A little Saturday night comedy:
Saturday, October 9, 2010
Latest from Jim Rogers
Great stuff here from from the legendary Jim Rogers. My favorite quote in this piece was "the central banks are going to keep printing money until they run out of trees".
I couldn't agree more with Mr. Rogers. What I thought was interesting here was Jim's counter arguement to David Tepper's thesis.
Tepper as we all know by now told the world on CNBC that you need to own equities because stocks will go up if the economy improves and if the economy doesn't then stocks will still go up because the Fed will QE.
Jim Rogers counters this thesis by saying the same thing will happen with hard assets. If the economy improves then commodities will be in higher demand which should increase prices. If economy tanks then then the Fed will QE which will then cheapen the dollar. Commodity prices would then rise as a result because of the inflationary effect that a cheaper dollar would have on hard assets.
I like Jim's theory a lot more than Tepper's because at the end of the day you actually own something of value versus a holding bunch of stocks that are way overvalued from a P/E standpoint.
Food for thought.
I couldn't agree more with Mr. Rogers. What I thought was interesting here was Jim's counter arguement to David Tepper's thesis.
Tepper as we all know by now told the world on CNBC that you need to own equities because stocks will go up if the economy improves and if the economy doesn't then stocks will still go up because the Fed will QE.
Jim Rogers counters this thesis by saying the same thing will happen with hard assets. If the economy improves then commodities will be in higher demand which should increase prices. If economy tanks then then the Fed will QE which will then cheapen the dollar. Commodity prices would then rise as a result because of the inflationary effect that a cheaper dollar would have on hard assets.
I like Jim's theory a lot more than Tepper's because at the end of the day you actually own something of value versus a holding bunch of stocks that are way overvalued from a P/E standpoint.
Food for thought.
Friday, October 8, 2010
Is Quantitative Easing Already Priced In?
I wanted to discuss QE before I shut things down for the day. Before I start below, let me preface the video by stating that I am vehemently against another quantitative easing by the Fed.
That being said, it's always great to hear the other side of the story. The video below also also helps us understand why the market keeps rising despite the relentless bearish economic news.
The clip is from CNBC's Strategy Session today. At the 6:37 mark you will hear the QEII case made by Jeff Kronthal who is principal at KLS diversified.
Jeff does a great job laying it all out:
My Take:
As you can see above, Wall St is fairly certain that they are going to get their QE from the Fed. If they do, and the numbers above are correct, the case for being long treasuries is easy.
The Fed plans on issuing $1.2 trillion in debt next year. If the Fed does a small QE of $500 billion and then invests the MBS run off of $350 billion into treasuries then 75% of our treasury auctions will already be purchased by the Fed.
Now that the case has been laid out I would like to respond to this nonsense.
First, how in the hell is it a positive when we are buying up 75% of the treasury auctions?
We issue treasuries in order to raise cash in order to fund our country's operations.
Can somebody please explain to me how financing yourself can actually work? How has it worked out in Japan after countless QE's? Anyone see their currency today?
This is a circle jerk plain and simple. Japan proves that this policy is a total failure. This solves absolutely nothing in the longer term.
Secondly, how does Wall St view this as a positive? They tell us the Fed has our back. Yeah ok, well how long is that going to last before they go bankrupt propping up this unsustainable Ponzi bubble?
Is Wall Street filled with total idiots?
Why don't we take the money and spend it on finding ways to create jobs. We might as well be pissing the money at the craps table if we do another QE.
Has the market already priced in the QE Ponzi Scheme?
I am starting to wonder. IMO, DOW 11,000 might become serious resistance until we hear from the Fed.
I didn't like how the market acted at all after finally breaking through 11k this afternoon:
I also didn't like how the 10 year sold off late in the day:
You have to ask why would treasuries reverse like that this afternoon. The DOW was essentially at the same levels it was in the morning. We have not seen any reversals like this in bonds for awhile. Usually the trend in the morning holds until the end of the day. Did something spook the bond boys?
The Bottom Line
I actually took a short position on tech via QID at the close. I didn't like this afternoon's tape today at all. I am also a little nervous about my metal holdings, and I suspect they might roll over if the market sells off so I wanted a little more short protection against a downside move in the metals.
The way I see it: The market could still move higher from here. The trend is your friend and the QE momo is strong. However, when I look at Apple about to hit $300 as the economy continues to roll over I can't help but think we are near a short term top.
I also believe that the market will tank if the Fed doesn't pull the QE lever in November. Wall St will have a temper tantrum and sell off the market if they don't get their way.
The problem Wall St has by putting all of their eggs in the QE basket is the Fed understands that hitting the QE button has a lot of consequences. I don't think they will press it unless the economic data is absolutely dreadful.
If/when they do hit the button I think it will give the market an initial sugar boost. However, I don't think it will last because the dollar will likely tank on the news which will force commodities back up which then crushes the consumer.
We will hit $150 a barrel on oil in no time if the Fed heads down this path. The already weary consumer would then be pushed over the edge.
Remember, the consumer was in better shape when oil was at these levels last time. Many of them have been out of work since the last commodity bubble and, as a result, I think the economy will hit a wall much quicker this time.
The absurd insanity on Wall St is truly something to behold. I have never seen a group of people that are so smart act so stupid from a macro point of view. Quantitative easing is a nightmare down the road. It does nothing but take us one step closer to insolvency.
Until next time!
That being said, it's always great to hear the other side of the story. The video below also also helps us understand why the market keeps rising despite the relentless bearish economic news.
The clip is from CNBC's Strategy Session today. At the 6:37 mark you will hear the QEII case made by Jeff Kronthal who is principal at KLS diversified.
Jeff does a great job laying it all out:
My Take:
As you can see above, Wall St is fairly certain that they are going to get their QE from the Fed. If they do, and the numbers above are correct, the case for being long treasuries is easy.
The Fed plans on issuing $1.2 trillion in debt next year. If the Fed does a small QE of $500 billion and then invests the MBS run off of $350 billion into treasuries then 75% of our treasury auctions will already be purchased by the Fed.
Now that the case has been laid out I would like to respond to this nonsense.
First, how in the hell is it a positive when we are buying up 75% of the treasury auctions?
We issue treasuries in order to raise cash in order to fund our country's operations.
Can somebody please explain to me how financing yourself can actually work? How has it worked out in Japan after countless QE's? Anyone see their currency today?
This is a circle jerk plain and simple. Japan proves that this policy is a total failure. This solves absolutely nothing in the longer term.
Secondly, how does Wall St view this as a positive? They tell us the Fed has our back. Yeah ok, well how long is that going to last before they go bankrupt propping up this unsustainable Ponzi bubble?
Is Wall Street filled with total idiots?
Why don't we take the money and spend it on finding ways to create jobs. We might as well be pissing the money at the craps table if we do another QE.
Has the market already priced in the QE Ponzi Scheme?
I am starting to wonder. IMO, DOW 11,000 might become serious resistance until we hear from the Fed.
I didn't like how the market acted at all after finally breaking through 11k this afternoon:
I also didn't like how the 10 year sold off late in the day:
You have to ask why would treasuries reverse like that this afternoon. The DOW was essentially at the same levels it was in the morning. We have not seen any reversals like this in bonds for awhile. Usually the trend in the morning holds until the end of the day. Did something spook the bond boys?
The Bottom Line
I actually took a short position on tech via QID at the close. I didn't like this afternoon's tape today at all. I am also a little nervous about my metal holdings, and I suspect they might roll over if the market sells off so I wanted a little more short protection against a downside move in the metals.
The way I see it: The market could still move higher from here. The trend is your friend and the QE momo is strong. However, when I look at Apple about to hit $300 as the economy continues to roll over I can't help but think we are near a short term top.
I also believe that the market will tank if the Fed doesn't pull the QE lever in November. Wall St will have a temper tantrum and sell off the market if they don't get their way.
The problem Wall St has by putting all of their eggs in the QE basket is the Fed understands that hitting the QE button has a lot of consequences. I don't think they will press it unless the economic data is absolutely dreadful.
If/when they do hit the button I think it will give the market an initial sugar boost. However, I don't think it will last because the dollar will likely tank on the news which will force commodities back up which then crushes the consumer.
We will hit $150 a barrel on oil in no time if the Fed heads down this path. The already weary consumer would then be pushed over the edge.
Remember, the consumer was in better shape when oil was at these levels last time. Many of them have been out of work since the last commodity bubble and, as a result, I think the economy will hit a wall much quicker this time.
The absurd insanity on Wall St is truly something to behold. I have never seen a group of people that are so smart act so stupid from a macro point of view. Quantitative easing is a nightmare down the road. It does nothing but take us one step closer to insolvency.
Until next time!
Unemployment Rate Remains at 9.6%
BUT(hat tip to Karl over at the Market Ticker)
U-6 which is the real unemployment rate soared to 17.1%:
Quick Take:
When you dig into the BLS report the numbers are ugly. The biggest spike in jobs was seen in the retail/services sector. The most losses were seen in government jobs as the country struggles with massive budget shortfalls.
So essentially we gained jobs that pay hourly wages with no benefits at the expense of well paying jobs in the government sector. Needless to say, this is not the answer for getting out of this mess.
The report also showed that 1,047,000 became "discouraged" meaning that they have basically given up looking for work.
The headlines will tell you that the employment rate stayed the same at 9.6%. The "fine print" however tells a whole different story.
Jon Stewart
A little comedy is always needed in times such as these where we are watching our country fall apart.
I found myself laughing out loud at times during this clip as Jon brilliantly explains how badly we are being gangraped by the banks and our government.
Kudos to The Daily Show for finding a way to make us laugh during such hard times:
U-6 which is the real unemployment rate soared to 17.1%:
When you dig into the BLS report the numbers are ugly. The biggest spike in jobs was seen in the retail/services sector. The most losses were seen in government jobs as the country struggles with massive budget shortfalls.
So essentially we gained jobs that pay hourly wages with no benefits at the expense of well paying jobs in the government sector. Needless to say, this is not the answer for getting out of this mess.
The report also showed that 1,047,000 became "discouraged" meaning that they have basically given up looking for work.
The headlines will tell you that the employment rate stayed the same at 9.6%. The "fine print" however tells a whole different story.
Jon Stewart
A little comedy is always needed in times such as these where we are watching our country fall apart.
I found myself laughing out loud at times during this clip as Jon brilliantly explains how badly we are being gangraped by the banks and our government.
Kudos to The Daily Show for finding a way to make us laugh during such hard times:
| The Daily Show With Jon Stewart | Mon - Thurs 11p / 10c | |||
| Foreclosure Crisis | ||||
| ||||
Thursday, October 7, 2010
Foreclosure Scandal Rocks Wall St
I thought I would address the foreclosure scandal tonight since the markets were so quiet today as investors prepare for tomorrow's big job report.
I haven't really discussed this topic because I am still trying to get my arms around it. Dylan had a great piece on it this afternoon that does a nice job explaining what happened in layman's terms:
What a mess eh?
The plot to this story thickened today when Obama vetoed a bill that would have allowed the banks to wash their hands of the liability associated with this massive fraud:
"WASHINGTON — President Barack Obama will not sign legislation that could have made it more difficult for homeowners to challenge unjustified foreclosure actions, the White House said on Thursday.
The bill would have required courts to accept all out-of-state notarizations, including those stamped en masse by computers in a practice that critics say has been improperly used to expedite foreclosure orders.
False notarizations figured in disclosures that GMAC, JPMorgan and other big mortgage processors filed false affidavits in thousands of cases, part of the wave of foreclosures that came in the wake of the financial and economic crisis.
The bill, passed by the House of Representatives in April, seemed destined to die with no action on it in the Senate Judiciary Committee. But on September 27, the day before the Senate recessed for the midterm election campaign, it was rushed through and passed by the full Senate.
Ohio Secretary of State Jennifer Brunner said it seemed odd that the law passed just as disclosures of fraudulent foreclosure were mushrooming, leading to widespread halts in foreclosure proceedings. "
My Take
HeHe....Anyone who doesn't believe that Congress is bought and paid for by Wall St needs to read the last two paragraphs above. If this doesn't change your mind then nothing will.
Folks, you can't make stuff like this up.
How does a foreclosure bill that cleanseds Wall St of the foreclosure mess suddenly soar through the Senate with bipartisan approval on September 27th when it appeared to be dead way back in April of this year?
I bet you could see the green ink on the Senators hands when they raised there hands to vote yes for the bill.
Folks, I am sorry but this group of politicians has to go. Vote them the hell out on November. All of them that are on both sides of the aisle! They are bought and paid for by Wall St's finest and we will never get out of this mess with this cast of characters.
Kudos to President Obama for killing this bill. The last thing the US taxpayers needed was another punch in the gut.
The Foreclosure Fraud: Where Do We From Here?
This is a great question. I discussed this topic with a credit trading friend of mine. We both concluded that the legal ramifications of the foreclosure mess is mind boggling.
The troubles are endless:
There are reports of multiple banks claiming they own same properties.
The ability for the banks to prove ownership when the mortgages are sliced and diced into tiny pieces is virtually impossible.
Many question remain unanswered:
What are the values of the CDO's that contain these mortgages if there is no proof of ownership?
Will the the title insurers ever touch any foreclosures moving forward if things are not reformed?
What are the legal ramifications of a house that was bought out of foreclosure if the documentation that was used for the purchase was fraudulent?
How many people are going to stop paying their bloated mortgage because they believe that their bank cannot prove they own the house?
Better yet, If you bought a bloated McMansion that you can't afford, why WOULDN'T you stop paying your mortgage?
Obviously the risk of moral hazard here is off the charts to say the least. This is a problem that isn't going to go away and the government MUST take drastic measures to address it. The whole banking system hangs in the balance.
Wait let me change that, the whole financial system hangs in the balance. I don't know what the answer is here. I think a moratorium on home sales for the time being is a good place to start. Nobody is going to touch a foreclosure until this problem gets straightened out. Since foreclosures are the only thing really selling at this point this pretty much means that the whole housing market has been shut down.
You thought home sales looked ugly this summer, I can't wait to see the numbers moving forward!
The Bottom Line
The way I see it, the biggest problem housing has is that the buyers have no skin in the game.
What little money they did put down has now been evaporated because the home has lost so much value.
This makes "walking away" or simply not paying the mortgage extremely tempting because people can't afford the homes and they feel like they have been robbed blind by the banks.
That sad truth here is for the most part they are right. Granted they are somewhat to blame because they bought the house. Nonetheless, it's become very apparent that the whole housing game was just one gigantic sloppy fraud.
The banks got so greedy at the end that they didn't do their "due diligence" to make sure that the documentation was done properly. They were too busy making a fortune by slapping these mortgages together and selling them off as fast as they could.
At the end when the lending got really sloppy, the banks sold this crap as fast as they could because they knew the CDO would fail as soon as it got out the door as the "no doc" buyers stopped paying on their loans. The pension funds and other suckers around the world got stuck holding the bag.
The problem here is the banks weren't able to get rid of all of this crap before the game ended. Usually Wall St is smart enough to dump the toxic financial waste after they have stripped it to the bone much like a vulture does with a carcass.
So this leaves us with a nasty dilemma:
You have the banks holding trillions of dollars in mortgages that are counting on Main St to pay them back. Meanwhile, the borrowers who took out these loans are now left with a house that's worth 30% less than what they paid for it. Most of them were given loans that they could not afford in the first place and they now feel like they were scammed as the stories of mortgage fraud continue to leak out into the media.
This situation alone makes the problem bad enough. When you add in the foreclosure fraud you have a full out fire on your hands because the borrowers now feel like they might have found a way to "get out" of their financial mistake because they don't believe the bank can prove they own the house.
This is pretty much a PERFECT STORM folks. I don't see a solution. I don't see how the banks can prove they own most of these loans when they were sliced and diced in so many different ways.
How in the heck does the housing market recover from this blow? I think buyers are starting to seriously lose faith in the whole home buying process. Potential buyers didn't want to buy before this foreclosure crisis. How are you ever going to get them back in the game after this?
I think you are going to see home sales fall off a cliff unless Congress takes action. The first thing that has to be done is to somehow find a way to force the home buyer to have some skin in the game while this mess is straightened out. Forcing them to pay for insurance and taxes for the property while the loan is negotiated would be a good start.
Doing nothing here is not an acceptable solution and to date this is how we have reacted to this crisis. We keep trying to sweep it under the rug and it hasn't and WILL NOT work.
Letting people sit in their homes without paying there mortgages will only lead to more copycat behavior and it will eventually take down the whole financial system.
We must force the banks to take huge haircuts on these loans and get housing payments in line with incomes. This is the ONLY solution. We need to LET THE BUBBLE POP before it takes us all down.
Continuing to extend and pretend is not working and the fraud has now been completely exposed as a Ponzi scheme. Now that the fraud is out of the closet it's time to deal with it because there is nothing left to hide.
I haven't really discussed this topic because I am still trying to get my arms around it. Dylan had a great piece on it this afternoon that does a nice job explaining what happened in layman's terms:
What a mess eh?
The plot to this story thickened today when Obama vetoed a bill that would have allowed the banks to wash their hands of the liability associated with this massive fraud:
"WASHINGTON — President Barack Obama will not sign legislation that could have made it more difficult for homeowners to challenge unjustified foreclosure actions, the White House said on Thursday.
The bill would have required courts to accept all out-of-state notarizations, including those stamped en masse by computers in a practice that critics say has been improperly used to expedite foreclosure orders.
False notarizations figured in disclosures that GMAC, JPMorgan and other big mortgage processors filed false affidavits in thousands of cases, part of the wave of foreclosures that came in the wake of the financial and economic crisis.
The bill, passed by the House of Representatives in April, seemed destined to die with no action on it in the Senate Judiciary Committee. But on September 27, the day before the Senate recessed for the midterm election campaign, it was rushed through and passed by the full Senate.
Ohio Secretary of State Jennifer Brunner said it seemed odd that the law passed just as disclosures of fraudulent foreclosure were mushrooming, leading to widespread halts in foreclosure proceedings. "
My Take
HeHe....Anyone who doesn't believe that Congress is bought and paid for by Wall St needs to read the last two paragraphs above. If this doesn't change your mind then nothing will.
Folks, you can't make stuff like this up.
How does a foreclosure bill that cleanseds Wall St of the foreclosure mess suddenly soar through the Senate with bipartisan approval on September 27th when it appeared to be dead way back in April of this year?
I bet you could see the green ink on the Senators hands when they raised there hands to vote yes for the bill.
Folks, I am sorry but this group of politicians has to go. Vote them the hell out on November. All of them that are on both sides of the aisle! They are bought and paid for by Wall St's finest and we will never get out of this mess with this cast of characters.
Kudos to President Obama for killing this bill. The last thing the US taxpayers needed was another punch in the gut.
The Foreclosure Fraud: Where Do We From Here?
This is a great question. I discussed this topic with a credit trading friend of mine. We both concluded that the legal ramifications of the foreclosure mess is mind boggling.
The troubles are endless:
There are reports of multiple banks claiming they own same properties.
The ability for the banks to prove ownership when the mortgages are sliced and diced into tiny pieces is virtually impossible.
Many question remain unanswered:
What are the values of the CDO's that contain these mortgages if there is no proof of ownership?
Will the the title insurers ever touch any foreclosures moving forward if things are not reformed?
What are the legal ramifications of a house that was bought out of foreclosure if the documentation that was used for the purchase was fraudulent?
How many people are going to stop paying their bloated mortgage because they believe that their bank cannot prove they own the house?
Better yet, If you bought a bloated McMansion that you can't afford, why WOULDN'T you stop paying your mortgage?
Obviously the risk of moral hazard here is off the charts to say the least. This is a problem that isn't going to go away and the government MUST take drastic measures to address it. The whole banking system hangs in the balance.
Wait let me change that, the whole financial system hangs in the balance. I don't know what the answer is here. I think a moratorium on home sales for the time being is a good place to start. Nobody is going to touch a foreclosure until this problem gets straightened out. Since foreclosures are the only thing really selling at this point this pretty much means that the whole housing market has been shut down.
You thought home sales looked ugly this summer, I can't wait to see the numbers moving forward!
The Bottom Line
The way I see it, the biggest problem housing has is that the buyers have no skin in the game.
What little money they did put down has now been evaporated because the home has lost so much value.
This makes "walking away" or simply not paying the mortgage extremely tempting because people can't afford the homes and they feel like they have been robbed blind by the banks.
That sad truth here is for the most part they are right. Granted they are somewhat to blame because they bought the house. Nonetheless, it's become very apparent that the whole housing game was just one gigantic sloppy fraud.
The banks got so greedy at the end that they didn't do their "due diligence" to make sure that the documentation was done properly. They were too busy making a fortune by slapping these mortgages together and selling them off as fast as they could.
At the end when the lending got really sloppy, the banks sold this crap as fast as they could because they knew the CDO would fail as soon as it got out the door as the "no doc" buyers stopped paying on their loans. The pension funds and other suckers around the world got stuck holding the bag.
The problem here is the banks weren't able to get rid of all of this crap before the game ended. Usually Wall St is smart enough to dump the toxic financial waste after they have stripped it to the bone much like a vulture does with a carcass.
So this leaves us with a nasty dilemma:
You have the banks holding trillions of dollars in mortgages that are counting on Main St to pay them back. Meanwhile, the borrowers who took out these loans are now left with a house that's worth 30% less than what they paid for it. Most of them were given loans that they could not afford in the first place and they now feel like they were scammed as the stories of mortgage fraud continue to leak out into the media.
This situation alone makes the problem bad enough. When you add in the foreclosure fraud you have a full out fire on your hands because the borrowers now feel like they might have found a way to "get out" of their financial mistake because they don't believe the bank can prove they own the house.
This is pretty much a PERFECT STORM folks. I don't see a solution. I don't see how the banks can prove they own most of these loans when they were sliced and diced in so many different ways.
How in the heck does the housing market recover from this blow? I think buyers are starting to seriously lose faith in the whole home buying process. Potential buyers didn't want to buy before this foreclosure crisis. How are you ever going to get them back in the game after this?
I think you are going to see home sales fall off a cliff unless Congress takes action. The first thing that has to be done is to somehow find a way to force the home buyer to have some skin in the game while this mess is straightened out. Forcing them to pay for insurance and taxes for the property while the loan is negotiated would be a good start.
Doing nothing here is not an acceptable solution and to date this is how we have reacted to this crisis. We keep trying to sweep it under the rug and it hasn't and WILL NOT work.
Letting people sit in their homes without paying there mortgages will only lead to more copycat behavior and it will eventually take down the whole financial system.
We must force the banks to take huge haircuts on these loans and get housing payments in line with incomes. This is the ONLY solution. We need to LET THE BUBBLE POP before it takes us all down.
Continuing to extend and pretend is not working and the fraud has now been completely exposed as a Ponzi scheme. Now that the fraud is out of the closet it's time to deal with it because there is nothing left to hide.
Wednesday, October 6, 2010
Economic Outlook Remains Unclear
I wanted to discuss a series of videos that I had a chance to watch today that featured Kyle Bass, of Hayman Capital, and Alan Fournier, of Pennant Capital Management.
Both of these hedge fund managers called the 2008 credit crisis and are very smart cookies. I believe Kyle Bass made a 600% return by shorting tranches of mortgage debt.
Take a close look below because there is some incredibly good insights by two extremely bright people about where we are headed economically.
I will have a few comments at the end:
Part 1
Part 2
Part 3
My Take:
As you can see above, even the smartest guys in the room don't have a good grasp as to where we head from here.
Alan was the first to admit that he is very "hedged". This is a nice way of saying I'm really not sure. You can see why the stock volumes are so anemic on Wall St when you listen to these two guys.
I thought Kyle's take on the markets were very interesting and he made a great point about Zimbabwe's stock market which has the best performing market in the world over the last 10 years.
What you have to ask yourself is are you really getting anywhere on a relative basis when the market goes up if the currency it is priced in keeps dropping.
The answer of course is no. This goes for any other assets priced in dollars as well.
A great example of this is seen here when you look at what gold has done in the US versus Europe as our currency continues to drop versus the Euro:
As you can see above, the fall of the dollar has decreased our purchasing power. The cost of gold keeps rising in US dollars. We are seeing the opposite effect across the pond as their currency strengthens.
You could look at a chart of any commodity and I sure it would look the same. Oil soared once again today.
The Bottom Line
The debasing of our currency is having a dramatically negative effect on our relative wealth versus the world.
If the Fed continues down this path of destroying the dollar then it will eventually bring down our standard of living because everything that's needed in order to survive rises in price.
As a result of this insanity, many people will be forced to live without many luxuries in this new world. Others may not be able to afford to live at all.
This is where the risk of social chaos kicks in. If a guy can't afford to feed his family he will take from someone who CAN in order to survive.
The recent surge in equities was explained nicely above. Fund managers are once again using old outdated financial models that are telling them to buy stocks.
Stocks are "supposed" to be a buy when the yields on stocks are higher than treasury yields. The problem is treasury yields are now close to zero.
Usually, corporate yields rise after stocks get pummeled in order to attract buyers.
The problem today is we haven't seen the sell off in stocks that usually triggers this "rising corporate yield" phenomenon which is usually is a signal to buy equities.
In other words: Treasury yields have dropped instead of stocks. This has triggered a false buying signal.
Corporate yields are basically the same because the market is holding up rather well.
IMO, as a result, I think the market has it wrong.
As I said yesterday, once oil gets over $100 a barrel the economy is going to be stopped dead in it's tracks. This will then hit earnings and we'll head right back down the crapper again just like we were in 2008 when the last commodity bubble hit.
The difference from 2008's bubble in commodities and today is the 2010 commodity bubble is a direct result of the Fed's reckless zero interest rate/cheap dollar policies. The 2008 bubble was fueled more by speculators as commodities turned into a Wall St. feeding frenzy.
The Fed is going to have a real tough decision to make in the near future. The way I see it they have two choices:
Risk hyperinflation and push the QEII button which then destroys our currency in a last ditch effort to stimulate the economy(which won't work).
Or
Stop the QEII/bailouts and save the currency as they let the credit bubble burst which then triggers a deflationary collapse.
Tough choice. Glad my last name isn't Bernanke
Both of these hedge fund managers called the 2008 credit crisis and are very smart cookies. I believe Kyle Bass made a 600% return by shorting tranches of mortgage debt.
Take a close look below because there is some incredibly good insights by two extremely bright people about where we are headed economically.
I will have a few comments at the end:
Part 1
Part 2
Part 3
My Take:
As you can see above, even the smartest guys in the room don't have a good grasp as to where we head from here.
Alan was the first to admit that he is very "hedged". This is a nice way of saying I'm really not sure. You can see why the stock volumes are so anemic on Wall St when you listen to these two guys.
I thought Kyle's take on the markets were very interesting and he made a great point about Zimbabwe's stock market which has the best performing market in the world over the last 10 years.
What you have to ask yourself is are you really getting anywhere on a relative basis when the market goes up if the currency it is priced in keeps dropping.
The answer of course is no. This goes for any other assets priced in dollars as well.
A great example of this is seen here when you look at what gold has done in the US versus Europe as our currency continues to drop versus the Euro:
As you can see above, the fall of the dollar has decreased our purchasing power. The cost of gold keeps rising in US dollars. We are seeing the opposite effect across the pond as their currency strengthens.
You could look at a chart of any commodity and I sure it would look the same. Oil soared once again today.
The Bottom Line
The debasing of our currency is having a dramatically negative effect on our relative wealth versus the world.
If the Fed continues down this path of destroying the dollar then it will eventually bring down our standard of living because everything that's needed in order to survive rises in price.
As a result of this insanity, many people will be forced to live without many luxuries in this new world. Others may not be able to afford to live at all.
This is where the risk of social chaos kicks in. If a guy can't afford to feed his family he will take from someone who CAN in order to survive.
The recent surge in equities was explained nicely above. Fund managers are once again using old outdated financial models that are telling them to buy stocks.
Stocks are "supposed" to be a buy when the yields on stocks are higher than treasury yields. The problem is treasury yields are now close to zero.
Usually, corporate yields rise after stocks get pummeled in order to attract buyers.
The problem today is we haven't seen the sell off in stocks that usually triggers this "rising corporate yield" phenomenon which is usually is a signal to buy equities.
In other words: Treasury yields have dropped instead of stocks. This has triggered a false buying signal.
Corporate yields are basically the same because the market is holding up rather well.
IMO, as a result, I think the market has it wrong.
As I said yesterday, once oil gets over $100 a barrel the economy is going to be stopped dead in it's tracks. This will then hit earnings and we'll head right back down the crapper again just like we were in 2008 when the last commodity bubble hit.
The difference from 2008's bubble in commodities and today is the 2010 commodity bubble is a direct result of the Fed's reckless zero interest rate/cheap dollar policies. The 2008 bubble was fueled more by speculators as commodities turned into a Wall St. feeding frenzy.
The Fed is going to have a real tough decision to make in the near future. The way I see it they have two choices:
Risk hyperinflation and push the QEII button which then destroys our currency in a last ditch effort to stimulate the economy(which won't work).
Or
Stop the QEII/bailouts and save the currency as they let the credit bubble burst which then triggers a deflationary collapse.
Tough choice. Glad my last name isn't Bernanke
Tuesday, October 5, 2010
Wall St's PR Machine Switches Gears
Stocks soared today as the Wall St's pump machine turned it's focus over to equities and away from bonds.
Warren Buffet led the charge today:
He was not alone:
"Fortune's Street Sweep blog points out that the 10-year Treasury yield has dropped to under 2.5 percent from 4 percent over the past six months.
FDIC Chairwoman Sheila Bair told CNBC there "a bit of a bond bubble now", longtime bond bull Goldman Sachs believes bonds have peaked and will be heading lower from here, and Pimco's Steve Rodosky tells Dow Jones today that "the best day in Treasurys is probably behind us." He hasn't bought them since July."
My Take:
Hmmm...Call me a skeptic.
You know, the longer I watch this act the more I learn. Isn't it convenient that PIMCO, Goldman Sachs, the FDIC's Sheila Bair, and Warren Buffet all come out on the same day and declare that equities now look much cheaper than bonds.
The minions of course didn't disappoint their blowhard leaders. The DOW closed the day up 200 points.
Today reminded me a lot of that infamous day in March of 2009 where all of the banking CEO's came out on the same day and told the world that business appeared to be improving.
The market soared that week and never looked back.
In hindsight, what really triggered that massive rally was the suspension of the mark to market accounting rules. Once word got out that the banks didn't have to take their losses the banking stocks instantly turned into screaming buys because they were priced like they were all about to go under.
What amazes me about days like today is the fact that these cast of characters still have any credibility left. You would think investors would have learned to put all of these clowns on ignore after seeing what they have done to the economy.
The problem with the recent rally is there is nothing behind it other than a string of bad debts. The last time we heard a Wall St. chorus like this there were fundemental reasons to buy the market.
Although the fundemental change was fraudulent(mark to market accounting changes), it nonetheless made stocks a buying opportunity.
Think about it:
Wouldn't you want to own a stock that just found out it didn't have to ever take their losses after it's value had dropped by 80%?
Now let's fast forward to today. What catalyst made stocks more attractive today versus yesterday? QEII?
I seriously have my doubts. Look at what's happened to the dollar and gold since they even discussed pulling the QE lever.
More on this in The Bottom Line. I wanted to talk a little bit about Buffet first.
Warren Buffet
Is it just me or does Warren Buffet make you want to make you vomit when you listen to him spew total BS to the masses. Talk about a fall from grace. With each speech it's clearly becoming evident that the "Oracle of Omaha" basically sold himself to the devil when he took a significant position in Goldman Sachs.
It's sad to listen to him today. Before our recent collapse, Buffet was deeply respected and trusted by the American people as being a sound voice of reason when it came to investments. Today he is just another sounding board for the elite.
I really don't understand why he did this. The guy was a legend of the game. He was a first ballot entrant into the Financial Hall of Fame.
His reputation was cemented during the tech bubble when he consistently warned investors to be careful because none of it made sense to him.
He stuck to his guns during this insanity despite being highly criticized, and he ended up being right. This turned him into an instant icon.
If I were him I probably would have taken my billions and walked off into the sunset at that point. He should have pulled a "Bill Gates" and just focused on philanthropy.
I would have totally understood it if he had chosen this path. It's probably the right thing to do when you have more money than you know what to do with.
Just look at all of the good that Bill Gates has done for Africa and the rest of the world with his genorosity.
BTW let me sidebar here real quick and add that I have the utmost admiration for Bill Gates. In fact, I can't think of another human being who I have more respect for. He has spent the majority of his life trying to make the world a better place with his fortune.
On the other hand, other billionaires have chosen a different path:
Some for example have decided to stay in the game and tell it like it is. They don't care if they piss of the elite because they already have more money than they know what to do with.
Jim Rogers or George Soros come to mind if you want a couple of examples. I don't have to provide you with sound bites from either one of these two fellows.
Both of them are predicting Financial Armegeddon. Soros owns over $600 million in gold. Jim Rogers "got out of Dodge" and now lives in Singapore. His fortune is invested mainly in commodities. The rest of it is most likely more short rather than long the market.
I have a lot of respect for the paths that these two fine fellows have taken as well. If you are gonna stay in the game at least try and tell the truth. Do they talk their books sometimes? Sure, but at least they didn't join the dark side.
Sadly, Warren Buffet chose neither of these two options. He has chosen instead to joing the pigmen and earn more billions at your expense.
For example, he has taken your taxpayer dollars via the AIG bailout because Goldman Sachs was paid out to the tune of $12 billion in the process. As a result, Buffet made a small fortune on his $10 billion investment in GS as Goldman's shares recovered.
Since the collapse he has decided to take 50% of his fortune and invest it into one railroad.
Question here:
If he is so bullish on stocks then why would he spend so much money on something so antiquated like a railroad? Why wouldn't he be buying equities hand over fist if he actually believed the venom he spewed?
Also:
How many times did he tell people to invest in 2008 before the market crashed?
Then ask yourself:
Is this who I should be listening to when it comes to investment advice?
The Bottom Line
I would trust Warren Buffet about as much as I would trust a realtor who is telling me that "now is the time to buy a home".
I don't know what today's motive was but Wall St definately sent a coordinated message today. The fact that all of the talking heads came out at once and tried to tell you to get out of bonds and into stocks was not a concidence.
What's interesting here is for the most part they were ignored by the bond market. Bonds held up pretty well relative to the big move in equities.
So what could be the motives of the Wall St PR machine?
There are many potential reasons:
Fear of the move into gold and out of US dollars?
Fear of scaring too many investors into bonds which has threatened the liquidity of the stock market?
Pressure from the elite on Wall St as they see investors bailing on NY and heading into the safety of bonds in Chicago?
Anyone of these or a combination of these makes sense to me.
Folks, one thing is clear: Today's "equities over bonds" announcement was definately calculated and I smell a rat.
Warren Buffet led the charge today:
He was not alone:
"Fortune's Street Sweep blog points out that the 10-year Treasury yield has dropped to under 2.5 percent from 4 percent over the past six months.
FDIC Chairwoman Sheila Bair told CNBC there "a bit of a bond bubble now", longtime bond bull Goldman Sachs believes bonds have peaked and will be heading lower from here, and Pimco's Steve Rodosky tells Dow Jones today that "the best day in Treasurys is probably behind us." He hasn't bought them since July."
My Take:
Hmmm...Call me a skeptic.
You know, the longer I watch this act the more I learn. Isn't it convenient that PIMCO, Goldman Sachs, the FDIC's Sheila Bair, and Warren Buffet all come out on the same day and declare that equities now look much cheaper than bonds.
The minions of course didn't disappoint their blowhard leaders. The DOW closed the day up 200 points.
Today reminded me a lot of that infamous day in March of 2009 where all of the banking CEO's came out on the same day and told the world that business appeared to be improving.
The market soared that week and never looked back.
In hindsight, what really triggered that massive rally was the suspension of the mark to market accounting rules. Once word got out that the banks didn't have to take their losses the banking stocks instantly turned into screaming buys because they were priced like they were all about to go under.
What amazes me about days like today is the fact that these cast of characters still have any credibility left. You would think investors would have learned to put all of these clowns on ignore after seeing what they have done to the economy.
The problem with the recent rally is there is nothing behind it other than a string of bad debts. The last time we heard a Wall St. chorus like this there were fundemental reasons to buy the market.
Although the fundemental change was fraudulent(mark to market accounting changes), it nonetheless made stocks a buying opportunity.
Think about it:
Wouldn't you want to own a stock that just found out it didn't have to ever take their losses after it's value had dropped by 80%?
Now let's fast forward to today. What catalyst made stocks more attractive today versus yesterday? QEII?
I seriously have my doubts. Look at what's happened to the dollar and gold since they even discussed pulling the QE lever.
More on this in The Bottom Line. I wanted to talk a little bit about Buffet first.
Warren Buffet
Is it just me or does Warren Buffet make you want to make you vomit when you listen to him spew total BS to the masses. Talk about a fall from grace. With each speech it's clearly becoming evident that the "Oracle of Omaha" basically sold himself to the devil when he took a significant position in Goldman Sachs.
It's sad to listen to him today. Before our recent collapse, Buffet was deeply respected and trusted by the American people as being a sound voice of reason when it came to investments. Today he is just another sounding board for the elite.
I really don't understand why he did this. The guy was a legend of the game. He was a first ballot entrant into the Financial Hall of Fame.
His reputation was cemented during the tech bubble when he consistently warned investors to be careful because none of it made sense to him.
He stuck to his guns during this insanity despite being highly criticized, and he ended up being right. This turned him into an instant icon.
If I were him I probably would have taken my billions and walked off into the sunset at that point. He should have pulled a "Bill Gates" and just focused on philanthropy.
I would have totally understood it if he had chosen this path. It's probably the right thing to do when you have more money than you know what to do with.
Just look at all of the good that Bill Gates has done for Africa and the rest of the world with his genorosity.
BTW let me sidebar here real quick and add that I have the utmost admiration for Bill Gates. In fact, I can't think of another human being who I have more respect for. He has spent the majority of his life trying to make the world a better place with his fortune.
On the other hand, other billionaires have chosen a different path:
Some for example have decided to stay in the game and tell it like it is. They don't care if they piss of the elite because they already have more money than they know what to do with.
Jim Rogers or George Soros come to mind if you want a couple of examples. I don't have to provide you with sound bites from either one of these two fellows.
Both of them are predicting Financial Armegeddon. Soros owns over $600 million in gold. Jim Rogers "got out of Dodge" and now lives in Singapore. His fortune is invested mainly in commodities. The rest of it is most likely more short rather than long the market.
I have a lot of respect for the paths that these two fine fellows have taken as well. If you are gonna stay in the game at least try and tell the truth. Do they talk their books sometimes? Sure, but at least they didn't join the dark side.
Sadly, Warren Buffet chose neither of these two options. He has chosen instead to joing the pigmen and earn more billions at your expense.
For example, he has taken your taxpayer dollars via the AIG bailout because Goldman Sachs was paid out to the tune of $12 billion in the process. As a result, Buffet made a small fortune on his $10 billion investment in GS as Goldman's shares recovered.
Since the collapse he has decided to take 50% of his fortune and invest it into one railroad.
Question here:
If he is so bullish on stocks then why would he spend so much money on something so antiquated like a railroad? Why wouldn't he be buying equities hand over fist if he actually believed the venom he spewed?
Also:
How many times did he tell people to invest in 2008 before the market crashed?
Then ask yourself:
Is this who I should be listening to when it comes to investment advice?
The Bottom Line
I would trust Warren Buffet about as much as I would trust a realtor who is telling me that "now is the time to buy a home".
I don't know what today's motive was but Wall St definately sent a coordinated message today. The fact that all of the talking heads came out at once and tried to tell you to get out of bonds and into stocks was not a concidence.
What's interesting here is for the most part they were ignored by the bond market. Bonds held up pretty well relative to the big move in equities.
So what could be the motives of the Wall St PR machine?
There are many potential reasons:
Fear of the move into gold and out of US dollars?
Fear of scaring too many investors into bonds which has threatened the liquidity of the stock market?
Pressure from the elite on Wall St as they see investors bailing on NY and heading into the safety of bonds in Chicago?
Anyone of these or a combination of these makes sense to me.
Folks, one thing is clear: Today's "equities over bonds" announcement was definately calculated and I smell a rat.
A Quick Warning
A few comments on the price action today so far. I see warning signs all over the place.
First of all the long bonds are not selling off nearly as hard as they should ne considering this huge stock rally. This is NOT a good sign. Take a look at the 30 year:
The dollar however is selling off hard:
Oil is also soaring on the weaker dollar news. We are now back over the $82 per barrel level. Folks, the economy will be stopped dead in it's tracks if we get back over $100.
Gold and silver are soaring as they respond to the move in the dollar. It's also reacting to last nights Japanese interest rate cut. The market is pricing in some huge inflationary risks here as the central banks race to the bottom with their currencies.
The market is moving higher on the weaker dollar but we have seen this game before. This works for the market until the surging cost of commodities like oil collapse the consumers discretionary income.
The 53.2 ISM number helped the market a tad as well but I don't think the market is moving on this because the number was hardly inpressive.
Buyer of stocks beware here. The pricing action we are seeing here is a monetary phenomenon and It's EXTREMELY dangerous. The central banks are playing with fire with all of these currency wars.
The moves in the bond market tell you they are not comfortable with the dollar action. The short end help up well today and the long end did to.
Why aren't the bond guys asking themselves: Why hold a long bond priced in dollars if the dollar is going into the crapper?
Today's action is confusing to say the least.
It's been a great day for my portfolio which is invested for inflation so I am not complaining, but I thought it was important to note the distortions that we are seeing out there.
The market is increasingly becoming a VERY juicy short.
Until later today!
First of all the long bonds are not selling off nearly as hard as they should ne considering this huge stock rally. This is NOT a good sign. Take a look at the 30 year:
The dollar however is selling off hard:
Gold and silver are soaring as they respond to the move in the dollar. It's also reacting to last nights Japanese interest rate cut. The market is pricing in some huge inflationary risks here as the central banks race to the bottom with their currencies.
The market is moving higher on the weaker dollar but we have seen this game before. This works for the market until the surging cost of commodities like oil collapse the consumers discretionary income.
The 53.2 ISM number helped the market a tad as well but I don't think the market is moving on this because the number was hardly inpressive.
Buyer of stocks beware here. The pricing action we are seeing here is a monetary phenomenon and It's EXTREMELY dangerous. The central banks are playing with fire with all of these currency wars.
The moves in the bond market tell you they are not comfortable with the dollar action. The short end help up well today and the long end did to.
Why aren't the bond guys asking themselves: Why hold a long bond priced in dollars if the dollar is going into the crapper?
Today's action is confusing to say the least.
It's been a great day for my portfolio which is invested for inflation so I am not complaining, but I thought it was important to note the distortions that we are seeing out there.
The market is increasingly becoming a VERY juicy short.
Until later today!
Monday, October 4, 2010
Are High Yield Investments The Next Bubble?
Stocks sold off today as a Microsoft downgrade and an investigation into American Express spooked the markets.
I wanted to talk about the high yield market today. We can thank the Fed and their reckless zero rates policy for creating yet another bubble. This time it's in high yield debt and I gotta admit folks: This one really pisses me off.
It's one thing to blow one up using assets like housing which are a necessary part of our daily lives. The Fed was reckless when it created this mania but it was not meant to be malicious.
Before that we had tech and it was easy to see how that bubble got going. The Internet was not understood by many and it's potential seemed endless at the time. I know I got caught up in it. Just about all investors did.
The high yield bubble however is a whole different animal. This is not speculators gone wild. This bubble has been created because investors that live off of yield like retirees are being forced to chase risky high yield investments in order to pay the bills.
The way I see it: The Fed stole their "way of lives" when they took interest rates downto zero. Many retirees have been robbed of their security by this development as they dive into risky investments after comfortably sitting in fixed income.
Sadly, the Fed has decided to try and bail out the banks and reckless speculators at the expense of the fiscally prudent.
The biggest losers other than the taxpayers in this debacle have been the prudent elderly savers who worked hard and saved all of their lives so they wouldn't have to worry about money when they retired.
Let me give you a couple of examples of what these victims have been forced to pile into in order to make up for their zero returns in CD's and treasuries:
Let's start with JHAQX which yields 12%. This high yield fund has performed spectacularly since the bottom in 2009 as it finds never ending demand from the desperate yield chasers:
Sure looks purdy doesn't it? The problem is when you wipe the lisptick off this pig you realize that you own nothing but a bunch of garbage.
Here are the holdings of the fund as reported by Yahoo Finance:
"Total Holdings Overall Portfolio Composition (%)
Cash: 9.29
Stocks: 17.45
Bonds: 48.32
Other: 1.26"
Let's dig a little deeper and see what their bond holdings look like:
"Bond Ratings (%)
Sector JHAQX Category Avg
US GOVERNMENT N/A N/A
AAA 0.25 1.73
AA 0.00 0.22
A 0.00 1.02
BBB 0.00 5.52
BB 3.99 27.13
B 22.12 40.49
BELOW B 59.47 19.36
OTHER 14.16 4.53 "
My Take:
As you can see above, about 60% of the bonds this fund owns is B or lower. Folks, we can't find buyers for AAA rated MBS because they are likely worth pennies on the dollar. What in the hell do you think a below B bond is worth when no one wants to buy AAA rated debt?
All Wall St has done here is dressed up this pig by slapping it with a 12% yield. The problem is you own NOTHING of any real value other than perhaps a few stocks this fund owns.
This is a catastrophe waiting to happen! Here is another one I love to look at. Let's take a look the commercial REIT Simon Properties Group(SPG):
As you can see, SPG and it's attractive 2.6% yield(relative to treasuries) has driven this stock back up near it's all time highs since the bottom.
SPG turned into one giant party once they were allowed to roll their debt over(thanks to a gift from the Fed). It turned into a Ponzifest a little while later when they were able to raise cash at low yields in the corporate debt market.
The problem here folks is SPG owns a bunch of commercial real estate that's worth around 50% of what it's marked at. There has been no "mark to market" on what it holds. In a lot of ways it's just like a bank. It holds a bunch of toxic assets at propped up prices that no one wants to own.
Yet, unlike the financials, SPG soared right back to the highs. Meanwhile the banks haven't even gotten close.
In many ways SPG's situation is even worse than the banks: Why on earth would you want to be involved in as stock that depends completly on the consumer in order to thrive? The banks can at least diversify into investiment banking and trading.
SPG has a lot of questions that need to be answered.
The Bottom Line
Needless to say, SPG is hot on my short list. It was up again today BTW despite today's sell off.
The whole market at this point believes that the Fed's got their back. If the recovery fails then they all believe that the Fed will do a QEII which will "save the day" and keep the markets flushed with cash.
People are responding by speculating into risky stocks and dividend funds that fundamentally are 50% or more over priced.
Sadly, when it comes to high yield debt, most of the speculating is being done by retirees who have run out of options.
The reality here is no one here is buying anything for fundemental reasons.
They are basically piling into these assets and hoping they can suck the yield off of it for awhile and then sell it to the next sucker at a higher price.
Gee....Does this type of investing mentality sound familiar?
Bubble anyone???
We were down again today, but I still think we will see some more buying binges in the near future as the speculators continue to pile into stocks for the wrong reasons.
All I can say here folks is this is all going to end badly because people are speculating instead investing.
When the music stops and the fundamentals matter you are going to see one massive run to the exits just like you did about 10 years ago.
Disclosure: No new positions taken at the time of publication.
I wanted to talk about the high yield market today. We can thank the Fed and their reckless zero rates policy for creating yet another bubble. This time it's in high yield debt and I gotta admit folks: This one really pisses me off.
It's one thing to blow one up using assets like housing which are a necessary part of our daily lives. The Fed was reckless when it created this mania but it was not meant to be malicious.
Before that we had tech and it was easy to see how that bubble got going. The Internet was not understood by many and it's potential seemed endless at the time. I know I got caught up in it. Just about all investors did.
The high yield bubble however is a whole different animal. This is not speculators gone wild. This bubble has been created because investors that live off of yield like retirees are being forced to chase risky high yield investments in order to pay the bills.
The way I see it: The Fed stole their "way of lives" when they took interest rates downto zero. Many retirees have been robbed of their security by this development as they dive into risky investments after comfortably sitting in fixed income.
Sadly, the Fed has decided to try and bail out the banks and reckless speculators at the expense of the fiscally prudent.
The biggest losers other than the taxpayers in this debacle have been the prudent elderly savers who worked hard and saved all of their lives so they wouldn't have to worry about money when they retired.
Let me give you a couple of examples of what these victims have been forced to pile into in order to make up for their zero returns in CD's and treasuries:
Let's start with JHAQX which yields 12%. This high yield fund has performed spectacularly since the bottom in 2009 as it finds never ending demand from the desperate yield chasers:
Sure looks purdy doesn't it? The problem is when you wipe the lisptick off this pig you realize that you own nothing but a bunch of garbage.
Here are the holdings of the fund as reported by Yahoo Finance:
"Total Holdings Overall Portfolio Composition (%)
Cash: 9.29
Stocks: 17.45
Bonds: 48.32
Other: 1.26"
Let's dig a little deeper and see what their bond holdings look like:
"Bond Ratings (%)
Sector JHAQX Category Avg
US GOVERNMENT N/A N/A
AAA 0.25 1.73
AA 0.00 0.22
A 0.00 1.02
BBB 0.00 5.52
BB 3.99 27.13
B 22.12 40.49
BELOW B 59.47 19.36
OTHER 14.16 4.53 "
My Take:
As you can see above, about 60% of the bonds this fund owns is B or lower. Folks, we can't find buyers for AAA rated MBS because they are likely worth pennies on the dollar. What in the hell do you think a below B bond is worth when no one wants to buy AAA rated debt?
All Wall St has done here is dressed up this pig by slapping it with a 12% yield. The problem is you own NOTHING of any real value other than perhaps a few stocks this fund owns.
This is a catastrophe waiting to happen! Here is another one I love to look at. Let's take a look the commercial REIT Simon Properties Group(SPG):
As you can see, SPG and it's attractive 2.6% yield(relative to treasuries) has driven this stock back up near it's all time highs since the bottom.
SPG turned into one giant party once they were allowed to roll their debt over(thanks to a gift from the Fed). It turned into a Ponzifest a little while later when they were able to raise cash at low yields in the corporate debt market.
The problem here folks is SPG owns a bunch of commercial real estate that's worth around 50% of what it's marked at. There has been no "mark to market" on what it holds. In a lot of ways it's just like a bank. It holds a bunch of toxic assets at propped up prices that no one wants to own.
Yet, unlike the financials, SPG soared right back to the highs. Meanwhile the banks haven't even gotten close.
In many ways SPG's situation is even worse than the banks: Why on earth would you want to be involved in as stock that depends completly on the consumer in order to thrive? The banks can at least diversify into investiment banking and trading.
SPG has a lot of questions that need to be answered.
The Bottom Line
Needless to say, SPG is hot on my short list. It was up again today BTW despite today's sell off.
The whole market at this point believes that the Fed's got their back. If the recovery fails then they all believe that the Fed will do a QEII which will "save the day" and keep the markets flushed with cash.
People are responding by speculating into risky stocks and dividend funds that fundamentally are 50% or more over priced.
Sadly, when it comes to high yield debt, most of the speculating is being done by retirees who have run out of options.
The reality here is no one here is buying anything for fundemental reasons.
They are basically piling into these assets and hoping they can suck the yield off of it for awhile and then sell it to the next sucker at a higher price.
Gee....Does this type of investing mentality sound familiar?
Bubble anyone???
We were down again today, but I still think we will see some more buying binges in the near future as the speculators continue to pile into stocks for the wrong reasons.
All I can say here folks is this is all going to end badly because people are speculating instead investing.
When the music stops and the fundamentals matter you are going to see one massive run to the exits just like you did about 10 years ago.
Disclosure: No new positions taken at the time of publication.
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