The market finally rallied today as Home Depot and Wal-Mart reported better than expected earnings.
However, when you read between the lines, neither company had many good things to say about the shrinking consumer:
"For two major retailers reporting quarterly results on Tuesday, consumers appeared to be holding back.
Steeper price-slashing did not lure customers into spending more at Wal-Mart, while shoppers at Home Depot spent less and put off big home improvement projects or big-ticket items like appliances.
Both Wal-Mart Stores and Home Depot posted second-quarter profits on Tuesday that beat analyst estimates, and both slightly raised their full-year earnings guidance for the year. Yet their results suggested that American consumers were not spending as much as had been expected."
As you can see above. Both companies produced larger profits via corporate initiatives versus seeing a surge in the strength of the consumer. Huge discounts at both failed to lure in customers.
I wouldn't put to much stock into today's bounce. We were very oversold and long overdue for a green day. I am hoping to see a little more to the upside because it's going to create a great opportunity to get into some short positions.
Kyle Bass
I wanted to put up some must watch videos from Kyle Bass who is the managing director of the hedge fund Hayman Advisors. Kyle accurately called the housing bust, and became one of the youngest Senior Managing Partners at Bear Stearns at the age of only 28.
Kyle was featured on David Faber's Strategy Sessions today. He painted an extremely gloomy global outlook for equities and especially Japan.
Edit: It appears video 1 was taken down. I will check and see if they repost it. Part 2 below is still up.
Take a look and I will have a some comments below:
My Take:
Kyle's best line was when he was asked if he was as concerned about where we are today versus where we were back then(2008).
His response: "Let me asnwer you with a question. How many of your problems have you kicked down the road have eventually gotten better?". The response from the CNBC boys was : "Good point".
Classic!
Kyle pretty much shredded the European stress tests and is extremely bearish about Japan as well as global equities. Mr. Bass predicts that Japan is very close to a restructuring which is a nice way of saying "economic reset".
Kyle also brilliantly focused on the increasing risks investors have been forced to take as a result of the Fed's zero interest rate policy.
A quote from Mr. Bass on this topic: "The Fed's policy is forcing people to make the wrong decisions" when it comes to investing. I spoke a lot about this yesterday.
He also talked about how Ponzi schemes can last a long time as long as you find more suckers to keep the game going. Right now the USA's suckers are the ones that keep buying our treasury debt. We all know that this isn't sustainable. China was a net seller of treasuries for the second month in a row in June.
Why wouldn't they be as treasuries soar to new highs?
The Bottom Line
Our Ponzi financial scheme will fail just like all the others. The system is being kept together right now with a few band aids and zero interest rates from the Fed which has allowed our zombie banking system to stay afloat.
As long as this policy is the status quo our economy will not recover. This place will look very much like Japan has the last 20 years.
The debate moving forward will start to hone in on this zero rates policy in my opinion.
The debate will center around these two themes:
A) Do we take our medicine now and and suffer through a horrible short term depression as we restructure in order to create a viable recovery that has a strong fiscal foundation?
Or
B) Do we zombify ourselves like Japan has and suffer through a 20 year funk where we lose a generation of prosperity but do not immediately collapse?
I would choose option A any day of the week. Who on earth wants to suffer for a couple decades? Ripping the Band Aid off quickly is much preferable than a slow painful peeling!
If you listened to Kyle above, the Japanese response ends up with a restructuring anyway. If this is the case then what's the point?
Unfortunately there are no easy answers to our problems. The one thing I know is I want this thing over with as soon as possible. History has shown us that short severe depressions can lead to quick recoveries.
A great example of this s the depression of 1920-1921. You can read about it here. Prices dropped 36% as severe deflation crippled the economy. The government slashed spending in order to control our deficits. This prudent rapid response then set the stage for one of the greatest periods of prosperity this nation has ever seen.
Wasting the hopes and dreams of a generation as we pull a Japan Part 2 would be a very sad thing to witness. Hopefully our government will find the will to do the right thing and take the hit today rather than 20 years from now.
Disclosure: No new positions taken at the time of publication.
Tuesday, August 17, 2010
Monday, August 16, 2010
Wall St's Bond Addiction Intensifies
Stocks closed the day relatively flat as money continued to pour into the treasury market.
Lets take a look at the 10 year today:
My Take:
This chart has gone parabolic! The contrarion in me is starting to believe this move is getting way over done. Especially when I see articles like this:
"SAN FRANCISCO (MarketWatch) -- U.S. Treasury bonds, often a top choice for risk-averse investors, are attracting more interest from hedge funds now, according to a study released Wednesday by consulting firm Greenwich Associates.
Hedge-fund trading volume in U.S. government bonds surged by more than 70% in the past year. In 2009, hedge funds generated about 3% of trading volume in this market. This year, that share jumped to roughly 20%, Greenwich Associates said.
The move is being partly driven by demands on the $1.8 trillion industry by institutional investors."
Is Wall St Blowing More Bubbles or have They Been Paralyzed by Fear?
This is the million dollar question. I am ALWAYS highly suspicious of any "pile on" trade that I see on Wall St. Just look at the "pile on" trades we have seen just in the past 10 years:
- The tech bubble in the 1990's...Need I say more?
- The Housing Bubble...Enough Said.
- The commodities bubble in early 2008 where oil soared to $150/barrel.
There are many other smaller versions of such trades but I will stop at these examples.
So are Treasuries the next bubble? I am starting to think so.
Before I get into the reasons why let me start off by saying there are many reasons to be in treasuries right now. The economy is a mess and nothing looks safe. It makes total sense to own treasuries during such a chaotic time in history.
However, the reason I am skeptical about the current move is because the market isn't trading like it should be if this was a "risk off/Armageddon on" trade.
I mean think about it: If people are so scared then why are stocks holding up so well? If this was a flight to safety then wouldn't investors be selling stocks and buying bonds?
You would have expected to see a 4000 point sell off on the DOW the way treasuries have traded recently. Yet the DOW was only down 3% last week. I smell a rat especially since the hedge funds are now in the game.
IMO, he whole thing is very suspicious. What I think is really going on here is the "unintended consequences" of the Fed's zero interest rate policy.
This policy has provided too much liquidity for the banks. What I believe is happening is the banks have decided they are better off borrowing at zero and buying bonds on the longer end of the curve then they are lending the money to a bunch of unemployed potential borrowers.
Making matters worse is the fact that potential borrowers have zero desire to lend more money in the first place because they are too busy paying down their debts from the last bubble.
As a result, the banks are flush with cash and they don't have to take the losses on their books thanks to accounting standards that are non existent which makes them even more flush with cash!.
This treasury trade looks HIGHLY speculative to me folks and these things usually end very badly.
The Bottom Line
The treasury trade looks tired but I still thinks it has legs so I will sit on the sidelines for now. The economy continues to tailspin and this will only put further pressure on our deficits. Any push back by the bond market as a result of our irresponsible spending could force this trade to unwind.
What angers me here is we shouldn't even be here in the first place. Our interest rate situation is really putting the fianancial system at risk.
Allowing the banks to make a killing using a zero interest rate policy is all well and good for the banksters. The problem is it's destroying the rest of the economy because the money is not being allowed to filter down to Main St where it is badly needed.
It's being hoarded by the banks and then being thrown into the treasury market.
This is killing the last place investors could find some yield and the "consequences" of such policy of this are extremely dangerous. I say this because it's forcing investors to take on enormous risk elsewhere because they are desperate to fiend yield.
Just look at the the corporate debt that's going bananas right now.
Corporate high yield debt issues has turned into a feeding frenzy as soon as it's offered. Companies I have never even heard of are raising money via selling 10 year debt because they are offering 8-9% yields.
Ummm...How is this going to end well? Many of these companies will not even be here 10 years from now. MBS's were offering the same returns and we all know how that worked out. The problem with the MBS instruments was the underlying debt was no good.
The same thing is going on this go around. Most of these companies are using this money to roll over BAD INVESTMENTS/DEBTS.
Example: Commercial real estate is down 40% for the most part from it's bubble highs. Yet companies like Simon Property Group have seen their stock price soar from $30's last year up into the $90's recently because they have been able to take advantage of the appetite for corporate debt
How on earth does this make any sense fundementally? The debt they own is garbage. Who is going to be shopping at the 100's of malls they own as unemployment soars? How many of their stores will go bankrupt as the consumer evaporates. How much more value will be lost on these properties when they do?
What if interest rates move higher? What happens to this debt then?
Let's get real here: The only reason SPG is alive right now to begin with is because they got a free pass by the banks to roll over their debt at full value despite the fact that it's woth wayyyyy less.
The fundementals should be telling investors to stay the hell away from companies like this because their underlying debts are 30-40% over vauled.
We all know what's going to eventually happen here:
SPG's cash flows will dry up as their tenants go BK and they will then be in deep doo doo as they try and make their debt payments to the banks and to the debt investors who allowed them to leverage back up.
The bottom line here is I believe we are seeing more bubble blowing throughout the financial system.
The problem is the balance sheets are bad this go around from the beginning and investors are getting sucked into it because they feel like they have no other options because stocks and treasuries are doing nothing at this point.
I tell you one thing: If the 10 year treasury gets down to 2% it will be time to get short treasuries because none of this is sustainable.
The markets once again is having a party. The problem is Main St wasn't invited this time because they are unable to profit from it like they did when they could flip houses.
The problem with this bubble party is only rich are invited, and without Main St. participating, it's likely to be a 4 hour affair versus an all nighter.
Disclosure: No new positions held at the time of publication.
Lets take a look at the 10 year today:
My Take:
This chart has gone parabolic! The contrarion in me is starting to believe this move is getting way over done. Especially when I see articles like this:
"SAN FRANCISCO (MarketWatch) -- U.S. Treasury bonds, often a top choice for risk-averse investors, are attracting more interest from hedge funds now, according to a study released Wednesday by consulting firm Greenwich Associates.
Hedge-fund trading volume in U.S. government bonds surged by more than 70% in the past year. In 2009, hedge funds generated about 3% of trading volume in this market. This year, that share jumped to roughly 20%, Greenwich Associates said.
The move is being partly driven by demands on the $1.8 trillion industry by institutional investors."
Is Wall St Blowing More Bubbles or have They Been Paralyzed by Fear?
This is the million dollar question. I am ALWAYS highly suspicious of any "pile on" trade that I see on Wall St. Just look at the "pile on" trades we have seen just in the past 10 years:
- The tech bubble in the 1990's...Need I say more?
- The Housing Bubble...Enough Said.
- The commodities bubble in early 2008 where oil soared to $150/barrel.
There are many other smaller versions of such trades but I will stop at these examples.
So are Treasuries the next bubble? I am starting to think so.
Before I get into the reasons why let me start off by saying there are many reasons to be in treasuries right now. The economy is a mess and nothing looks safe. It makes total sense to own treasuries during such a chaotic time in history.
However, the reason I am skeptical about the current move is because the market isn't trading like it should be if this was a "risk off/Armageddon on" trade.
I mean think about it: If people are so scared then why are stocks holding up so well? If this was a flight to safety then wouldn't investors be selling stocks and buying bonds?
You would have expected to see a 4000 point sell off on the DOW the way treasuries have traded recently. Yet the DOW was only down 3% last week. I smell a rat especially since the hedge funds are now in the game.
IMO, he whole thing is very suspicious. What I think is really going on here is the "unintended consequences" of the Fed's zero interest rate policy.
This policy has provided too much liquidity for the banks. What I believe is happening is the banks have decided they are better off borrowing at zero and buying bonds on the longer end of the curve then they are lending the money to a bunch of unemployed potential borrowers.
Making matters worse is the fact that potential borrowers have zero desire to lend more money in the first place because they are too busy paying down their debts from the last bubble.
As a result, the banks are flush with cash and they don't have to take the losses on their books thanks to accounting standards that are non existent which makes them even more flush with cash!.
This treasury trade looks HIGHLY speculative to me folks and these things usually end very badly.
The Bottom Line
The treasury trade looks tired but I still thinks it has legs so I will sit on the sidelines for now. The economy continues to tailspin and this will only put further pressure on our deficits. Any push back by the bond market as a result of our irresponsible spending could force this trade to unwind.
What angers me here is we shouldn't even be here in the first place. Our interest rate situation is really putting the fianancial system at risk.
Allowing the banks to make a killing using a zero interest rate policy is all well and good for the banksters. The problem is it's destroying the rest of the economy because the money is not being allowed to filter down to Main St where it is badly needed.
It's being hoarded by the banks and then being thrown into the treasury market.
This is killing the last place investors could find some yield and the "consequences" of such policy of this are extremely dangerous. I say this because it's forcing investors to take on enormous risk elsewhere because they are desperate to fiend yield.
Just look at the the corporate debt that's going bananas right now.
Corporate high yield debt issues has turned into a feeding frenzy as soon as it's offered. Companies I have never even heard of are raising money via selling 10 year debt because they are offering 8-9% yields.
Ummm...How is this going to end well? Many of these companies will not even be here 10 years from now. MBS's were offering the same returns and we all know how that worked out. The problem with the MBS instruments was the underlying debt was no good.
The same thing is going on this go around. Most of these companies are using this money to roll over BAD INVESTMENTS/DEBTS.
Example: Commercial real estate is down 40% for the most part from it's bubble highs. Yet companies like Simon Property Group have seen their stock price soar from $30's last year up into the $90's recently because they have been able to take advantage of the appetite for corporate debt
How on earth does this make any sense fundementally? The debt they own is garbage. Who is going to be shopping at the 100's of malls they own as unemployment soars? How many of their stores will go bankrupt as the consumer evaporates. How much more value will be lost on these properties when they do?
What if interest rates move higher? What happens to this debt then?
Let's get real here: The only reason SPG is alive right now to begin with is because they got a free pass by the banks to roll over their debt at full value despite the fact that it's woth wayyyyy less.
The fundementals should be telling investors to stay the hell away from companies like this because their underlying debts are 30-40% over vauled.
We all know what's going to eventually happen here:
SPG's cash flows will dry up as their tenants go BK and they will then be in deep doo doo as they try and make their debt payments to the banks and to the debt investors who allowed them to leverage back up.
The bottom line here is I believe we are seeing more bubble blowing throughout the financial system.
The problem is the balance sheets are bad this go around from the beginning and investors are getting sucked into it because they feel like they have no other options because stocks and treasuries are doing nothing at this point.
I tell you one thing: If the 10 year treasury gets down to 2% it will be time to get short treasuries because none of this is sustainable.
The markets once again is having a party. The problem is Main St wasn't invited this time because they are unable to profit from it like they did when they could flip houses.
The problem with this bubble party is only rich are invited, and without Main St. participating, it's likely to be a 4 hour affair versus an all nighter.
Disclosure: No new positions held at the time of publication.
Sunday, August 15, 2010
Tony Robbins Gets It!
Take some time out of your night to watch this warning by Tony Robbins. I couldn't agree more with Tony here when it comes to his take on the economic change that we are all about to witness.
We should all take notice when the most famous motivational speaker in the world comes out and warns us that we all need to get prepared for the "economic winter" that is coming.
Enjoy!
We should all take notice when the most famous motivational speaker in the world comes out and warns us that we all need to get prepared for the "economic winter" that is coming.
Enjoy!
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