Wow
What a day. What a comeback in the stock market! This morning the market stared into the abyss. Futures came close to reaching lock limit down as the market prepared for a major plunge following the senate's rejection of the automotive bailout last night.
Adding to the fear this morning was the imminent bankruptcy of the huge commercial company(REIT) GGP which owns more than 200 commercial properties throughout the US. To top things off, famed Wall Streeter Bernard Madoff was charged with securities fraud after they broke up a $50 billion ponzi scheme that cost investors and hedge funds billions. The $17 billion in assets that Madoff supposedly had under management is totally unaccounted for. Its gone, all gone.
So why were we up today?
The stock market was able to pull a rabbit out of the hat. First, the Treasury announced that they would potentially finance the auto bailout:
"Dec. 12 (Bloomberg) -- General Motors Corp. and Chrysler LLC, draining cash as sales slump, won a reprieve to stay alive until January as the Bush administration said it might finance an industry rescue with funds set aside for banks.
The White House’s reversal on tapping the Troubled Asset Relief Program for short-term aid came a day after the Senate rejected a short-term loan package for GM and Cerberus Capital Management LP’s Chrysler, pushing the companies toward a bankruptcy they were working to avoid."
Quick Take:
This is not a done deal folks. The TARP was not created to save auto companies. Word in Washington is they want to see the numbers before coughing up the cash. Stay tuned. Nevertheless, the market liked the news.
GGP Sticksave
GGP was able to put together some last minute financing that allowed them to avoid going bankrupt:
"DOW JONES NEWSWIRESGeneral Growth Properties Inc. (GGP) refinanced almost $900 million in debt, though the moves are unrelated to the major debt deadline the struggling real estate investment trust faces Friday.
The company completed $896 million of mortgage loans used to retire a $58 million bond that matured Thursday and refinance $814 million in mortgage loans maturing next year.General Growth said the loans are separate from the $900 million in debt backed by two of its malls in Las Vegas that is facing a Friday deadline. It said it was continuing discussions with its lenders on those two loans and there was no assurance it would get further extensions."
Quick Take:
My take here is the banks are doing everything possible to avoid foreclosing on GGP. I am sure they absolutely dread the thought of owning 200 shopping malls. This company looks like a "dead man walking". At some point they will be toast IMO. Their stock sits at around a buck. Take a look at SRS folks. It pulled back into 70's and could even drop a little lower from here if the banks show a lot of leniency towards GGP. This could be interpeted as good news for other REIT's that are in trouble.
GGP could go tits up at any minute folks so expect SRS to be very volatile. Obviously the GGP news also supported stocks today.
Retail Sales
Stocks were further strengthened by better than expected retail numbers:
"Dec. 12 (Bloomberg) -- U.S. retail sales fell in November for a record fifth consecutive month, led by slumps at auto dealers and service stations that overshadowed gains at electronic and department stores.
The 1.8 percent decrease was smaller than forecast and extended the longest string of declines since records began in 1992, the Commerce Department said today in Washington. Sales at service stations dropped by a record 15 percent as fuel costs plummeted."
Quick Take:
This is bullish? That was the spin on bubblevision today. The market liked it.
Bottom Line:
The market dodged a major bullet folks. Technology got a nice bump after Rep. Pelosi announced that part of the stimulus package next year will include an increase in computer spending.
When its all said and done, we saw a bunch of window dressing and sticksaves today. None of the above catalysts solve any of our problems in our economy. The series of moves you saw today only delay the eventual pain that must be taken. Its time for the financial crack addicts to go to rehab!
Despite all of the interventions and sticksaves today the market still only managed less than a 1% gain on the DOW. Not foreclosing on a dead company like GGP is not a positive. Its time for the corporate zombie's to be stripped, broken up, and sold. We can't prop up these insolvent companies forever! The banks should force them into BK and put their properties up for auction. They will get bids.
Start taking the hits pigmen!
Just write off the losses and move on for crying out loud!
Argggg
Don't even get me started when it comes to the automotive TARP bailout. I am against all bailouts, but I gotta admit it bothers me that Paulson didn't fork over a measly $15 billion to save 3 million jobs.
How does this bastard have the nerve to say no to the automakers for $15 billion after just throwing $700 billion to his banking buddies? The arrogance here just astonishes me! God forbid this guy tries to do something that helps the average blue collar worker.
How does this guy sleep at night?
This bailout is all about politics in my opinion. We just watched a high stakes game of political chicken. The senate wanted to take a stand against the bailouts and said no guessing that Paulson would swoop in and use the TARP.
Lets see if Paulson and Bush cave and give them the money. Its an interesting political game to watch. If Paulson says no he better not travel to Detroit anytime soon! In fact, Detroit may come to him!
Trades:
I did nothing and held into the close. We could see a bounce next week after seeing such a strong comeback today. The fact the market moved higher on such horrific news must be respected.
I am looking at a few commodity stocks on the long side to hedge out my shorts but I didn't pull the trigger. I am kicking myself this morning because I almost went long via SSO after the drop at the open assuming the Treasury would announce that they had a deal on the auto bailout. That would have been a nice trade. Oh well, there will be other entries.
Bank earnings come out next week so it should be a wild ride. Morgan and Goldman should have a few skeletons in the closet that they will be forced to expose. Lets see how the market reacts.
If the market holds through the bank earnings news next week, a change is strategy may be required. I will put any trades in the comments section on Monday. I want to see the news flow over the weekend.
Stay Tuned!
Friday, December 12, 2008
Thursday, December 11, 2008
Some Holiday Cheer from Fred Thompson
Good Evening Folks!
Since its the holiday season I figured it was time I put up a holiday video from former presidential candidate Fred Thompson. Please watch this. Its both brilliant and hilarious at the same time. I couldn't have summarized the idiocy of our government response to this economic crisis any better.
I will have some comments on today's market action below.
Enjoy!
Having technical trouble with putting the You Tube video up today. Please click on the link!
http://www.youtube.com/watch?v=7IrR3o7x1ps
My Take on Today:
Isn't that a classic? You gotta love it.
Just a few quick notes on today. Stocks were down sharply today on worries that the auto bailout may be in trouble. Adding to the troubles today were our usual doses of horrific economic data.
US jobless claims soared 58,000 to a 26 year high:
"Dec. 11 (Bloomberg) -- The number of Americans filing first- time claims for unemployment benefits surged more than forecast last week to a 26-year high, a sign companies are stepping up firings as the recession deepens.
Initial jobless claims increased 58,000 to 573,000 in the week ended Dec. 6, the highest level since November 1982, from a revised 515,000 the previous week, the Labor Department said today in Washington. The number of workers staying on benefit rolls reached 4.429 million, also the most since 1982.
Employers are slashing payrolls as consumers retrench and credit stays frozen. Mounting job losses and falling home prices increase the likelihood that the U.S. recession will extend well into 2009, adding impetus to President-elect Barack Obama’s call for an economic stimulus package of unprecedented size."
Quick Take:
Our economy is shredding jobs at a pace that I have never seen. Bank of America came out late today and announced they will be laying off 30,000 as they absorb the aquisition of Merrill Lynch.
I don't know about the rest of you, but for the first time I am seeing family and friends begin to lose their jobs. This crisis in now getting personal. Many of the major companies in the Baltimore are cutting including Legg Mason. I guess many investors decided to move thair money out of there after famed Legg investor Bill Miller lost 60% in the market this year. The fund he manages has shrunk from $16 billion down to $4 billion this year due to losses and redemptions. Ouch! Thats going to leave a mark.
Auto Bailout
I thought this was a done deal but apparantly there aren't enough votes in the senate to pass it:
"Dec. 11 (Bloomberg) -- A $14 billion automaker bailout plan and other alternatives lack the votes to pass the Senate, as lawmakers seek to beat a deadline to keep General Motors Corp. and Chrysler LLC from collapsing.
GM and Chrysler are in a race against the clock as they need federal aid to keep from running out of cash early next year. Pressure is mounting on GM as a small number of partsmakers ask for payments in advance, people familiar with the matter said.
“It’s going to be really hard for anything to get to 60” votes needed to overcome delaying tactics, said South Dakota Republican Senator John Thune.
Senate Majority Leader Harry Reid said he’s working on an agreement that would let the Senate consider Democratic legislation approved yesterday by the House, as well as a slightly different version by Senate Democrats and a Republican alternative. The George W. Bush administration has endorsed the Democratic plans it helped negotiate.
The Republican alternative, offered by Senator Bob Corker of Tennessee, would require bondholders to take 30 cents on the dollar and would set wages similar to foreign companies such as Volkswagen AG."
Bottom Line:
I am with the Republicans on this one. You all know my thoughts on the bailouts. Enough is enough. These companies must be shredded and put back togetether with a chance to be profitable before I want my taxdollars going anywhere near them.
As of right now, the big 3 are filled with more fat than Oprah Winfrey before she starts her next diet. Its time to get lean GM or face the consequences! I am tired of throwing money into black holes. Lets get this bailout straight before we give them a dime
Trading
My purchases of FAZ and SRS worked very nicely today. Both were up around 20%. I decided to hold them into the close. Many of the traders that I follow think the market is going to retrace back higher upto 1000 on the S&P and then nosedive early next year. I personally don't see that happening folks. The economy is literally disinigrating and I the news flow keeps getting worse.
I mean The New York Times is in trouble for crying out loud! How can you buy equities when the gloom and doom is now threatening US instutions like the Times, the Tribune, and GM?
I think the 20% retrace we just saw was about it. I could be wrong. A lot of smart people think there is more to go. I just don't see it. I think many of these retrace calls are based on looking at the massive retraces that were seen during The Great Depression.
In my view, the market moves much faster today, and trying to compare trading patterns from 1929-32 doesn't work. There is too much fast money flying around from day traders and hedge funds. Retraces that took months in the '30's take a few weeks in this day and age.
Will we have more bounces? Of course. Could this one continue? Its possible but I doubt it. I believe we retrace back down to the lows. I don't believe the market has priced in an economy that has come to almost a complete hault.
A great example of what has happened in the economy in the 4th quarter was described by Nucor's CEO on Cramer's show last night(Disclaimer: I am not a Cramer fan). The CEO explained that they were running at full capacity and had everything sold for the first 3 quarters of the year. Orders then fell off a cliff in Q4. Nucor only had to run at 50% capacity in order to to satisfy their orders for the last three months of the year.
Thats a 50% drop in one quarter. Thats absolutely devastating folks! Many companies will be toast if they see a few quaters like the one Nucor had.
One thing to note on the bullish side today is its the week before OpEx. Usually the market moves in the opposite direction of what happens on this day. Since we were red today, the indicator says you should see green going into OpEx. If we get hammered with a deep drop tomorrow I may cover some of these shorts and take profits because this indicator is often accurate.
Lets see what happens tomorrow. There were whispers on the street according to Bloomberg that the retail number that comes out tomorrow is going to be a disaster. If this is true and the senate disses the bailout, it could be a historic day.
Enjoy the fireworks tomorrow.
Since its the holiday season I figured it was time I put up a holiday video from former presidential candidate Fred Thompson. Please watch this. Its both brilliant and hilarious at the same time. I couldn't have summarized the idiocy of our government response to this economic crisis any better.
I will have some comments on today's market action below.
Enjoy!
Having technical trouble with putting the You Tube video up today. Please click on the link!
http://www.youtube.com/watch?v=7IrR3o7x1ps
My Take on Today:
Isn't that a classic? You gotta love it.
Just a few quick notes on today. Stocks were down sharply today on worries that the auto bailout may be in trouble. Adding to the troubles today were our usual doses of horrific economic data.
US jobless claims soared 58,000 to a 26 year high:
"Dec. 11 (Bloomberg) -- The number of Americans filing first- time claims for unemployment benefits surged more than forecast last week to a 26-year high, a sign companies are stepping up firings as the recession deepens.
Initial jobless claims increased 58,000 to 573,000 in the week ended Dec. 6, the highest level since November 1982, from a revised 515,000 the previous week, the Labor Department said today in Washington. The number of workers staying on benefit rolls reached 4.429 million, also the most since 1982.
Employers are slashing payrolls as consumers retrench and credit stays frozen. Mounting job losses and falling home prices increase the likelihood that the U.S. recession will extend well into 2009, adding impetus to President-elect Barack Obama’s call for an economic stimulus package of unprecedented size."
Quick Take:
Our economy is shredding jobs at a pace that I have never seen. Bank of America came out late today and announced they will be laying off 30,000 as they absorb the aquisition of Merrill Lynch.
I don't know about the rest of you, but for the first time I am seeing family and friends begin to lose their jobs. This crisis in now getting personal. Many of the major companies in the Baltimore are cutting including Legg Mason. I guess many investors decided to move thair money out of there after famed Legg investor Bill Miller lost 60% in the market this year. The fund he manages has shrunk from $16 billion down to $4 billion this year due to losses and redemptions. Ouch! Thats going to leave a mark.
Auto Bailout
I thought this was a done deal but apparantly there aren't enough votes in the senate to pass it:
"Dec. 11 (Bloomberg) -- A $14 billion automaker bailout plan and other alternatives lack the votes to pass the Senate, as lawmakers seek to beat a deadline to keep General Motors Corp. and Chrysler LLC from collapsing.
GM and Chrysler are in a race against the clock as they need federal aid to keep from running out of cash early next year. Pressure is mounting on GM as a small number of partsmakers ask for payments in advance, people familiar with the matter said.
“It’s going to be really hard for anything to get to 60” votes needed to overcome delaying tactics, said South Dakota Republican Senator John Thune.
Senate Majority Leader Harry Reid said he’s working on an agreement that would let the Senate consider Democratic legislation approved yesterday by the House, as well as a slightly different version by Senate Democrats and a Republican alternative. The George W. Bush administration has endorsed the Democratic plans it helped negotiate.
The Republican alternative, offered by Senator Bob Corker of Tennessee, would require bondholders to take 30 cents on the dollar and would set wages similar to foreign companies such as Volkswagen AG."
Bottom Line:
I am with the Republicans on this one. You all know my thoughts on the bailouts. Enough is enough. These companies must be shredded and put back togetether with a chance to be profitable before I want my taxdollars going anywhere near them.
As of right now, the big 3 are filled with more fat than Oprah Winfrey before she starts her next diet. Its time to get lean GM or face the consequences! I am tired of throwing money into black holes. Lets get this bailout straight before we give them a dime
Trading
My purchases of FAZ and SRS worked very nicely today. Both were up around 20%. I decided to hold them into the close. Many of the traders that I follow think the market is going to retrace back higher upto 1000 on the S&P and then nosedive early next year. I personally don't see that happening folks. The economy is literally disinigrating and I the news flow keeps getting worse.
I mean The New York Times is in trouble for crying out loud! How can you buy equities when the gloom and doom is now threatening US instutions like the Times, the Tribune, and GM?
I think the 20% retrace we just saw was about it. I could be wrong. A lot of smart people think there is more to go. I just don't see it. I think many of these retrace calls are based on looking at the massive retraces that were seen during The Great Depression.
In my view, the market moves much faster today, and trying to compare trading patterns from 1929-32 doesn't work. There is too much fast money flying around from day traders and hedge funds. Retraces that took months in the '30's take a few weeks in this day and age.
Will we have more bounces? Of course. Could this one continue? Its possible but I doubt it. I believe we retrace back down to the lows. I don't believe the market has priced in an economy that has come to almost a complete hault.
A great example of what has happened in the economy in the 4th quarter was described by Nucor's CEO on Cramer's show last night(Disclaimer: I am not a Cramer fan). The CEO explained that they were running at full capacity and had everything sold for the first 3 quarters of the year. Orders then fell off a cliff in Q4. Nucor only had to run at 50% capacity in order to to satisfy their orders for the last three months of the year.
Thats a 50% drop in one quarter. Thats absolutely devastating folks! Many companies will be toast if they see a few quaters like the one Nucor had.
One thing to note on the bullish side today is its the week before OpEx. Usually the market moves in the opposite direction of what happens on this day. Since we were red today, the indicator says you should see green going into OpEx. If we get hammered with a deep drop tomorrow I may cover some of these shorts and take profits because this indicator is often accurate.
Lets see what happens tomorrow. There were whispers on the street according to Bloomberg that the retail number that comes out tomorrow is going to be a disaster. If this is true and the senate disses the bailout, it could be a historic day.
Enjoy the fireworks tomorrow.
Wednesday, December 10, 2008
Back on the Short Side
Good Afternoon Everyone!
Stocks ended mixed today in a very volatile session. Well, what can i say: I tried to be a bull! I really really tried! Sadly, after reading the constant negative news flow, my bear claws are now growing back.
Guys, the news just keeps getting worse. I have always been more of a long term macro trader based on the fundementals. I reached a point today where I can't just can't continue to sit in denial and go long the market as I watch Rome burn. The bulls still have some momo but its losing stream quickly in my view.
I decided to get back on the short bus. I find it much more comfortable on here because it matches my thoughts on the economy! I also found some entry points that looked very juicy to me. I was hoping to pick SRS back up in the 60's. However, the continuing bad news flow makes me believe that I have a better chance of seeing god before this happens so I picked some up at $85. I look to be a little early here after watching it dip into the late 70's today but that's ok I am patient.
I also flip flopped on the financials and grabbed some FAZ which is a 3x inverse short financial fund. I did this after selling my Citi calls at a profit and i also sold my UYG.
There are a few reasons why I flip flopped to the bearish side today. I spent a long time researching the markets last night and today. Let me layout what I found the last two days followed by some thoughts at the bottom. The first piece was something I picked up on Bloomberg around a formula on stocks that was discovered by Nobel Prize-winning economist James Tobin. Here is the piece:
"Dec. 10 (Bloomberg) -- A global stock slump may have further to go, according to Tobin’s Q ratio, which compares the market value of companies to the cost of their constituent parts, CLSA Ltd. strategist Russell Napier said.
The ratio, developed in 1969 by Nobel Prize-winning economist James Tobin, shows the Standard & Poor’s 500 Index is still too expensive relative to the cost of replacing assets, said Napier. While the 39 percent drop in the index this year pushed equity prices below replacement cost, history suggests the ratio must sink further as deflation sets in, he said. The S&P may plunge another 55 percent to 400 by 2014, Napier said.
“In the long run, stocks will become even cheaper,” said Brian Shepardson, who helps manage $1.9 billion at Xenia, Ohio- based James Investment Research. The firm’s James Balanced Golden Rainbow Fund beat 98 percent of similar funds this year. “There’s a likelihood of some type of rally and further pullback surpassing the lows we’ve already set.”
The Q ratio on U.S. equities has dropped to 0.7 from a peak of 2.9 in 1999, and reaching 0.3 has always signaled the end of a bear market, said Napier, 44, the author of “Anatomy of the Bear,” a study of how business cycles change course. The Q ratio for U.S. equities has fluctuated between 0.3 and 3 in the past 130 years.
Previous Bottoms
At the end of the four largest U.S. bear markets in 1921, 1932, 1949 and 1982, the Q ratio fell to 0.3 or lower, and history is likely to repeat, said Napier. From the 1982 trough, the S&P 500 grew more than 14-fold to the middle of 2000, when Napier says the last bull market ended."
Article #2 Moral Hazard Anyone?
I thought this was a really interesting article in the USA Today. This is a catastrophe just waiting to happen folks. Want a loan modification and can't qualify? Just stop paying the mortgage!
"Are homeowners purposely falling behind on their mortgage payments to qualify for cheaper home loans?
Economists, lenders and other housing experts are concerned that programs to bail out troubled homeowners might have an unintended consequence: encouraging people to miss mortgage payments so they can qualify for a handful of programs that ease loan terms.
"It's a problem," says Mark Zandi, chief economist and co-founder of Moody's Economy.com. "A lot of the programs require you to be at some stage of delinquency, so homeowners say, 'What about me?' and they get delinquent in order to get help."
Many mortgage modification programs require that borrowers be 60 to 90 days late on payments to get a mortgage reworked.
"We speak with homeowners every day that have few qualms about walking away from their mortgage or missing payments as a way to 'get in on' loan modifications and low house prices," says Jeremy Brandt, CEO of 1-800-CashOffer, which buys homes. "The attitude is starting to move toward, 'How can the government help me,' " says Chad Olivier, a certified financial planner in Baton Rouge. "We are seeing it on Wall Street, and now we are seeing it with the public."
It's frustrating for Cara Halstead Cea, 38, of Suffern, N.Y., who last year refinanced into a 30-year, fixed-rate mortgage at an interest rate of 7.5%.
She says she's struggling to make her mortgage payments while others who fall behind get assistance. "I have felt that my husband and I are being punished, in a way, because we put the mortgage first, and we are always on time with payments; therefore, we're not eligible for loan modification. … We would do much better with a lower rate."
Article #3 The Fed to Issue its Own Debt?
No link here but an interesting read to say the least. It was in today's Wall St Journal:
"* DECEMBER 10, 2008, 12:00 A.M. ET
Fed Weighs Debt Sales of Its Own
Move Presents Challenges: 'Very Close Cousins to Existing Treasury Bills'
By JON HILSENRATH and DAMIAN PALETTA
The Federal Reserve is considering issuing its own debt for the first time, a move that would give the central bank additional flexibility as it tries to stabilize rocky financial markets.
Government debt issuance is largely the province of the Treasury Department, and the Fed already can print as much money as it wants. But as the credit crisis drags on and the economy suffers from recession, Fed officials are looking broadly for new financial tools.
The Federal Reserve drained $25 billion in temporary reserves from the banking system when it arranged overnight reverse repurchase agreements.
Fed officials have approached Congress about the concept, which could include issuing bills or some other form of debt, according to people familiar with the matter.
It isn't known whether these preliminary discussions will result in a formal proposal or Fed action. One hurdle: The Federal Reserve Act doesn't explicitly permit the Fed to issue notes beyond currency.
Just exploring the idea underscores many challenges the ongoing problems are creating for the Fed, as well as the lengths to which the central bank is going to come up with new ideas.
At the core of the deliberations is the Fed's balance sheet, which has grown from less than $900 billion to more than $2 trillion since August as it backstops new markets like commercial paper, money-market funds, mortgage-backed securities and ailing companies such as American International Group Inc.
The ballooning balance sheet is presenting complications for the Fed. In the early stages of the crisis, officials funded their programs by drawing down on holdings of Treasury bonds, using the proceeds to finance new programs. Officials don't want that stockpile to get too low. It now is about $476 billion, with some of that amount already tied up in other programs."
Bottom Line:
Lets talk a little bit about this stuff. The Q ratio article is quite startling with a prediction of 400 on the S&P. I thought this made a lot of sense. The Q formula is dead on when it comes to predicting how the Fed would react to this mess. The Fed is fighting deflation just as they described.
What you saw today in the markets was a reflation trade as the Fed continues to drop $8 trillion out of helicopters. As a result, oil, gold and energy stocks all went up today. This is why we closed green. This is a foolish long term trade because deflation is inevitable. Dennis Gartman was on Fast Money last night describing tankers filled with oil that have no where to go because there is no demand.
The Middle East continues to pump it in order to pay the bills. All of their economies are based on $80 oil. They now have a major problem. The more they pump the lower crude goes. If they reduce production they can't pay the bills. Hmmm....and I thought we had problems. Dubai? Can you say biggest bubble in history? I sure as hell wouldn't want to be peddling property in that city. Is it just me or was building millions of $5 million homes in the middle of a desert a bad idea?
Financials
The financials did nothing today and the risk around our banking system is increasing on a daily basis. Look at the last two articles above. The loan modification article was startling to me. This is what the Fed gets when it tries to meddle in the free markets. Once you set precedent and bailout a bunch of homeowners who made poor financial decisions, everyone then wants the same deal! Why would anyone continue to pay a mortgage without getting a loan modification.
I can't say that I blame anyone who stops paying their mortgage in order to qualify for their own piece of the TARP. Maybe the Fed will learn a lesson from this once most of the country stops paying the mortgage. They should have never ever ever done this in the first place.
Gee, do you think this might happen again if the automotive industry gets their bailout. Who will be next? The hotel industry? Airlines? Home builders? Tech?
Where does it end folks? Once one industry gets a piece of the Treasury pie, everyone will want a taste. Like the auto industry, every other consumer driven sector is suffering as the consumer caves like Oscar Delahoya did on Saturday night.
Regarding the last piece on the Fed issuing debt, WTF? Are they now going to sell their own debt and compete with treasuries? The fact that they are even considering such acts tell you that they don't have anywhere near the money on their balance sheet that they need in order to prevent this massive debt bubble from collapsing.
If they do this, overnight it will turn our banks into walking zombies(like they aren't zombies now!) with absolutely zero chance to make money going forward. I don't see this ever happening, but its another sign that the Fed is running out of ammo and is in dire straights.
Folks I woke up today and drank a big tall glass of reality juice.
The ship is sinking fast and we are running out of lifelines.
Stocks ended mixed today in a very volatile session. Well, what can i say: I tried to be a bull! I really really tried! Sadly, after reading the constant negative news flow, my bear claws are now growing back.
Guys, the news just keeps getting worse. I have always been more of a long term macro trader based on the fundementals. I reached a point today where I can't just can't continue to sit in denial and go long the market as I watch Rome burn. The bulls still have some momo but its losing stream quickly in my view.
I decided to get back on the short bus. I find it much more comfortable on here because it matches my thoughts on the economy! I also found some entry points that looked very juicy to me. I was hoping to pick SRS back up in the 60's. However, the continuing bad news flow makes me believe that I have a better chance of seeing god before this happens so I picked some up at $85. I look to be a little early here after watching it dip into the late 70's today but that's ok I am patient.
I also flip flopped on the financials and grabbed some FAZ which is a 3x inverse short financial fund. I did this after selling my Citi calls at a profit and i also sold my UYG.
There are a few reasons why I flip flopped to the bearish side today. I spent a long time researching the markets last night and today. Let me layout what I found the last two days followed by some thoughts at the bottom. The first piece was something I picked up on Bloomberg around a formula on stocks that was discovered by Nobel Prize-winning economist James Tobin. Here is the piece:
"Dec. 10 (Bloomberg) -- A global stock slump may have further to go, according to Tobin’s Q ratio, which compares the market value of companies to the cost of their constituent parts, CLSA Ltd. strategist Russell Napier said.
The ratio, developed in 1969 by Nobel Prize-winning economist James Tobin, shows the Standard & Poor’s 500 Index is still too expensive relative to the cost of replacing assets, said Napier. While the 39 percent drop in the index this year pushed equity prices below replacement cost, history suggests the ratio must sink further as deflation sets in, he said. The S&P may plunge another 55 percent to 400 by 2014, Napier said.
“In the long run, stocks will become even cheaper,” said Brian Shepardson, who helps manage $1.9 billion at Xenia, Ohio- based James Investment Research. The firm’s James Balanced Golden Rainbow Fund beat 98 percent of similar funds this year. “There’s a likelihood of some type of rally and further pullback surpassing the lows we’ve already set.”
The Q ratio on U.S. equities has dropped to 0.7 from a peak of 2.9 in 1999, and reaching 0.3 has always signaled the end of a bear market, said Napier, 44, the author of “Anatomy of the Bear,” a study of how business cycles change course. The Q ratio for U.S. equities has fluctuated between 0.3 and 3 in the past 130 years.
Previous Bottoms
At the end of the four largest U.S. bear markets in 1921, 1932, 1949 and 1982, the Q ratio fell to 0.3 or lower, and history is likely to repeat, said Napier. From the 1982 trough, the S&P 500 grew more than 14-fold to the middle of 2000, when Napier says the last bull market ended."
Article #2 Moral Hazard Anyone?
I thought this was a really interesting article in the USA Today. This is a catastrophe just waiting to happen folks. Want a loan modification and can't qualify? Just stop paying the mortgage!
"Are homeowners purposely falling behind on their mortgage payments to qualify for cheaper home loans?
Economists, lenders and other housing experts are concerned that programs to bail out troubled homeowners might have an unintended consequence: encouraging people to miss mortgage payments so they can qualify for a handful of programs that ease loan terms.
"It's a problem," says Mark Zandi, chief economist and co-founder of Moody's Economy.com. "A lot of the programs require you to be at some stage of delinquency, so homeowners say, 'What about me?' and they get delinquent in order to get help."
Many mortgage modification programs require that borrowers be 60 to 90 days late on payments to get a mortgage reworked.
"We speak with homeowners every day that have few qualms about walking away from their mortgage or missing payments as a way to 'get in on' loan modifications and low house prices," says Jeremy Brandt, CEO of 1-800-CashOffer, which buys homes. "The attitude is starting to move toward, 'How can the government help me,' " says Chad Olivier, a certified financial planner in Baton Rouge. "We are seeing it on Wall Street, and now we are seeing it with the public."
It's frustrating for Cara Halstead Cea, 38, of Suffern, N.Y., who last year refinanced into a 30-year, fixed-rate mortgage at an interest rate of 7.5%.
She says she's struggling to make her mortgage payments while others who fall behind get assistance. "I have felt that my husband and I are being punished, in a way, because we put the mortgage first, and we are always on time with payments; therefore, we're not eligible for loan modification. … We would do much better with a lower rate."
Article #3 The Fed to Issue its Own Debt?
No link here but an interesting read to say the least. It was in today's Wall St Journal:
"* DECEMBER 10, 2008, 12:00 A.M. ET
Fed Weighs Debt Sales of Its Own
Move Presents Challenges: 'Very Close Cousins to Existing Treasury Bills'
By JON HILSENRATH and DAMIAN PALETTA
The Federal Reserve is considering issuing its own debt for the first time, a move that would give the central bank additional flexibility as it tries to stabilize rocky financial markets.
Government debt issuance is largely the province of the Treasury Department, and the Fed already can print as much money as it wants. But as the credit crisis drags on and the economy suffers from recession, Fed officials are looking broadly for new financial tools.
The Federal Reserve drained $25 billion in temporary reserves from the banking system when it arranged overnight reverse repurchase agreements.
Fed officials have approached Congress about the concept, which could include issuing bills or some other form of debt, according to people familiar with the matter.
It isn't known whether these preliminary discussions will result in a formal proposal or Fed action. One hurdle: The Federal Reserve Act doesn't explicitly permit the Fed to issue notes beyond currency.
Just exploring the idea underscores many challenges the ongoing problems are creating for the Fed, as well as the lengths to which the central bank is going to come up with new ideas.
At the core of the deliberations is the Fed's balance sheet, which has grown from less than $900 billion to more than $2 trillion since August as it backstops new markets like commercial paper, money-market funds, mortgage-backed securities and ailing companies such as American International Group Inc.
The ballooning balance sheet is presenting complications for the Fed. In the early stages of the crisis, officials funded their programs by drawing down on holdings of Treasury bonds, using the proceeds to finance new programs. Officials don't want that stockpile to get too low. It now is about $476 billion, with some of that amount already tied up in other programs."
Bottom Line:
Lets talk a little bit about this stuff. The Q ratio article is quite startling with a prediction of 400 on the S&P. I thought this made a lot of sense. The Q formula is dead on when it comes to predicting how the Fed would react to this mess. The Fed is fighting deflation just as they described.
What you saw today in the markets was a reflation trade as the Fed continues to drop $8 trillion out of helicopters. As a result, oil, gold and energy stocks all went up today. This is why we closed green. This is a foolish long term trade because deflation is inevitable. Dennis Gartman was on Fast Money last night describing tankers filled with oil that have no where to go because there is no demand.
The Middle East continues to pump it in order to pay the bills. All of their economies are based on $80 oil. They now have a major problem. The more they pump the lower crude goes. If they reduce production they can't pay the bills. Hmmm....and I thought we had problems. Dubai? Can you say biggest bubble in history? I sure as hell wouldn't want to be peddling property in that city. Is it just me or was building millions of $5 million homes in the middle of a desert a bad idea?
Financials
The financials did nothing today and the risk around our banking system is increasing on a daily basis. Look at the last two articles above. The loan modification article was startling to me. This is what the Fed gets when it tries to meddle in the free markets. Once you set precedent and bailout a bunch of homeowners who made poor financial decisions, everyone then wants the same deal! Why would anyone continue to pay a mortgage without getting a loan modification.
I can't say that I blame anyone who stops paying their mortgage in order to qualify for their own piece of the TARP. Maybe the Fed will learn a lesson from this once most of the country stops paying the mortgage. They should have never ever ever done this in the first place.
Gee, do you think this might happen again if the automotive industry gets their bailout. Who will be next? The hotel industry? Airlines? Home builders? Tech?
Where does it end folks? Once one industry gets a piece of the Treasury pie, everyone will want a taste. Like the auto industry, every other consumer driven sector is suffering as the consumer caves like Oscar Delahoya did on Saturday night.
Regarding the last piece on the Fed issuing debt, WTF? Are they now going to sell their own debt and compete with treasuries? The fact that they are even considering such acts tell you that they don't have anywhere near the money on their balance sheet that they need in order to prevent this massive debt bubble from collapsing.
If they do this, overnight it will turn our banks into walking zombies(like they aren't zombies now!) with absolutely zero chance to make money going forward. I don't see this ever happening, but its another sign that the Fed is running out of ammo and is in dire straights.
Folks I woke up today and drank a big tall glass of reality juice.
The ship is sinking fast and we are running out of lifelines.
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