Obama Rally: I smell a Rat!

Good Afternoon Everyone!

I will be brief today. Stocks staged an election day rally today as the DOW surged over 300 points.

However, when you look a little deeper into the numbers, the rally was not all that impressive. First of all the volume continues to be extremely light at the NYSE. The market needs to confirm this move higher by having stocks rally higher on strong volume. We did see this today.

Another thing that I found interesting today was the big rise in demand for the 10-year (click here to see the chart) . Why would investors be piling into treasuries after such a bullish move? Investors should be flying out of treasuries and into stocks forcing the 10-year yields to rise. As you can see from the chart above, the 10-year yields fell off a cliff today.

This tells me that you are seeing a serious flight to safety by some of the boys in the bond market. I always follow their moves closely. They are a much more sophisticated group of investors than the "bubble boys" on Wall St. Perhaps they are sensing that the bottom is about to fall out of this rally?

They know that an Obama/Democratic landslide would be bad for equities. Even worse, a strong democratic sweep could eliminate the ability of a filibuster. Wall St. will most likely selloff equities on this news because Obama will then be able to get most of his aggressive spending legislation through Congress without opposition. Its usually never good for either the Democrats or the Republicans to have all three branches of the government. A system of checks and balances is almost always the healthiest form of government.

Commodities/US dollar collapse

Here is another reason why I smell a rat today:

"Nov. 4 (Bloomberg) -- Surging prices for oil, copper and gold sent commodities rallying as a U.S. Election Day plunge in the dollar boosted the appeal of raw materials as a hedge against inflation.
The Standard & Poor's GSCI Index of 24 commodities jumped 7.5 percent to 467.26 at 3:25 p.m. in New York, the biggest gain since August 1990. The Reuters/Jefferies CRB Index gained 5.3 percent, the second-biggest rally since 1956. Crude oil jumped as much as 12 percent, gold rose the most in six weeks and corn touched a three-week high.

The dollar fell the most against the euro since the 15- nation currency's 1999 debut. U.S. stocks advanced in the biggest rally on a presidential Election Day in 24 years. Speculation that Democratic candidate, Senator Barack Obama, who leads national polls, will win against Republican John McCain helped send the dollar lower and lift commodity and equity markets.

``With the Democrats, there's the assumption of the potential of more inflation, given their spending plans,'' said William O'Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey. ``There's general enthusiasm out there. It's happening in all the markets, including commodities and stocks. The dollar is a huge factor today and the idea of more inflation will send commodities higher.''

Final Take:

Gold also surged $40 today as the dollar tanked. The traders in Chicago aren't stupid. They understand that Obama is going to attempt to spend this country into oblivion. Clinton attempted to do the same thing when he got into office in the early '90's. What Obama(assuming he wins) will learn quickly is you cannot spend what you don't have. This lesson could cause a lot of pain in the stock market because it might take a bond market dislocation to get this through his head.

In his defense, Obama does seem like a pretty reasonable guy at least at face value. Lets hope he understands that he cannot spend like a homeowner with a giant home equity loan. We have $11 trillion in debt and if he raises taxes, Obama better realize that some of it needs to go towards reducing our deficit.

Bottom Line:

Lets see the results tonight before I get ahead of myself. I personally think today was just a "feelgood" rally as the country looks forward to likely change in leadership. The CME traders are well aware that Obama's higher taxing and spending programs are not a positive for the stock market. As a result, they decided to run and hide in commodities and treasuries awaiting the fallout of the election results.

Feel free to go long here, but I am not buying this rally folks. A weak dollar, stronger metals, and higher commodities tells me that investors are again beginning to pile into hard assets. This does not bode well for the stock market. Lets see if this trend continues.

The "Obama honeymoon" on Wall St. will be a short one once investors realize what a far left President means for the markets.

That is if he wins.

Stay Tuned!

Jim Rogers: The Zombie Banks Must Fail

Good Evening Folks!

Here is the latest from Jim Rogers today on Bloomberg. He has some great investing ideas. Rogers is basically long commodities, short long term treasuries and neutral on the stock market. I like a lot of his investment ideas here. I plan on picking up some TBT after the next drop in the stock market which will take treasuries higher.

I have a couple of thoughts after the videos.

Enjoy!




Part 2





Market Update:

It was a very quiet day in the stock market as the world awaits the election results tomorrow. The global recession is taking a serious toll on manufacturing. Manufacturing in the US contracted at the fastest pace in Octomber in 26 years:


"Nov. 3 (Bloomberg) -- Manufacturing in the U.S. contracted in October at the fastest pace in 26 years as a record share of banks made it tougher to get loans and faltering economies abroad eroded prospects for American exports.

The Institute for Supply Management's factory index fell to 38.9 from 43.5 in September; 50 is the dividing line between expansion and contraction. The Commerce Department said separately that construction spending fell for the eighth time in 10 months in September.
Today's report may add to pressure for further interest-rate cuts and an additional federal package of tax and spending measures. The figures also showed the weakest level for U.S. export orders in the two decades the ISM has kept the data, a sign of slowdowns in Europe and Asia.

``Manufacturing is definitely in a deep recession right now,'' John Lonski, chief economist at the Moody's Capital Markets Group in New York, said in an interview with Bloomberg Television. ``We're definitely going to have more rate cuts'' and possibly ``more in terms of fiscal stimulus"

Quick Take:

Manufacturing essentially fell off a cliff in October as the consumer continues dramatically pull back. I love the solution offered by economist John Lonski from Moody's. We need more rate cuts: Yeah! Like that's going going to help. When are these economists going to realize that the Greenspan easy money approach is no longer the answer. We are now at 1% and things continue to deteriorate. He also wants a stimulus. Great idea John! The last one worked so well!

This mentality among economists has to stop. What we need is a serious recession that wrings out the excesses of the economy. The cheap money "Greenspan approach" created the debt bubble that we now find ourselves in today. More liquidity is not the answer when consumers don't want to borrow and banks have no desire to lend!

Another stimulus will do nothing but dig us even deeper into debt and give us one quarter of growth like the last one did. Then it will be right back to our regularly scheduled recession/depression. It makes no sense to piss away another $150 billion when it does nothing to fix the problems in the economy.

Take that money and throw it into a infrastructure investment that creates jobs. Don't give it to J6P! He will just waste it paying down debt or buying another flat screen TV.

Lets take a look at the car biz:

"Nov. 3 (Bloomberg) -- U.S. auto sales plummeted 32 percent in October to the lowest monthly total since January 1991, led by General Motors Corp.'s 45 percent slide, as reduced access to loans and a weaker economy kept consumers off dealer lots.

Ford Motor Co. reported a 30 percent drop in car and light- truck sales from a year earlier and Toyota Motor Corp.'s declined 23 percent. Honda Motor Co.'s slid 25 percent, Nissan Motor Co.'s were down 33 percent and Chrysler LLC's fell 35 percent.

``If you adjust for population growth, it's the worst sales month in the post-World War II era'' for the industry, said Mike DiGiovanni, GM's chief sales analyst, on a conference call. ``Clearly we're in a dire situation.''

Final Take:

The last time car sales were this bad we had just defeated the Germans in WWII. Yikes! The more data I see, the more scared I get folks.

What frightens me the most is I don't see how we dig ourselves out of this. Could we have another lost decade similiar to Japan that Jim Rogers warns of above? The answer to this is looking more and more to be yes.

Bottom Line:

Well its election day tomorrow! It looks like Obama has it in the bag. In my opinion neither candidate has the goods to get us out of this mess. The next president is almost assuredly a one termer as our economy heads into the abyss. There will be little that either candidate can do in reaction to this mess. The war chest is empty and the economic hand has already been dealt.

It will be interesting how the markets respond tomorrow. I think the next trade is shorting treasuries. Its becoming pretty clear that the government is hell bent on attempting to bailout the economy no matter what the price. An Obama presidency will most assuredly take this government spending to an even higher level.

As a result, its highly likely that investors will start backing away from buying treasuries until we either learn to control our spending or we default on ourselves.

Make sure you get out and vote tomorrow. Every vote counts!

Mortgage Modification Plan Grows as Delinquencies Soar

Good Afternoon!

Folks, the numbers are ugly.

Here is an expanded article from The Wall Street Journal on the loan modification program. It appears Bank of America is also involved:

" The plan comes amid intense national focus on a root cause of global financial turmoil: rising home foreclosures, and what the role of banks and government should be in helping struggling homeowners. The banking industry is under much political pressure address the foreclosure problem.

Rival Bank of America Corp. has two loan-modification pools in place, one hashed out with state attorneys general. At the government level, after other programs failed to halt the rise in foreclosures, the Federal Deposit Insurance Corp. recently floated a plan that could help three million troubled borrowers; it is being considered by the White House. The FDIC also is assisting strapped borrowers who had mortgages with IndyMac Bancorp, which the FDIC seized this summer. (Please see related article.)

"It doesn't make sense for us to wait" to tackle the problem, said a J.P. Morgan executive, Charles Scharf. "We've heard loud and clear and are listening to what some of the thought leaders around the country are saying." Mr. Scharf runs the retail division, which includes mortgages and branch banking, at J.P. Morgan, the largest U.S. bank in stock-market value.

The move also suggests that banks are realizing they can improve the value of their loan portfolios through mass modifications rather than foreclosures, which tend to produce larger losses. Until now, mortgage holders have been reluctant to renegotiate loans or have been doing so one-by-one, a time-consuming process. The bundling of loans into securities that are then sold to investors further complicates matters.

Nationwide, 7.3 million American homeowners are expected to default on their mortgages between 2008 and 2010, about triple the usual rate, according to Moody's Economy.com, a research firm. Some 4.3 million of those are expected to lose their homes.

J.P. Morgan unveiled the plan days after receiving $25 billion in federal capital from the Treasury's program to shore up financial institutions and get credit flowing. Mr. Scharf declined to comment on whether the bank would use any of those funds for the mortgage overhaul. "The stronger you are, the more willing you are to spend money and do a whole series of things," he said, noting that the government cash "certainly makes decisions easier."

Of the two loan-modification pools at rival Bank of America, one targets 265,000 borrowers with all types of mortgages. The other was hashed out with 14 state attorneys generals and involves 400,000 subprime and option-ARM customers serviced by the big lender Countrywide Financial Corp., which Bank of America purchased July 1."

My Take:

I think this is a disaster in the making as I said yesterday, but it may be the only move that the banks have left. One problem I see here is these loan modifications are only going to be able to be done by the banks that received money from the housing bailout. Notice that these programs weren't announced until the big banks got $25 billion apiece via capital injections from the Treasury.

This is where I see another big problem. The banks that didn't receive the money from the TARP aren't going to be able to afford to offer such a modification program. As these 7.3 million homes continue to get foreclosed on, the inability to modify will be the final nail in the coffin IMO for hundreds of banks that don't have access to the capital injections from the housing bailout.

Essentially folks, this article tells you the taxpayer are the ones paying for these modifications. The taxpayer now gets a chance to be bent over by greedy homebuyers. Are there any other ways that we can get screwed? I guess living within your means is turning out to be the wrong way to live. It appears committing fraud and lying about your income so you can qualify for a mortgage that you can't afford was the "right" thing to do in this twisted society.

Notice how JP Morgan had "no comment" when asked if the money they received from the TARP was going to be used for loan modifications. It doesn't take a brain scientist to read in between the lines on that answer. Remember these firms are all nearly insolvent. There is no way they could have done this without the government capital injections.

As I said yesterday, expect millions of homeowners that don't get modified to stop paying their mortgages. Taxpayers are going to get infuriated when this plan begins to be implemented. Wait until word gets out in a neighborhood that a neighbor's loan was modified by 100k which in turn drops the value of their own home by six digits. The guy who got modified better put a padlock on his door and buy a gun. God only knows what he might find on his lawn the next day!

This isn't going to end pretty folks. This could be the trigger that blows up the financial system. This is going to absolutely destroy the banks balance sheet. I predict you will see another massive injection of liquidity into the banks as more and more homebuyers walk away. This will put our government even deeper in debt as they continue to keep the banks alive. MBS debt will almost immediatly become almost worthless.

Perhaps this is why the cost buying a credit default swap(CDS) on the 10-year treasury has gone through the roof:

Think about this for a second folks. The cost to insure a piece of US government debt from defaulting via a CDS has risen 4 fold to 42 basis points in one year! Why would anyone pay to insure this? If this debt ever defaults the game is over because it means our government has defaulted on itself.

The soaring spreads tells you that Wall St increasingly thinks that a government default is a distinct possibility.