdrawals in their 401k's in order to survive:

"The portion of participants borrowing from their 401(k) accounts or taking out a hardship withdrawal rose two percentage points from a year earlier to 11%, while those with loans outstanding also grew two percentage points, to 22%.

Hardship withdrawals edged up to 2.2% of participants from 2%. About 45% of those who made hardship withdrawals a year earlier also took another one in the second quarter. Top reasons included prevention of foreclosure or eviction, college expenses or home purchases."

Quick Take:

I often wonder why the bulls think the market will continue to go up when there are so many headwinds for stocks.  On top of the issue above there is also the issue of simple demographics.

Where are the buyers of stocks going to be as our baby boomer generation starts tapping into their 401k instead of adding to it?  Also, who is going to replace them as our aging population begins to decline?

The population problem is now a serious issue for Russia and some believe this problem was one of the triggers that exacerbated the death spiral in Japan:

As you can see above, a depression is probably the best form of birth control on the planet.  People begin to ask themselves how they can support a child if they don't have the ability to work?

What's scary here is we now have the same issue that Japan did:  An aging population.

Eventually, the longer term effects of a depression begins to psychologically effect younger generations who decide to not get married and instead live with their parents for longer periods of time in order to financially survive.

I just finished an interesting article about how difficult it is for young women in Japan to just find a date let alone marry as the males lose their confidence in their ability to support a family.

Will this happen here?  Time will tell but my best guess is its highly likely.

The Fed

The Fed's Bullard was out with more QE rhetoric today as the economy continues to sink:

"WASHINGTON (MarketWatch) -- If inflation continues to decline, a new round of quantitative easing by the Federal Reserve in the form of Treasury purchases may be warranted, said James Bullard, the president of the St. Louis Federal Reserve Bank on Thursday. At the moment, with inflation low and the recovery on track, no action is needed, he said. "Should economic developments suggest increased disinflation risk, purchases of Treasury securities in excess of those required to keep the size of the balance sheet constant may be warranted," Bullard said. Any quantitative easing should not be large or sudden. "Shock and awe is almost never a good way to proceed," Bullard said. A series of small policy actions can add up to large action, he noted in a speech in Rogers, Arkansas. The European sovereign debt crisis has abated somewhat but remains an important factor in the global economic mix, he said."

Quick Take:

What on earth is this going to accomplish?  We have record low interest rates right now as it is and nothing has changed.

People have no interest in borrowing more money right now!  This policy is idiocy at its finest.  Pissing away more tax dollars on a failed policy is nto the answer.

I can't help but think of that song "We're on the Road to Nowhere" from the '80's when I see such asinine rhetoric.

The scary part is you know they will pull the trigger and do it too.  I call it rhetoric now because I don't think they are ready to pull the trigger yet.  Eventually you can be guaranteed that they will.

The results of such actions are going to eventually going to hurt the currency.  They also risk waking up the bond market who has been extremely patient with the Fed's policy to date.

At some point this is all going to become extremely inflationary.  Deflation may rule the day today but inflation will almost assuredly rule the day down the road if we continue down this QE path.


I will shut things down for the week after this last segment and The Bottom Line.  I wanted to highlight a Trilia survey that polled renters sentiment on housing:

"Today Trulia hosted a quarterly conference call with Simply Hired discussing the results from our recent American Dream survey on attitudes toward home ownership. Government and industry experts agree: consumer interest in buying homes is an essential element of a healthy real estate market. However, 27 percent of renters indicated that they do not plan to buy a home - ever. Of those renters who do plan to purchase someday, 68 percent said it would be more than two years before they do. This reluctance to buy could potentially drag out the real estate market’s recovery timeline further than many have predicted."

The McMansion Era is Over

"Americans are veering away from the “McMansions” that had grown popular before the recession. Those American adults for whom home ownership is part of the American Dream displayed a preference for smaller homes, with only 9 percent saying their ideal home size is more than 3,200 square feet– the same number of who said they’d like their home to be between 800 and 1,400 square feet. Fifty-five percent of Americans would prefer a home between 1,401 and 2,600 square feet."

Quick Take:

Yawn....Call me when 75% of renters say they never want to buy a house again!

Seriously, this is some pretty alarming data.  This essentially tells you that 95% of renters plan on buying nothing for 2 years.  Almost 1/3 now say they never want to own buy a house.

If you are a Realtor you probably haven't slept well since this data came out.  

Something else to noote here is it appears the days of wanting to own a McMansion are apparently over.  I personally never understood why anyone would want to own these huge homes in the first place.  The maintenance alone would drive me nuts!

Essentially what this tells me is the people that paid bubble prices for McMansions at the peak are totally screwed for two reasons:

1)  No one can qualify for a mortgage to buy these Ponzi priced McMansions because they can't afford them.

2)  Potential buyers no longer have the desire to own a huge home.

I think when all is said and done this is the segment of the market that's going to get hit the hardest.

The Bottom Line

Nothing changed much today.  Investors continue to avoid stocks like the plague.  We have some huge bond auctions next week.  This is where my attention will be focused.

I think the early week auctions should go well because they are short term treasuries.  I am hoping to see treasuries rise on this news.

We have 5 and 7 year auctions later on in the week.  This is where I plan on taking a shot with some TBT if treasuries move higher earlier in the week. 

Interestingly, treasuries were down today despite the market sell off.  Something to take note of. 

Have a great weekend everyone!


Thursday, August 19, 2010

Troubles in Europe?

What a day.  I will start with my trades that I talked about yesterday.  I ended up sitting on my hands.  I got no entry on my shorts after the hideous jobs report, and I also remembered that tomorrow is Op-Ex.  These days can often be brutal so i decided to not get involved. 

Without the hedging of short positions I saw no reason to get in front of the bond freight train without any protection.  No harm no foul.  We will see where we are with this on Monday.

Something else of note:  We got a second confirmed Hindy today which is something to take notice of. 

Lets get to the markets:

Jobless claims...YYYYYYuck............

From Haver:

"Unemployment insurance claims jumped unexpectedly in the week ending August 14, reaching 500,000 from an upwardly revised 488,000 the week before (originally 484,000). It was the first appearance of 500,000 initial claims since November 14, 2009. The 4-week moving average was 482,500 in the August 14 week, up from 474,500 August 7 and 459,250 July 31. Forecasts, according to the Action Economics consensus, called for a decrease in the weekly number to 476,000."

We then took another punch to the gut when the Philly Fed number came out:

"Disappointingly, the Philadelphia Fed's monthly business outlook survey turned negative for this month. The general activity index was -7.7% compared with July's +5.1%. It was the first negative reading since July 2009."

My Take:

Ouch.  These numbers are not only awful, they are flat out frightening!  Without jobs this economy is toast.  I know you all are probably tired of hearing it but it can't be emphasized enough.

I can tell you one thing:  I see no double dip recession here!(sarcasm off).

All of the data is telling you that the economy has basically been fallen off a cliff since May.  The only thing rising right now is our deficits.

This leads me to my next piece.  If you want to see what can happen to the people in a country that is struggling from a debt crisis all you have to do is take a look at Greece.  Unemployment has now reached 60-70% in some areas.  A few snippets from the article:

"A report by HSBC said banks had lost 8pc of their entire deposit base in the five months to May. "The Greek market has never, since the first data in 2001, experienced such attrition," said banking analyst Joanna Telioudi.

While some withdrawals point to capital flight by wealthy Greeks, it is clear that households and companies are running down savings to make ends meet. The Athens Chamber of Commerce warned yesterday that its members are in "dire straits", with a majority facing a liquidity threat."

"Simon Ward from Henderson Global Investors said Greek lenders are covering their funding gap through loans from the European Central Bank (ECB), which reached a record €96bn in July. "The question is how much eligible collateral they have left to take to the ECB. It must be nearing the limits," he said.

"What is worrying is that this is not just Greeks. Portuguese banks borrowed €50bn in July compared to €41.5bn in June. Together with Ireland and Spain they have borrowed €387bn from the ECB," he said."

Mr Stannard said a report on Greece by Spiegel magazine entitled "Entering a Death Spiral" revived worries about political stability, painting a picture of a country nearing popular revolt. It said unemployment had reached 60pc to 70pc in depressed areas.

"The entire country is in the grip of a depression," said Speigel. "Everything seems to be going downhill. The spiral is continuing unabated and there is no clear way out."

"The markets suspect that Greece will have to restructure its debt sooner or later, and bondholders will be the losers. They don't believe that Greece's euro membership on present terms is economically viable. The country doesn't have the freedom it needs to get out of this crisis," he said."
Take Continued:

As you can see above, the situation is getting desperate over there.  Greece's debt problems are still exploding despite effectively implementing severe austerity measures.  The yields on their bonds shot up to over 10% once again today.

The article basically concludes that Greece cannot get out of this crisis as long as it stays with the Euro because it can't be devalued.

This is the only way for Greece to get out of this mess, and it will eventually happen over here as well although are day of reckoning is a little ways off. 

I must admit:  This article bothered me more than anything else today.  Can you imagine what this country would look like with 60-70% unemployment?  Don't say it can't happen here.  The way we are spending is putting is on the same exact path as Greece.

Believing that "it's different here" puts you in the same category as a person who believed a Realtor who told them that "housing always goes up!" back in 2005.

This article also triggered an alarm bell in my head today:

Perhaps "austerity" can't work alone without a devaluing of a currency?  Greece may be telling us that this is the case.   If you look at most economic collapses you will notice that many of them end with a currency devaluation.  Argentina anyone?

Articles like this makes me want to go out and buy more gold!

The Bottom Line

What a crazy time in history folks.  You can almost smell the fear in the air.  Never in my life have I seen a stock market like this.

I am drooling at the idea of shorting treasuries.   Why wouldn't you when you look at the Ponzi scheme below that continues to roll on?

We plan on selling $194 billion in treasuries next week alone:

"• Monday: In the usual weekly sale, $30 billion in three-month bills and $30 billion in six-month bills will be sold. The bills will be dated Aug. 26 and mature Nov. 26, 2010, and Feb. 24, 2011, respectively. The Cusip number for the three-month bills is 912795W80 and for the six-month bills is 9127952C4.

Noncompetitive tenders for the bills must be received by 11 a.m. Eastern time on Monday, and competitive tenders by 11:30 a.m.

• Monday: $7 billion in 30-year TIPS will be sold: dated Aug. 31 and maturing Feb. 15, 2040. TIPS are Treasury inflation-protected securities. Cusip number is 912810QF8. Noncompetitive tenders must be received by noon on Monday, and competitive tenders by 1 p.m.

• Tuesday: $25 billion in 52-week bills will be sold: dated Aug. 26 and maturing Aug. 25, 2011. Cusip number is 9127952A8. Noncompetitive tenders must be received by 11 a.m. Eastern time on Tuesday, and competitive tenders by 11:30 a.m.

• Tuesday: $37 billion in two-year notes will be sold: dated Aug. 31, and maturing Aug. 31, 2012. Cusip number is 912828PH7. Noncompetitive tenders must be received by noon on Tuesday, and competitive tenders by 1 p.m.

• Wednesday: $36 billion in five-year notes will be sold: dated Aug. 31, and maturing Aug. 31, 2015. Cusip number is 912828NV8. Noncompetitive tenders must be received by noon on Wednesday, and competitive tenders by 1 p.m.

• Thursday: $29 billion in seven-year notes will be sold: dated Aug. 31, and maturing Aug. 31, 2017. Cusip number is 912828NW6. Noncompetitive tenders must be received by noon on Thursday, and competitive tenders by 1 p.m."

I guess you might as well sell as much as you can when you have so much demand right?

I just don't see how this continues.  It will be interesting to see how all of these auctions go. 

There will come a time where there is simply not enough money to soak up all of these auctions week after week.   The jig is up when this eventually happens.

A word of caution before I end here folks:  If this bond run isn't a bubble then get prepared for the worst economic collapse this country has ever seen because that's exactly what the bond market is telling you. 

People do not sit in investments that return no yield unless they are VERY afraid.

I will have more tomorrow.   
Disclosure:  No new positions at the time of publication.

Wednesday, August 18, 2010

Is It Time To Take a Timeout from the Capital Markets?

Stanley Druckenmiller sure thinks so.   I think many others on Wall St would admit that they wish they could do the same.  Druckenmiller is a legend of the game folks.  If Wall St had a Hall of Fame he would surely be a first ballot lock to get in.

all I can say here is can you blame the guy?  The casino gambling mentality of the new Wall St traders combined with the constant government interventions has turned the markets into an absolute unmitigated disaster.

I think many of the big players have decided to pick up their toys and go home.  The question I then have to ask myself if they are doing this then shouldn't we be following them?

If the biggest names on Wall St can no longer perform at a high level how should we be expected to do any better?

The constant interventions has created a total loss of confidence in the markets.  The volumes have become anemic which then makes the market even more vulnerable to violent moves based on any news that hits the wires.

The market has looked like one gigantic roller coaster since last October for the most part:

Markets like this are very difficult for any investor to make money in.  You may find a nimble trader who has done OK in such an environment, but I guarantee you for everyone that has done well there are 10 others that have blown up their trading accounts.

Volatility like this makes it really tough.  Making matters worse, the horrific news flow around jobs and deflation has created a panic into bonds which has created even more uncertainty in the markets.

There was a lot of talk around a bond market bubble on CNBC today after Jeremy Siegel's much talked about op-ed in the Wall St Journal.  Jeremy basically compared this move in bonds to the tech bubble.

I shared similar concerns on here yesterday.  Bonds were up once again today(shocker eh?).  This parabolic move is doing nothing to help investor confidence.

The way I see it:  Investors are now paralyzed in terms of where they should be putting their money.  

Every asset class has considerable risk.  Stocks are over valued.  High yield debt pays a nice yield but the risk is with real price discovery the bonds they hold could be worth pennies on the dollar.  

Munies look good comparable to treasuries but the state deficits make these bonds risky as well.  The news out of New Jersey today certainly wasn't helpful for munies today:



Washington, D.C., Aug. 18, 2010 - The Securities and Exchange

Commission today charged the State of New Jersey with securities
fraud for misrepresenting and failing to disclose to investors
in billions of dollars worth of municipal bond offerings that it
was underfunding the state’s two largest pension plans."

When you look at all of the uncertainty out there maybe we all need to ask ourselves if it's time that we get out of this game all together.


Unfortunately, the greatest opportunities in the markets for the near future are most likely on the short side.

I wanted to end today with a little discussion around a trade that I am starting to look at as treasuries continue to soar.  I can't help but start thinking about going the other way on bonds if  the 10 year gets below 2.5%

Treasuries are beginning to look risky to many including Doug Kass who is calling this the trade of the decade(Doug's take is towards the end of the video):

My Take

I can't help but agree with Doug here.  In fact, I wanted to put up an interesting chart on TBT that I put together today:

As you can see above, TBT has now firmly broke down below where it traded when the Fed announced their QE last year.  The 10 year and the 30 year bonds have yet to do the same.

I think this makes TBT interesting here but I want to stress what Kass said above.  This is a trade that you need to scale into because there is a lot of momo in treasuries right now.

The fact that TBT has firmly broken to new lows is something to take note of.  I am a buyer here tomorrow if the 10 year dips down into the 2.5% range. 

The Bottom Line

Be aware when you see huge players like Druckenmiller exiting the market like this.  The market really has made no sense for over a year now and it's becoming increasingly difficult for even the best of the best to trade.

The bond binge has only made things even more unstable in my view.

Ironically, I pick today as a day I want to talk about trades as everyone else is throwing in the towel.  Perhaps I am a glutton for punishment but this is the first time I have seen a few things that look interesting to me.

Here is my plan: 

If we see another move higher tomorrow I am considering a pair trade where I short stocks/short treasuries.

My thinking here is a market selloff is the only way treasuries move significantly move higher from such lofty levels.  This will hedge me out of my TBT position.

I say this because I simply do not think both stocks and treasuries will continue to move up simultaneously. 

In fact, I think over the longer term we could see the exact opposite where all confidence is lost and stocks and bonds both sell off at the same time similar to 1932.  This trade becomes a big winner under such a scenario.

I will use a combination of ETF's and PUT's for this strategy.  I will be looking to use the ETF's  QID, TBT, SDS and TWM on the short side.    My PUT strategy would involve the SPY and TLT(treasuries).

There is a good chance that I will start scaling into this trade tomorrow.  I will have an update on Thursday!

Best to all and be careful:  It's a jungle out there.

Tuesday, August 17, 2010

Market Rallies/Kyle Bass CNBC Appearance

The market finally rallied today as Home Depot and Wal-Mart reported better than expected earnings.  

However, when you read between the lines, neither company had many good things to say about the shrinking consumer:

"For two major retailers reporting quarterly results on Tuesday, consumers appeared to be holding back.

Steeper price-slashing did not lure customers into spending more at Wal-Mart, while shoppers at Home Depot spent less and put off big home improvement projects or big-ticket items like appliances.

Both Wal-Mart Stores and Home Depot posted second-quarter profits on Tuesday that beat analyst estimates, and both slightly raised their full-year earnings guidance for the year. Yet their results suggested that American consumers were not spending as much as had been expected."

As you can see above.  Both companies produced larger profits via corporate initiatives versus seeing a surge in the strength of the consumer.  Huge discounts at both failed to lure in customers.

I wouldn't put to much stock into today's bounce.  We were very oversold and long overdue for a green day.  I am hoping to see a little more to the upside because it's going to create a great opportunity to get into some short positions.

Kyle Bass

I wanted to put up some must watch videos from Kyle Bass who is the managing director of the hedge fund Hayman Advisors.  Kyle accurately called the housing bust, and became one of the youngest Senior Managing Partners at Bear Stearns at the age of only 28.

Kyle was featured on David Faber's Strategy Sessions today.  He painted an extremely gloomy global outlook for equities and especially Japan. 

Edit:  It appears video 1 was taken down.  I will check and see if they repost it.   Part 2 below is still up.

Take a look and I will have a some comments below:

My Take:

Kyle's best line was when he was asked if he was as concerned about where we are today versus where we were back then(2008).

His response:  "Let me asnwer you with a question.  How many of your problems have you kicked down the road have eventually gotten better?".  The response from the CNBC boys was :  "Good point".


Kyle pretty much shredded the European stress tests and is extremely bearish about Japan as well as global equities.  Mr. Bass predicts that Japan is very close to a restructuring which is a nice way of saying "economic reset". 

Kyle also brilliantly focused on the increasing risks investors have been forced to take as a result of the Fed's zero interest rate policy.

A quote from Mr. Bass on this topic:  "The Fed's policy is forcing people to make the wrong decisions" when it comes to investing.  I spoke a lot about this yesterday. 

He also talked about how Ponzi schemes can last a long time as long as you find more suckers to keep the game going.   Right now the USA's suckers are the ones that keep buying our treasury debt.  We all know that this isn't sustainable.  China was a net seller of treasuries for the second month in a row in June. 

Why wouldn't they be as treasuries soar to new highs?

The Bottom Line

Our Ponzi financial scheme will fail just like all the others.  The system is being kept together right now with a few band aids and zero interest rates from the Fed which has allowed our zombie banking system to stay afloat.

As long as this policy is the status quo our economy will not recover.  This place will look very much like Japan has the last 20 years. 

The debate moving forward will start to hone in on this zero rates policy in my opinion. 

The debate will center around these two themes:

A)  Do we take our medicine now and and suffer through a horrible short term depression as we restructure in order to create a viable recovery that has a strong fiscal foundation?


B)  Do we zombify ourselves like Japan has and suffer through a 20 year funk where we lose a generation of prosperity but do not immediately collapse?

I would choose option A any day of the week.  Who on earth wants to suffer for a couple decades?  Ripping the Band Aid off quickly is much preferable than a slow painful peeling!

If you listened to Kyle above, the Japanese response ends up with a restructuring anyway.  If this is the case then what's the point?

Unfortunately there are no easy answers to our problems.  The one thing I know is I want this thing over with as soon as possible.   History has shown us that short severe depressions can lead to quick recoveries.

A great example of this s the depression of 1920-1921.  You can read about it here.  Prices dropped 36% as severe deflation crippled the economy.  The government slashed spending in order to control our deficits.  This prudent rapid response then set the stage for one of the greatest periods of prosperity this nation has ever seen.

Wasting the hopes and dreams of a generation as we pull a Japan Part 2 would be a very sad thing to witness.  Hopefully our government will find the will to do the right thing and take the hit today rather than 20 years from now.

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

Monday, August 16, 2010

Wall St's Bond Addiction Intensifies

Stocks closed the day relatively flat as money continued to pour into the treasury market.

Lets take a look at the 10 year today:

My Take:

This chart has gone parabolic!  The contrarion in me is starting to believe this move is getting way over done.  Especially when I see articles like this:

"SAN FRANCISCO (MarketWatch) -- U.S. Treasury bonds, often a top choice for risk-averse investors, are attracting more interest from hedge funds now, according to a study released Wednesday by consulting firm Greenwich Associates.
Hedge-fund trading volume in U.S. government bonds surged by more than 70% in the past year. In 2009, hedge funds generated about 3% of trading volume in this market. This year, that share jumped to roughly 20%, Greenwich Associates said.

The move is being partly driven by demands on the $1.8 trillion industry by institutional investors."

Is Wall St Blowing More Bubbles or have They Been Paralyzed by Fear?

This is the million dollar question.  I am ALWAYS highly suspicious of any "pile on" trade that I see on Wall St.  Just look at the "pile on" trades we have seen just in the past 10 years:

-  The tech bubble in the 1990's...Need I say more?
-  The Housing Bubble...Enough Said.
-  The commodities bubble in early 2008 where oil soared to $150/barrel.

There are many other smaller versions of such trades but I will stop at these examples.

So are Treasuries the next bubble?  I am starting to think so.

Before I get into the reasons why let me start off by saying there are many reasons to be in treasuries right now.  The economy is a mess and nothing looks safe.  It makes total sense to own treasuries during such a chaotic time in history.

However, the reason I am skeptical about the current move is because the market isn't trading like it should be if this was a "risk off/Armageddon on" trade.

I mean think about it:  If people are so scared then why are stocks holding up so well?  If this was a flight to safety then wouldn't investors be selling stocks and buying bonds?

You would have expected to see a 4000 point sell off on the DOW the way treasuries have traded recently.  Yet the DOW was only down 3% last week.  I smell a rat especially since the hedge funds are now in the game.

IMO, he whole thing is very suspicious.  What I think is really going on here is the "unintended consequences" of the Fed's zero interest rate policy.

This policy has provided too much liquidity for the banks.  What I believe is happening is the banks have decided they are better off borrowing at zero and buying bonds on the longer end of the curve then they are lending the money to a bunch of unemployed potential borrowers.

Making matters worse is the fact that potential borrowers have zero desire to lend more money in the first place because they are too busy paying down their debts from the last bubble.

As a result, the banks are flush with cash and they don't have to take the losses on their books thanks to accounting standards that are non existent which makes them even more flush with cash!.

This treasury trade looks HIGHLY speculative to me folks and these things usually end very badly.

The Bottom Line

The treasury trade looks tired but I still thinks it has legs so I will sit on the sidelines for now.  The economy continues to tailspin and this will only put further pressure on our deficits.  Any push back by the bond market as a result of our irresponsible spending could force this trade to unwind.

What angers me here is we shouldn't even be here in the first place.  Our interest rate situation is really putting the fianancial system at risk.

Allowing the banks to make a killing using a zero interest rate policy is all well and good for the banksters.  The problem is it's destroying the rest of the economy because the money is not being allowed to filter down to Main St where it is badly needed.  

It's being hoarded by the banks and then being thrown into the treasury market.

This is killing the last place investors could find some yield and the "consequences" of such policy of this are extremely dangerous.  I say this because it's forcing investors to take on enormous risk elsewhere because they are desperate to fiend yield. 

Just look at the the corporate debt that's going bananas right now.

Corporate high yield debt issues has turned into a feeding frenzy as soon as it's offered.  Companies I have never even heard of are raising money via selling 10 year debt because they are offering 8-9% yields.

Ummm...How is this going to end well?  Many of these companies will not even be here 10 years from now.  MBS's were offering the same returns and we all know how that worked out.  The problem with the MBS instruments was the underlying debt was no good.

The same thing is going on this go around.  Most of these companies are using this money to roll over BAD INVESTMENTS/DEBTS. 

Example:  Commercial real estate is down 40% for the most part from it's bubble highs.   Yet companies like Simon Property Group have seen their stock price soar from $30's last year up into the $90's recently because they have been able to take advantage of the appetite for corporate debt

How on earth does this make any sense fundementally?  The debt they own is garbage.  Who is going to be shopping at the 100's of malls they own as unemployment soars?  How many of their stores will go bankrupt as the consumer evaporates.  How much more value will be lost on these properties when they do?

What if interest rates move higher?  What happens to this debt then?  

Let's get real here:  The only reason SPG is alive right now to begin with is because they got a free pass by the banks to roll over their debt at full value despite the fact that it's woth wayyyyy less.

The fundementals should be telling investors to stay the hell away from companies like this because their underlying debts are 30-40% over vauled. 

We all know what's going to eventually happen here:

SPG's cash flows will dry up as their tenants go BK and they will then be in deep doo doo as they try and make their debt payments to the banks and to the debt investors who allowed them to leverage back up.

The bottom line here is I believe we are seeing more bubble blowing throughout the financial system. 

The problem is the balance sheets are bad this go around from the beginning and investors are getting sucked into it because they feel like they have no other options because stocks and treasuries are doing nothing at this point.

I tell you one thing:  If the 10 year treasury gets down to 2% it will be time to get short treasuries because none of this is sustainable. 

The markets once again is having a party.  The problem is Main St wasn't invited this time because they are unable to profit from it like they did when they could flip houses.

The problem with this bubble party is only rich are invited, and without Main St. participating, it's likely to be a 4 hour affair versus an all nighter.

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

Sunday, August 15, 2010

Tony Robbins Gets It!

Take some time out of your night to watch this warning by Tony Robbins.  I couldn't agree more with Tony here when it comes to his take on the economic change that we are all about to witness.

We should all take notice when the most famous motivational speaker in the world comes out and warns us that we all need to get prepared for the "economic winter" that is coming.