Friday, February 27, 2009

BOFA is Next.

Bank Of America is progressively getting weaker as the day moves on. The stock is currently down 20% to $4.22. With Citibank's stock collapsing today, the next likely target is BOFA.

It looks like the pattern is to totally kill the preferred and equity shareholder to stabilize the banking system. Lots of people think that BOFA is to big to fail...I agree with them, since they were nudged to buy both Countrywide and Merrill Lynch.

Most analysts believe they need anywhere from $50-100 Billion in new capital immediately. Why such a wide range? Because BOFA is not coming clean with regards to reserves and marks, investors have to speculate what their exposure is.

The government has already backstopped $15 or so Billion in capital on top of guaranteeing almost close to $120 Billion in losses at BOFA. But since Merrill is in the business of losing billions of dollars instead of actually running a business it doesn't surprise me in the least the figure is going to be closer to $100 Billion. Why risk anymore capital, when the government can just convert the preferred to common...and kill the stock? Thats the trade...short the common.

BOFA is awfully quiet today, the only thing they have come out with is the cancellation of the NY Yankee Marketing Deal.

Every time the market tries a rally attempt...sellers quickly come in. Looks to me sellers are lurking at higher levels. The buyers have to make a stand here mid day or the fear of being run over is highly likely.

BTW....Yes I do see the Irony...of the Bank Of America Google Banner Add to the right.
BOFA is a great consumer bank, but a rotten stock. There is the difference.

Denial And Soft Nationalization

Lot of market observers who follow the banks are still in denial. Take for example Dick Bove, a guy who has been consistently wrong on the financials for the last 2 years. He tossed in his usual 2 cents this morning. Despite Citigroup plunging on the announcement of government plans to swap its preferred stock for common equity.

Mr. Bove states the following: "I absolutely believe they are a buy". He goes on to state Citi is cash-flow positive, had a significant amount cash on hand and has businesses with very strong franchises. "I think on that basis one should want to own the stock". I don't even know where to begin with these statements. His best missive is the following gem: "that markets were obsessed with the meaningless capital levels and weren't looking at
fundamentals". What Mr. Bove fails to understand is that Citigroup is plunging because like Bear Stearns, Lehman, Wamu, & Wachovia there is a general lack of confidence in the physical entity, coupled with frozen credit markets, continued denial over mark to market pricing of securities, and most importantly the investment community has totally lost all confidence in managements ability to lead. Also...The fundamentals do suck. I am beginning to believe that Mr. Bove comes from a long line of deniers, his great grandfather must have had a strong buy on the White Star Liner in the weeks following the Titanics sinking.

What the government is doing is effectively and philosophically nationalizing the system without intently telling you so. Lot of analysts deem this a scary proposition, they couldn't be furthest from the truth, the market currently has regained all of its losses as I speak. The market is in the process of filtering out all of the static that is currently in the system. It needed a resolution to the Citigroup mess, it partially got it. Now we know, Citigroup will not file for bankruptcy as the government is its the biggest backer. So as more and more of these type of transactions are transferred to other sick banks, the market will come to grips with it. BOFA & Wells are next, no matter what the analysts say.

What the government is doing is the quickest, but not the lowest cost solution to the current problem. The country cant afford what happened to Lehman to happen to BOFA, Citi, and Wells. The next step is to effectively extract these toxic securities from the balance sheets of these institutions and place them in a RTC (Resolution Trust Company), similar to what happened with the Savings & Loan.

Listen...The whole planet is in the midst of a massive de-leveraging campaign that has seriously dented confidence not only in the US, but the global financial system, the only way to restore confidence is to have a concrete plan. The US leads the world, as Europe and Britain are already on their way to fix their issues. The global economy is waiting for the U.S. to step up. They did today.

This is step 1 of the plan - Conversion of TARP Preferred to Common Equity.
Although its mighty dilutive, the banks and shareholders have no choice. We will have a few days of heavy selling (Financials) as investors will get ahead of any future conversion, but there will be a point where these institutions are buys.

There is probably a dozen more steps to be taken, but remember it took 30 years to create this credit bubble, it will take the better half of a decade to resolve it, but confidence needs to be restored.

There was two things the government could have done to go about addressing the banking crisis:

1- Closed Bank Solution: Close bad banks, wipe out equity shareholders as well as debt holders, extract bad assets transfer them to RTC, and then sell off the good parts of the bank back to the public markets as soon as possible. This is what the government did partially to Wamu and IndyMac. These were successful, but the current scale of losses make this politically (Lobbyists/PACS) unfeasible, although its the most cost effective.

2- Open Bank Assistance: Inject capital into institutions, guarantee bank liabilities, access to greater liquidity, and TARP. This is what I call "Soft Nationalization"
This has been what they have been doing to the likes of Citigroup today and Wachovia previously....This is what they will continue to do for the future, but they also need to incorporate most importantly the extraction of bad assets into RTC. After they accomplish this, they can start to recapitalize the good banks with private equity and re float them to the public.

The market is trying hard to make up lost ground, but there are heavy losses in the financials that are being offset by gains in Tech and some Energy.

Keeping the Faith.

Good News....Bad News...

The market is looking down about 16o points currently, that puts the Dow near 7000. Can the market hold this level? Dont know. We have to let it play out. We have to defer and respect the action that is front of us.

I don't know if this is the low or not, too many people are betting that it is, but there simply is no change in direction to state otherwise. Too many headwinds. But whats positive is that the real bad news is getting out there so it can be absorbed. Nationalization was the elephant in the room that had many people spooked. That idea is slowly filtering into the market community. I don't think the market would be down as much if it weren't for the ugly GDP figures that hit the tape at 8:30am.

The banks have continued their downward acceleration as I write this post. This may finally be the market recognition of the fact that the common stock in many of these banks are close to worthless as more ownership shifts to the government. It isn't nationalization, but as close to it as its going to get....It may not feel like it... but this is positive news...Stay Tuned.

I cant wait for Ken Lewis to make his usual CNBC cameo appearance stating everything is kicking on all cylinders.

Feeling vindicated at the moment.

Citigroup...Effectively Nationalized

The government has begun to exchange the preferred shares of Citigroup to common shares, which raises the governments stake in this dog to roughly 36%. Which is effectively nationalization. The government will replace the majority of Citigroups sycophant board of directors. The company has come and stated that they think this will remove the uncertainty that investors currently have...well the stock is of 43% in the pre market to $1.38. Anyway you look at it, its a bad deal that had to happen, the economy cant sustain the bankruptcy of this institution. The only good thing in terms of the public, is the government is converting their stake to common, not pumping anymore money into Citi.

BOFA is the next target, then Wells Fargo will soon follow.

There will be a time when the banks will bottom, maybe today is the day, I doubt it, as the 4Th QTR GDP figures just hit the tape, and they are real bad. GDP shrank a whopping 6.2% in the 4TH QTR. A horrible figure, that is sure to kill stock index futures, but there is a silver lining in that next years comparisons will look that much better. The powers that be wanted this report to be bad...Food for thought.

The market is now looking 200 points lower off the GDP and Citigroup news.

This situation with Citibank is eerily similar to the governments actions with regards to AIG. Its all about the massive dilution that shareholders are about to take. When the government made their move in AIG, people thought that the pain had stopped until more and more bad news came out on AIG. This just confirms not only that the problems at Citigroup are far more serious, but more of these type of actions are going to happen. I think the damage is going to be confined to C, BAC, WFC, and the regional banks. In the short term, like I said bad news, but mid to long term good news in the sense that what ails the banks is the inability of their trading desks to properly value/mark their toxic securities. This action by the govt will speed up the process of properly pricing these bonds, and to extricate them from balance sheets going forward. At this moment no one knows or can make a true assessment of where the banks stand, because they lie all of the time with regards to their operations. Just listen to Ken Lewis at BOFA, watch closely, his nose is bigger at the end of his interviews.

This form of nationalization had to happen. The country/economy cant afford a lost decade like Japan had in the 90's. The system will feel lots of pain but its worth it in the long run.

This is good news for the market, not withstanding the GDP figures which are hammering the futures, I am venturing a guess to say that 6900-7000 should be the low, if we break that, then all bets are off.

Thursday, February 26, 2009

Buying Time....

Seeing mostly short covering in the financial space. No real buying. The institutions just don't feel comfortable putting money to work in these banks. Why would they? What has changed over the last few days other then Obama and Geithner giving the banks until the end of April to examine their books? Nothing. Do people actually think that in 60 days the banks balance sheets are going to get that much better? With the absence of any bad news has made the news flow very scarce. They say "never short a dull market". So people who have been on the short side making money, are covering their bets for big profits. Just hoping to reload on the short side a little later.

Also of note is Moody's warning of more future losses from subprime mortgages. They are on record stating that subprime mortgages that were originated in 2005-2008 are in a severe free fall state and that banks have not marked these bonds down to acceptable levels. How in the world can we trust the banks anymore, after all that we have been through, they are still in denial over these mark downs? Many of these type of securities have seen downgrades and more downgrades are seen in the future...

The losses for vintage years are as follows:

2005 = 15% of Original Balance
2006= 33% of Original Balance and 42% of all Subprime Mortgages are delinquent.
2007= 35% of Original Balance
2008= 39% of Original Balance

Moody's has put up close to 8000 Mortgage Tranches involving Sub Prime under review for another series of downgrades.

With these type of headwinds, I cant understand or create a scenario where there would a sustainable rally in them.

One Important thing to note - A friend of mine made a good point. He states "if the Government wants to keep propping these banks up with tax payer money...then I can envision a scenario where I would buy them, only thing is when does enough mean enough? How much more money can be earmarked before it becomes unfeasible"?

This is what has made the shorts slightly nervous currently, but the moves you see in these banks are unsustainable. You need more then short covering.

The treasury has stated that any bank with more then $100 Billion in Assets has to go throw the test, and any bank that fails will be allowed access to immediate cash. Again, most of these banks will fail, thus billions more will be wasted propping them up. The market has already come to grips with the fate of these institutions, that is why you have not seen any serious rallies, even when a rally should happen.

The government is playing Poker, but the market has all of the face cards and is calling Geithner and Obama's Bluff. Is the government playing Poker or Russian Roulette?

Let me be very serious and crystal clear! The market is not going to start rallying until the government COMES to their SENSES and NATIONALIZES the BANKS!

We will drift lower and lower every day until some clarity is achieved. The day the news comes out, the market will rally huge...count on it. Its always buy the rumor sell the news...this is the opposite...Sell the the news!

You heard it here first...The market doesn't want any more of these shenanigans. Enough Tax Payer money has been wasted in Citigroup and BOFA. They are all effectively Nationalized already...make it official. anyone else sick of looking at Bobby Jindal? What a clown! The Republicans have 90% of their constituency in White America, yet their advertising campaign is based around Bobby Jindal? A fake Indian?

Trying to Keep The Faith and not get too angry.

Happy Trading.

Another Day of Meaningless Short Covering.

The markets look higher this morning for what ever reason. I guess the absence of bad news means only that the shorts will have to cover some of their bets. I see no one "naturally buying" any stocks currently except for a few in the Tech/Pharma areas. My gut feeling is that we will rally (200-300 points)for a few days. Financials will also see some short covering here as Obama/Geithner/Bernanke cabal are saying the right things to make the banks and most importantly their lobbyists happy. But traders are just waiting for a better entry point to reload on the short side.

I will have more to say about the PACS & lobbyists and how they operate in an upcoming post, as well as Part 2 of CDS.....stay tuned.

News of Note-

JP Morgan is going to sell Specialist Firm Bear Wagner to Barclay's. Hmmm...Has the Bank Of England heard about this? Should they not be re-pricing their crap assets and rebuilding their equity capital instead of buying a dying business from JP? These managers are supposedly the smartest and most well educated people in the world, they should start acting like it. The value of a Harvard Education has taken a hit spiritually and philosophically of late, but I digress...who cares about that..its about getting paid isn't it?

This is a great deal for JP if they can pull it off and they will. Jamie Dimon is not only the smartest guy on Wall Street, but the most brutal. After JP cut its dividend yesterday it is now a certainty that Wells, PNC, BB&T, and USB will also follow that. Its ludicrous that these banks have taken Tax Payer Tarp Money, yet still pay out dividends. JP has their analyst day (Kissing Fest) today...they are also announcing they are cutting 12,000 Wamu jobs.

Bank Of America's Ken Lewis keeps talking about how great Merrill is going to be. How great Countrywide is going to be. How great BOFA is...To bad he wont be around to enjoy it...He is on his way on that.

GM posted a $9.6 Billion loss....enough said.

Jobless claims have reached 667,000 which is the highest reading since 1982. This will reach 700,000 before decelerating.

Obama is projecting a $1.75 Trillion budget Deficit....That is a conservative will go as high as $3 Trillion before the economy gets its bearings back.

The US Treasury may break up AIG to keep it afloat....they have no choice.

American Express is paying people to close their credit accounts? I'm Speechless

Why is Yahoo not selling their dead carcass to Microsoft? Has not MSFT "Put it on the glass" enough? Google has just about finished eating breakfast, lunch and dinner here at this time. The only thing Yahoo is good for is free email, Fantasy Sports (beginning to suck), and Yahoo Finance. BTW- why is Yahoo in the business of relationship advise? Would you take relationship advise from a company that should have been sold $35 Billion ago? a very good mood this morning.

Happy Trading....Keep The Faith!

Wednesday, February 25, 2009

Bank on This...More Bad News Maybe?

News just out that the Banking Stress Test will be completed by end of April.

The Basis is as follows:

1- U.S. banks Under $100B In Assets May Be Eligible For More Capital.
2-U.S. Bank Stress Tests To Consider Losses Over 2 Year time period.
Stress Tests To Consider Loan, Trading, and Securities Losses.
Banks Will Have 6 Months To Raise Private Capital After Stress Test
Banks Needing Capital Will Issue Convertible Preferred Shares
6-Treasury Will Convert Bank Securities To Common Stock As Necessary
7- Banks Already Receiving TARP Funds Can Convert To New Securities
8- Stress Tests Based On Baseline, Adverse GDP, Employment Forecasts

I think these turn of events takes nationalization off the table until April. Not good news in my opinion, but it may lead to some short covering of the financials till then.
The market may rally here.

I think the governments tests are just window dressing, as these are quite common in banking circles from what I here.

This buys some time for the banks to "cook" their books as they have been for the last few years. It also gives the regulators some ammunition if they actually wanted to take some action which they won't, because after all they are regulators.

The financials have rallied off their lows quite impressively again mostly on short covering and the abated concerns till at least April.

Its good I didn't get short these....That would seriously hurt right about now.

Trying to stay awake.

Back To The Sell Side...

After one measly day of rallies in the financials which was 100% driven by short covering, the sellers are out once again. There are multiple sell programs within the financial patch on most trading desks this morning. Most if not all gains from yesterday will disappear I am afraid. I am very tempted to take a short position in a few names (JPM, STT, BK, PNC).

Remember the 'Geithner Stress Test" starts today, and Obama's speech last night laid it pretty clear to the banks. There is a new sheriff in town and its not you. Most of the regional banks are selling off more violently then the majors obviously concerned over the Stress Test.

More and more mainstream journalists are now on the nationalization bandwagon as well as Alan Greenspan (Still Relevant?).

Bill Gross (Real Smart Guy) from PIMCO thinks that this is a bad idea. What Gross says is interesting in the sense that regulators are already overwhelmed, why put this on their table as well? He goes further by saying "The goal of future policy should be to recapitalize lending institutions while maintaining the basic infrastructure of credit markets. Outright nationalization and haircutting of creditors will do just the opposite. "If the government cannot substitute credit to the same extent that it is disappearing from the private system, then the U.S. and global economies will retreat". He makes some great points, he is more in favor of massive (Trillions) government stimulus directly into the financial system. Problem is how much is enough? I have always stated roughly $3.5 Trillion (30%-40% markdown instead of the current 70% that banks have them priced at) is needed to wipe out all of the bad MBS debt on the banks balance sheets. We have not even gone into the potential losses in these toxins:

1- Commercial Real Estate
2- Home Equity Line Of Credit
3- Auto Loan & ABS
4- Credit Cards
5- Hybrid Securities.

Lets just say miraculously Obama is able to get Congress on board for $3.5 Trillion to take the bad MBS debt, that takes care of just 1 problem! They would need in my calculation another $3.5 to $4 Trillion in additional funding to fix the entire issue. Is this happening? I don't think so ever.

I keep sounding like a broken record....There are no more alternatives other then a partial nationalization of our once great financial system. Once this is announced, the orderly liquidation of all toxic securities can begin. It can be done at its own pace with no more pressure from the capital markets. Bid/Ask Spreads would narrow, liquidity would come back into the system all be it at a slow pace. The markets will then come to grips with this tragedy, but there would at least be some plan other then just Press Clips and DJ News Stories from the White House.

The reason the markets acted so violently when Lehman blew up was the way it was handled. They went haphazardly into bankruptcy and people had to scramble to find out what the true exposure was. When they found out it was nuclear, well you saw what happened. If Lehman went into bankruptcy in an orderly fashion, just some of the credit damage could have been avoided. I am telling you...the market would not have fallen out of bed (some damage would have happened anyway) if the Lehman situation was handled properly.

Random Thoughts-

Smith And Wesson is recalling pistols from 2002-2009...Did they find out they actually KILL people??? Hmmm. Good catch!

I was talking to a friend about recession proof jobs...We were only able to come up with one. know what type!

Happy Trading!

Tuesday, February 24, 2009

AIG, JP, And More Stuff.

AIG might post up to $60 Billion in Losses. Mind Boggling...lack of supervision. Is it even possible to lose this much money? I understand that the Government had to take over this entity, because after all we probably be living in caves if AIG went bankrupt, but the total utter lack of risk supervision is just astonishing!

J.P. Morgan cut their dividend. Just like I said they would in my very first post of the month. That should save about $5 Billion. That's a start. Like I said...J.P. Morgan is the most scary institution on the planet. To scary to fail.

The markets are vastly oversold, and some sort of snap back relief rally is in store. Can we please have some real buyers? Some New Buyers? Not just short covering....Just a thought.

Obama, Geithner, and Bernanke are all over the news and will be front and center the next few days on the Idiot Box.

Stress Tests start tomorrow....We should have some clarity (Finally) on the Obama/Geithner Plan tomorrow.

On a somber note...My grandfather passed away last night at the age of 86. He was a good man who worked on the last day of his life. My parents are on their way to the Mother Country (India) later tonight.

Happy Trading and Keep The Faith!

Monday, February 23, 2009

The Swedish Method?

I am on the record stating if and when the Government comes to their senses, the market will have a brief furious rally, without BOFA, Wells, & Citi of course. Those are the major banks that I think will be nationalized or recapitalized. The smaller regional banks will fail their Stress Tests and trade much lower if not go bankrupt.

But what about Sweden's Nationalization Efforts in the Early 90's?

In 1992, The Swedish Government took over its insolvent banks, wiped out the equity shareholders, cleaned them up, re privatized them. The problems in Sweden are small compared to the scope of our problems, but this type of solution could work here, as we are still the USA.

The Swedish Method started out badly managed, with out of control bureaucracy, but what they did do was delegate all of the details of the clean up to private bankers hired by the government. This process eventually was applied correctly and the results were smooth, although it took some time to stabilize the system.

Geithners Stress Test goes into effect Feb 25Th. This is the first important step in calculating which banks are insolvent. After figuring out who fails the test, immediately nationalize or put into receivership the insolvent banks. This will wipe out the equity shareholder, but keep the debt shareholder (Most Important) whole until depositors and short term creditors are paid. Once an institution is taken down, separate the assets into good and bad assets, The good assets can either be re floated to the public or sold to private equity. The bad assets cant be marked down to where they should be marked to, and sold off to again Private Equity.

This is not revolutionary stuff. The simplest plan is usually the easiest plan. Stop listening to the talking heads on TV, they over complicate and over analyze the situation because they want to feel important while really not knowing what they are talking about. Why in the world are we so worried about the potential losses and the subsequent chaos that would ensue in the event of nationalization, when guess what? There won't be an economy or banking system left after all is said and done. Its like Abraham Lincoln suspending Habeas Corpus during the Civil War. He took a lot of flack for it, but his reasoning was sound, "Why worry about the State of The Union, when the very loss of the Union is Inevitable"!

The government can actually break even here if they do this the right way before there is a total complete meltdown which is inevitable in the current environment.

The eventual outcomes are:

Short & Mid Term: Tremendous Pain, Chaos, and an out of control spiraling deficit that will kill any type of economic expansion, but the market will stop going down!!!! They can save the economy, the banking system, and the country long term.

Long Term: A healthy Financial System to hand over to our kids.

Bush, Paulson, Obama, and Geithner have used up all of their bullets, there are no more guns or cannons left. There are no more alternatives.

That's it....I cant make it sound any better then that.

Self Fulfilling Prophecy

The Treasury, Government, and Barack Obama's own words have not quelled what the market feels is unavoidable, that is why rally attempts fail. Why have not the investment community listened to all of the talking heads on TV? Why don't they believe the Analysts who tell them that nationalization is not going to happen? Why are they not listening to the Bank Executives? Why is the market totally discounting what even the President is shouting at the top of his lungs? WHY?

Because the market is looking past the basic business models the banks have currently, and purely looking at the mathematical side of the equation. Most of the large banks just cant survive in their current state for the millions of reasons I have laid out in previous posts. The losses are incalculable, the equity is just not there on their books to cover for them. The banks refuse to mark down their Toxic Assets. They have far more other pressing problems stemming from a 30 year Credit Bubble, and they hide behind the fact that they have deposits to protect.

The collapse of many financials stock prices make it more difficult for banks to run their day to day activities. This has contributed to the loss of confidence. Its quite sad to keep hearing BOFA say that their business is great. We know the business is great. Banks have a great business model. They borrow short then lend long. They borrow money at nearly zero % then lend to us at 5-6-7%. Who cant make money in that environment? What the problem is, if they would have just stuck to that idea, they would not be in the mess they are in currently. The only ones who think BOFA is a buy here is the Corporate Communications Department at BOFA. Obviously they have not spoken to their largest shareholders who keep dumping.

Citigroup is in advanced talks with the Government in regards to an infusion of cash that would bring the Treasury's stake to 40%. Isn't this already nationalization?


Let me just say that I am not in favor of nationalization. Quite the contrary...This would be devastating not only to the Banking System, but would handcuff the U.S. Tax Payer for years, but this is the only real option on the table. All other attempts to stabilize the Banking System have failed miserably. How much more money, patience, and most importantly time have we wasted on these trivial proposals? They keep wasting time, and market is breaking technical barriers every day.

The market has already made up its mind on what the best course of action is, why has not the government?

What The Analysts Are Saying About The Banks

Reading a lot about how nationalization cant and wont happen.

Most analysts hate the idea of this, stating that it would "crush the bank stocks" (I think this is already the case).

"No intervention is needed as long as depositors are safe". This is a stupid statement, depositors will pull money out of a bank if they think the bank is in serious trouble. This in turn makes the banks insolvent. This is basic human nature, when we see trouble...we react spontaneously..for good or bad.

Reading that the "government shouldn't cater to the fears of Wall Street". This is another ludicrous statement, the government has been catering to Wall Street for 100 years. That is why we have TARP, TALF, Term Auctions, lower interest rates, forced mergers, and the backing of AIG, FNM, and Freddie. Do these people actually read over the things they write before they hit submit? Who proof reads their analyst reports?

"Customers will avoid a government owned bank", Ridiculous! Do customers currently feel warm and fuzzy with the likes of Pandit and Ken Lewis running their respective companies? Customers don't care unless the financial institution they currently have their life savings in is currently trading at $1.62! "Employees will avoid these type of companies". Most dumb statement ever, with the economy losing 600,000 jobs a month, people are not that selective with respect to where they work. They have bills to pay.

"Will the government ever be able to sell the banks back to the public"? Who knows?? The public currently doesn't want them anyway. The massive institutional selling in the financial space leads me to believe that no one wants financial exposure in their portfolios.

Analysts also claim that "the banks are liquid, so why liquidate"? The only reason they are liquid, is because of the U.S. Taxpayer. If the banks actually found religion (BTW- There is No God) they would mark down their toxic crap to 30 cents on the dollar instead of 70 cents on the dollar, where the market currently values them, but if they do, guess what? They are not that liquid any more.

In a much more "favorable environment, they would be in a better position to mange their business". I cant stop laughing reading that last one. This is a 100 year storm that has hit the credit markets. There is no favorable environment currently or even in the foreseeable future.

These analysts all should come clean and just state the obvious:

"We need the banks to be publicly traded companies because how else are we going to justify our absurd salaries"? "We need them to be publicly traded so we ourselves can do deals to support our investment banking business". "We can no longer screw the public tax payer if the government is running the banks".

You see...Is it that hard?

Don't believe this rally will hold, as the government keeps wanting to put a band aid on a patient that is being rolled into the morgue...

Please can we all just tag the toes of Bank Of America and Citigroup already?

Sunday, February 22, 2009

Conversations That I Had...Busy Week Ahead

I thought I would lighten it up a little before getting down to some serious things that I will be posting this week.

I was at my cousins 10 Year Wedding Anniversary this weekend, and the talk was pretty much centered around the following subjects:

In order of conversations that actually transpired.

1- How low can the market go?

2- How worse can the economy get?

3- Can housing stop going down? Please! I am begging you!

4- Why has Unleaded Gas gone up on the average .40 cents or so with Crude Oil collapsing every day?

5- The Republicans have some nerve after what they have let go the last 8 years to start being fiscally conservative! I mean they stood there and ear marked Trillions under Bush, and they bust Obama's Balls over $20 Billion here and there in his Stimulus Bill? Absurd!

6- Can A-ROD just shut his mouth? The more he speaks, the more the noose tightens around his neck....The Red Sox are still winning the east on Karma alone.

7-Are you married? I live just down the road.

8-Are the drinks really free here?

9-Is Obama going to Nationalize the Banks?

10- Are you married? Because you are not wearing a wedding ring.

11- I bought 3000 Shares of Citigroup at 23- What should I do? Buy more to lower my cost?

12- Damn dude...that girl is really hot! To bad your married. BTW-Where's your lovely Wife this evening?

13- The Giants can't be serious giving Eli Manning $125 Million? Can they? Those commercials he is in are awful.

14- Does Roger Federer need to cry every time he losses to Nadal? Did Tiger Woods ever shed any tears when he handed the Green Jacket to Phil Mickelson?

15-The Knicks are not that bad...Nate Robinson is the Man Bro!

16-I have a bad feeling that the Mets are going to deliver the final death blow to us this year...Couldn't Aaron Heilman, Billy Wagner, Luis Ayala, and the Wilpons be in Shea Stadium when they actually blew it up last week? Is that too much to ask?

17-The food here is good but what I need to know is? ....are you Single?

18- Brodeur is coming back soon...I cant wait...But Ovechkins the best in the league...Did you see that goal he scored?

19- How stupid is Johnny Damon for entrusting his money to Stanford Financial? He writes a book telling everyone he had an affair, then marries a girl straight out of see there is something called Karma.

20- I sure hope Mickey Rourke wins the Oscar...He deserves it after his dog died...but I am praying and rooting that Slumdog doesn't win because that movie which every Fake Phoney Pseudo Indian Person that I know watched and liked needs to be taken down a notch or three.

21- Do you really think Obama is going to nationalize the banks?

Happy Trading!

Friday, February 20, 2009

More Of The Same From DC....



White House: Privately Held Bk System "The Correct Way To Go"

These are the comments that are coming out of DC.

Makes you want to believe that no matter how much "CHANGE" there is....Things will always remain the same.

The only way to avoid a full blown depression is to nationalize the Financial Institutions.

My big thesis on Nationalization has always been not necessarily to create or spark a run in the equity on all of the banks, but to stop the pain the market has currently. That is the big fear. The stock market doesn't like the idea of nationalization, but what is worse is the panic that it is going to inflict once the devil is out of the bag. This will only increase the number of banks that will eventually need to be taken down. Right now, as we stand, BOFA, Citigroup, and to a lesser extent Wells Fargo needs to be taken under. If they are proactive, they can save most of these institutions. I mean is anyone in their right minds think that Citigroup and or BOFA can be saved at this point without government intervention? PNC, State Street, Bank Of NY, BB&T still have a future, but for how long? Once the public even has a remote idea that their money is not safe, they will deliver a classic once in a lifetime "Run On The Banks", completely wrecking not only the stock market but the whole structure of our economy.

I Cant Stress This Enough.....

DOW Down 1.82%
S&P Down 1.84%
NASDAQ Down 0.56%

I still believe that the Nasdaq and Tech will be the first to recover when the selling ends.

Thursday, February 19, 2009

Look For the Eventual Re-Balancing

Financials are slowly and painfully going into oblivion.

The PHLX KBW Banking Index currently stands at 22.32 down 5% for the day. The all time high is 121!!!

My continued thesis is that the market is trying to manage and gauge what the future holds for the market in general if there are no more publicly traded banks.

My take is that there is not going to be a whole sale or systematic nationalization of the banking system. What is going to happen is the Treasury is going to roll up all of the bad banks that probably wont pass the "Stress Test"

These are the banks that are sure to fail any type of "Stress Test"

Bank Of America
Fifth Third Bank Corp
Regions Financial
Huntington Bancshares
Marshall & Isley
Wells Fargo

These Banks I believe will pass any "Stress Test"

JP Morgan
State Street
Bank Of New York
PNC Financial

Does this mean that these particular banks are buys here? NO, but I do think those institutions will likely survive (stay public). Also of note the Metro NY Banks such as New York Community Bankcorp, Astoria Financial, and Hudson City Savings are also seeing severe selling pressure resulting from the potential of a Manhattan Real Estate downturn. I think these institutions in the end have value at much lower levels.

People have also asked me about American Express and Capital One Financial, lets just say I dislike Amex less. I do think that Capital One Financial has a future in its current form, but Amex is a better play all be it at much lower levels.

Mutual Fund managers will eventually have to totally re balance their portfolio holdings away from financials, that is why I continue to believe that Technology is the way to go to "outperform" the market, once the market comes to grips with the impending Financial Funeral.

I believe there is tremendous upside potential in the Energy Sector. Crude Oil is a commodity that is finite in nature, so there is value there...somewhere.

Nationalization Continued.....

I generally think now that this would be beneficial for the market. It takes away one major cancer that is spreading through our economy.

Obviously there is no cure for cancer, but there is a cure for the banks if the treasury does the right thing.

I think that once a Nationalization Plan is enacted, the market will re access and ultimately Institutions will re deploy there former financial exposure to other sectors such as Technology, Pharma, Bio-Tech, and Energy.

Just my 2 cents.

Bank Nationalization..Coming To a City Near You.

With the recent vicious declines even on the backs of the Stimulus Bill and Homeowner Bailout Plan leaves me to believe that some sort of Bank Nationalization Plan is in the works. The market is trading like this is almost a given.

Remember that Banks & Financials make up about anywhere from 16%-19% of the S&P 500, so you can see the pressure that the market is under currently.

Does it also help that Energy and its equivalents are in total liquidation mode? Energy & Energy Services make up close to 1/5Th of the S&P 500. So when you have these type of headwinds hitting these two huge industries, the answer is pretty clear.

Crude Oil has become so dependent on the general health of the global economy that any and all attempted rallies are sold off furiously.

But remember the market will re-balance itself, that is why I like tech here. Painfully a little early unfortunately.

Regional Bank Decline Worsens....


I have written in the past that the options activity currently in these portended imminent disaster and insolvency.

Unfortunately, these banks are not shortable as there is no stock borrowing of these securities any where on the street. But you can buy puts that are obviously very expensive.

With the way the markets are trading, it is for sure that a partial Bank Nationalization Plan is under way to roll up the following institutions:


The rest might have to file for some sort of pre-packaged bankruptcy.

Monday, February 16, 2009

More Numbers to Digest....

Japan GDP - Annualized (Revised)

1st Qtr = .06%
2nd Qtr = -3.6%
3rd Qtr = -2.3%
4th Qtr = -12.7%

World Economy

GDP Growth YOY

Japan = -12.7%
US = -.02%
UK = -1.8%
Europe = -1.2%

Sunday, February 15, 2009

Credit Default Swaps....The Ultimate Time Bomb! Part 1

What Are They?

A Credit Default Swap or a CDS Contract is just a derivative contract between two parties or people. These contracts come in various forms and time frames. What typically happens is that a buyer of a CDS contract pays the seller a payment (premium) and in return receives a payoff (In the event of a default) of the underlying asset. Basically its an insurance contract between two parties, with the caveat that the buyer doesn't really have to own the underlying asset being insured.

But in most cases, a normal swap contract is enacted as a way to hedge or limit losses due to interest rate or credit volatility.

The first Credit Default Swap contracts were invented at J.P. Morgan in 1997.

Historically the default rate on CDS Contracts are around 0.17% for Investment Grade Companies. This is the main reason why most Quantitative Models created never modeled for mark to market accounting or total default.

Credit default swaps were seen as easy money for banks and other financial institutions when they were first launched more than a decade ago. The reason? The economy was booming and corporate defaults were few back then, making the swaps a low-risk way to collect premiums and earn extra cash. The swaps focused primarily on municipal bonds and corporate debt in the 1990s, not on structured finance securities. Investors flocked to the swaps in the belief that big corporations would seldom go bust in such flourishing economic times.

The CDS market then expanded into structured finance, such as CDOs, that contained pools of mortgages. It also exploded into the secondary market, where speculative investors, hedge funds and others would buy and sell CDS instruments from the sidelines without having any direct relationship with the underlying investment. They're betting on whether the investments will succeed or fail. It's like betting on a sports event. The game is being played and you're not playing in the game, but people all over the country are betting on the outcome.

How They Work?

For example:

I have a car for which I buy insurance in the event of a accident. This is a normal insurance policy. The way a CDS Contract works is that I (Buyer) would buy a CDS contract underwritten versus my friend (Underlying Asset) who I know is a bad driver. Another friend (Counter Party) writes the contract. I pay the counter party a fee (Premium) as protection against my friend getting into a serious accident. If my friend continues to obey all driving rules and avoids accidents, the premium generally will stay constant for the life of the contract, and the counter party continues to collect "Risk Free Premiums". But if my friend gets into a serious accident, the premiums will sky rocket and my CDS Contracts are making money as the contract is more valuable. The counter party is now liable not only for any damages caused by the driver but also has to make up the difference (Mark To Market) the contract is now worth.

The idea or the reason to buy or sell these type of contracts is to take advantage of the price or spread that the buyer or seller is currently quoting.

For Example:

I am buying $1mm worth of protection against my friend, I pay 100 basis points to the seller. I then pay the seller $10,000 for the CDS Contract. I make money if the driver gets into an accident, and the premium shoots up to 300 basis points. The contract is now valued at $30,000, and I have a profit of $20,000. The seller is not only liable for the losses stemming form the accident, but also has to put up a margin (%Difference between 10K and 30K) to me.

CDS contracts don't trade on any regulated exchange, thus are not normally registered or regulated...This is what makes the counter party risk that we are experiencing. There was never a regulating body exercising any control on who is buying or selling these type of derivative contracts.

In theory, the higher the CDS associated with a company, the higher chance of default or bankruptcy.

Like most financial instruments, CDS are created and formed for:

1- Speculation
2- Hedging / Insurance
3- Arbitrage

CDS are traded over the counter between 2 people or dealers who are trying to gain an advantage with regards to the spread within a given period of time.

If a credit event does occur, one of two things can happen:

1-Physical Settlement - The seller pays the buyer par value for the debt being insured, and the buyer delivers the bonds.

2-Cash Settlement- The seller pays the difference between par and the current market price for the bonds being insured.

If in the event a large default takes place where many CDS Contracts are underwritten, an auction settled by the International Swaps and Derivatives Association (ISDA) takes place.

Also in the event of a default, because of the heavy trading volume inherent with CDS Instruments, the secrecy involving CDS transactions, and most importantly the lack of any regulation, an original CDS instrument can go through 20-25 trades, so when a default occurs, the so-called insured party or hedged party doesn't know who's responsible for making up the default and if that end player has the resources to cure the default.

What Is The Market?

Year End Values - Source: International Swaps and Derivatives Association (ISDA)

2001: $918 billion
2002: $2.2 trillion
2003: $3.8 trillion
2004: $8.4 trillion
2005: $17.1 trillion
2006: $34.4 trillion
2007: $62.3 trillion
2008: $54.6 trillion

The total market capitalization of all publicly traded companies in the world was US$51.2 trillion as of January 2007.

The Total US Mortgage Market is roughly $10 Trillion in 2008

As of 2008 the size of the international bond market was $48 Trillion

The U.S. Bond Market has roughly $30 Trillion of debt outstanding as of 2008

You get the picture!

Recent 2009 Figures - $27.5 Trillion

More and more of these contracts are being either offset and settled because of bankruptcy, insolvency, auctions, or mark downs.

In 2008, The top 25 Largest Banks held $13Trillion in CDS obligations. acting either as the insurer or insured.

What Are the Benchmarks?

The most liquid instruments in the CDS Market are the benchmark indexes that reference the 5 Year Debt of companies.

Markit iTraxx Europe - based on 125 European investment-grade companies
Markit iTraxx Crossover - based on 50 European companies mostly junk-rated with stable outlook
Markit CDX IG -based on 125 investment-grade North American companies
Markit CDX HY -based on 100 North American companies that do not rank as investment grade

Part 2 We Will discuss what happened to the CDS Market that contributed to the Global Credit Meltdown.

Numbers to Digest....

U.S. and Foreign Banks have reported a slew of write downs since the Mortgage crisis emerged as rising unemployment and a weak housing market have walloped consumers. Since the credit crunch began in mid-2007, U.S. and Foreign Banks have reported more than $700 billion of write downs.

Please see below the damage.

Write Downs

Citigroup $88.3
Wachovia Corp $72.7
Merrill Lynch & Co $63.7
UBS $48.7 AIG $42.1
Washington Mutual $41.3
National City $25.8
HSBC Holdings $23.6
Bank of America $21.5
Morgan Stanley $19.4
Freddie Mac $19.4
Lehman Brothers $18.2
Royal Bank of Scotland $17.1
IKB $14.7
Fannie Mae $14.5
Barclays $14.4
Lloyd's TSB $12.7
AMBAC $12.0
Credit Suisse $12.0
JPMorgan Chase & Co $11.5
Deutsche Bank $11.1
MBIA $9.9
ING $9.8
Wells Fargo & Co $8.7
Bayerische Landesbank $8.6
Munich Re $8.5
DZ Bank $6.8
Canadian Imperial Bank of Commerce $6.5
Societe Generale $6.4 Dresdner Bank $5.0
Goldman Sachs Group $4.9
Bear Stearns $3.4
Fortis $3.1
WestLB $3.0
BNP Paribas $2.7
Unicredit $2.7
Swiss Re $2.6
Indymac Bancorp $2.2
Natixis $2.0
HSH Nordbank $1.7
LBBW $1.7
Commerzbank $1.2
AXA $1.1


Citigroup $50B
AIG $40B
Wells Fargo $25B
JP Morgan 25B
Goldman Sachs 10B
Morgan Stanley 10B
US Banccorp 6.5B
PNC Financial 7.5B
Capital One 3.5B
American Express 3.3B

Friday, February 13, 2009

Stimulus...Will it Work?

Looks like the market is trying very hard to make up some lost ground this week. The market has made up losses in the afternoon the last 2 days. We were down 240+ yesterday, and was able to make up almost all of the losses on strenght in tech. Today, we were down almost 100, but trying to make up some ground currently. Crude Oil is also trying to retrace some lost losses. I think the last two days the market is trying to find some sort of bottom, as news of the Stimulus Plan approval is heating up. Question is how will or will the Stimulus Plan work? My take:

It will have some sort of short term positive aspect on the market as evidenced by the way high tech has acted the last few days. I am a true believer in that Technology must lead the market out of its rut, and in the short term I am seeing that.

The Obama Stimulus Plan is not going to help the economy in the short term, its not going to stop the pace of job losses, or even the problems the banks have. What it will do is have some effect towards the end of the year, but most importantly this will hit our economy in 2010. Which I think is the perfect situation, because I think the economy will start to pick up again in terms of positive GDP revisions starting in 4Th QTR 2009. I also think housing bottoms in 1st-2ND QTR 2010, right when the economy will feel the full effect of the Obama Stimulus. Also by the end of the year you will see a deceleration in job losses. Remember that the stock market moves about 6-9 months ahead of the macro economy. You see.....I told you this Obama guy knows what he is doing! America did the right thing.

Again....Am I saying the market has bottomed? NO!
Am I saying put all of your money in the market? NO!
There are still tons of issues effecting our delicate financial system. I still think Bank Nationalization is inevitable, and that other asset classes like:

1- Hybrid Securities
2- Commercial Real Estate
3-Credit Card Delinquencies
4- Auto Loan Problems
5- Continued job losses

Still pose a huge burden on the system, but with this Stimulus Plan going into effect, as well as any type of a "Real Housing Plan" can severely limit the losses the market could have had with out such plans.


Happy Trading-


Continues to outperform.

DOW down .90%
S&P down .83%
NAZ down .39%

More green in technology and energy. I think those are the areas to be currently.
Continue to stay away from the Financials. The reason I am not short them is very simply, they are due for a major short cover bounce.

Thursday, February 12, 2009

Clarification on Earlier Post

People have just asked me:

Are you now long the financials? Why not short anymore after killing them in each previous post?

Easy Answer: I don't like the financials, there is not ONE FINANCIAL STOCK I would buy in America.
But...then again...Trading is an ART FORM....The most important thing when trading stocks is to keep your eye on the ball. Opinions don't matter. Do what the market is telling you. Always take the profits when they are there to be taken. Always live to fight another day! I am quite concerned that the banks can go down further, but I am more concerned about a super short cover rally that would obliterate my profits. Its all about execution!

I personally think that the financials will be a lot lower then they are today, 1 month from now, 3 months from know, will they be around 6 months from now? Who knows? I have my opinion, I think I am right, but what good is it to be short for the right reasons, and the market is ripping against you? Bottom line- Do what the market is telling you. The market is telling me that 7500 could lend to be some sort of support, thus some short covering will kick in and take the mkt higher. BTW- the financials are the most heavily shorted sector on the street, you don't think they will rally 20-30% if things ignite?

The one problem with living on the short side is there are times when all of the facts say down, but the market is ready to move higher and against you. You have to be able to realize that you are wrong regardless of what the facts say. EXECUTE!

You like the market now?

EASY ANSWER: I like the NASDAQ names better. I have said previously that the NASDAQ has stopped going down. Its an Opinion. I hope it works out.
I still think the market will test the lows in November when the DOW hit 7500. I don't think the S&P 500 will test the lows at 740, partly because the NASDAQ has outperformed (Relative).
I think the S&P bottoms at 790-800 Short Term.
I am looking for a bit of a rally after we shake people out from here partly because of:

1- Detailed information on Housing Package from Geithner & Obama
2- To much short term negativity- Long term its justified.
3- Outperformance of NASDAQ Horseman - INTC MSFT CSCO ORCL GOOG - It looks like these stocks have finally stopped going down.

Hey- Am I saying the market has stopped going down, Green Light from here? All systems go?
NOPE- Just that all of the MOONS are positioned for a bit of a rally soon, regardless of the facts.

Happy Trading-

What's Working In This Market?

Well for starters:
Being Short the Banks - LOL!!

Just Kidding-

I just covered my financial shorts as the strength in the NASDAQ is pushing the S&P Futures higher as we speak. I still think the market needs to test the low of 7500 on the DOW and 790-800 on the S&P 500, but it will do it without me being short. I think the risks far out weigh the reward at this moment. I foresee a 1000-1500 point move higher in the DOW in the coming months as more and more details of the housing plan come across.

Those Retail Sales numbers that came out this morning have me a little more optimistic then I was yesterday. Remember we the consumer make up 2/3 of GDP, and that number cant be ignored, how ever the number was spun by the government.


This is what I think is working in this market:

I think the NASDAQ and High Tech in general are definitely in the 9Th inning of its correction. Its stopped going down relative to the S&P 500 and DOW.

I think if you have a 6-12 month investment horizon, you can safely buy the following:


I think Crude Oil which will trade with the consumer is headed higher.

Watch the Energy Stocks.

Good Luck

Stick With The NASDAQ

Dow down 2.14%
S&P down 2.04%
NAZ down 1.11%

Looks to me that the NASDAQ is the place to be when the market bottoms.

Like I said earlier, buy the NASDAQ Horseman

RIMM - forecasted a bad earnings quarter, but stock is up today in down market.

Futures Look Weak

Current Stock Index Futures are pointing to a 100 point loss or roughly 1.5% downdraft on the open on weakness from European and Asian Markets. Spain is officially in a recession.

Continuing unemployment claims were in in-line with expectations, but continuing claims increased more then expectations. On a positive note, Retail Sales were very strong in January rising 1%. Stock Futures have sold off badly here the last 3o minutes as there is just more and more bad news flow in the financials. The Wall Street Journal has an article about the troubles in the $700 billion Hybrid Securities Market. More negative stuff about the state of the Commercial Real Estate market as well.

More On The Binary Question

Few of my friends (Yes- I do have them) were asking me to clarify what I meant by the term Binary which I used to describe the investment stance on some of the financial institutions.

Binary means composed of two parts or a representation of a number that has only two digits, usually 0 and 1. Meaning that there is only two likely mathematical outcomes from any decision or action. Another way to explain is any action that has only two arguments.

How this relates to the banks is easy. An investment in some or most financial institutions currently such as a Royal Bank of Scotland, Citigroup, BOFA, or Barclay's will in the end have only two likely outcomes. Its really like a lottery ticket. You pay a buck for it (Dollar and a Dream), you either lose it all or win it big. The outcomes are the following:

1-Total Equity Wipe out resulting from a Nationalization or:
2-The significant upside stock performance potential that would exist if these banks can some how survive and the economy moves to a more "normal" environment.

I was reading that some of these banks are good gambles at such low expectations. For Example the following UK Banks could represent some value as a "gamble" as the odds of full nationalization of RBS & Barclay's are at anywhere from 60% to 85%.

1-RBS - Royal Bank Of Scotland - roughly 70-80% owned by the British Government. Trading at
.35 of Book Value

2-Barclay's - Trading at .60 of Book Value.

Both of these institutions have nearly doubled from their lows from a few weeks ago.
Take it for what that is worth.

Wednesday, February 11, 2009

Bank Ownership - A Binary Question?

Is owning any one of the major banks/financial institutions becoming a Binary Issue?
Meaning that at the end of the day, there is only 2 likely outcomes - Survival or Nationalization?

Many of the European Institutions such as Royal Bank Of Scotland, Barclay's, and Union Bank Of Switzerland are in this category. RBS for all practical purposes has been nationalized as 80% of the institution is owned by the Bank Of England. Barclay's and UBS have most probably another round of write downs and will need to raise additional cash to keep their Tier 1 Capital Ratio's stable.

The financials are rallying today as there is a tug of war going on with respect to the announced Govt. Bank Bailout. J.P. Morgan is on the tape announcing that credit card losses will equal $10 Billion for 2009.

CEO's from Citigroup, JPM, and BOFA are on Capital Hill explaining their incompetence in handling their banks finances. Stating the obvious, "we really didn't screw up, its the short sellers who are to blame, its vicious rumors, shit happens, yada yada yada"

Oh yeah...the best one - "we have substantially increased our personal stakes in our companies"
Please don't nationalize us.

Don't count on it.

Classic Fade The Tape....

After Yesterdays bog drop the market is set for a slightly higher open 35-45 points higher on the Dow. I believe investors will "fade the tape" on the open, meaning they will sell into any advances they see when stocks begin to trade.

I still see 7500 as the next support for the market.

Tuesday, February 10, 2009

When Was The Last Time....

You had a STRESS TEST?

Evidently the Treasuries idea of a sound financial system is contingent upon a positive "Stress Test"

The horrific slide in most of the regional banks has to do with this particular proposal.

All banks with more than $100 billion in assets will be required to submit to the test, unveiled as part of Treasury's Financial Stability Plan to tackle the economic crisis.

That level of assets encompasses such institutions as BAC, JPM, and WFC, all of which have dropped badly this afternoon.

Some other institutions, most notably the regional banks will face a much steeper test.

Banks like SunTrust, Huntington, Comerica, Fifth Third, and Regions Financial all have major issues with regards to equity capital on their balance sheets, if the test was administered today, they would all fail miserably....Like we didn't know this earlier.

If a bank passes the test, they will be given capital to buffer some of their losses.

From the looks of it, most of these banks are DOA.

Regional Banks

STI - Suntrust
ZION - Zions Bank
FITB - Fifth Third Bank
RF - Regions Financial
HBAN -Huntington Bancshares
MI - Marshall & Isley
CMA - Comercia

Are all down 20% or more as the death spiral continues.

There is absolutely no hope for any of these banks in their current state.
The next thing is to call the priest.

Geithner, The Bailout, and The Banks.

OK...back to the negatives.
The shorts and more importantly the sellers have wrestled control of the market once again. There are multiple sell programs involving the banks sitting on trading desks. Its better to be on the sell/short side at this moment.

This could be a real ugly close today as Geithner's plan really isn't a plan. Its really a reiteration of the existing TARP program, which is a major waste of tax payer money.

Geithner's plan to use private money is going to fail because who in their right minds would buy these rotten MBS securities? Surely not the same hedge funds who have been buying CDS Protection, then subsequently shorting the bank stocks??? Are you kidding me? Why would they do this?

Also, the type of money needed to bailout BOFA, Citigroup, Wells Fargo, etc is such a number that most private equity/hedge funds would not be able to afford it. So the only option is to:


With again NATIONALIZATION being the only answer. That is what is forcing the action today.

Most institutions have come to the understanding that some sort of action other then a tax payer equity partnership has to happen. To bad that type of action will most likely kill the equity shareholder.

I don't understand after all we have been through, this is the best the Treasury can do? WEAK!

Also- there is no mention of an actual Housing Rescue Plan, they have postponed this till a few weeks from today. Possibly because they wanted to gauge the markets reaction to this particular Bailout Plan. Well - We all know the markets reaction. I think the market tests the lows at around 7500 or so on the Dow.

I am actually interested in the Housing component of his plan, from what I am hearing there are some forward thinking aspects embedded into it. If this housing plan reduces mortgage costs and rates, creates a stable secondary market for MBS, and some how lets home owners sleep in their homes, we may see an intermediate bottom in the averages.

You Want Positive's?

Here we go-

Buy the NASDAQ Horseman!

It looks like they have finally stopped going down relative to the market.


All of these companies reported horrible earnings reports yet there stock prices have risen since their earnings announcements.

INTC, MSFT, CSCO, and ORCL all have good balance sheets with lots of cash to spend on research and development. When the broader market shakes out of its funk, these will be the first companies to come back.

Again- This is a 6-12 Month trade.

Why So Negative?

Many people have stated that I am too negative on the market, surely this is a contra indicator? Maybe? But being negative has worked since early Labor Day - Hasn't it?

This market correction is serious and its not our run of the mill correction. Usually markets have some sort of "dead cat' bounce, and you have seen a few furious rallies since, most notably in early Oct, late Oct before the election, then a late November rally, followed by an end of year rally, but the market currently stands only 500 Dow points below the November lows. So why hasn't the market rallied and stayed near higher levels? The most simplest of answers is that too many Institutions own too many bad companies at much higher levels, as soon as the market lifts, people sell to get at least even or to minimize some of their pain. There is too much over head supply of stock bought at much higher levels that investors are trading out of every time the market rallies, this coupled with forced liquidation from the likes of hedge funds, retail investors, and blown out investment houses (Lehman & Bear- Just to name a few) have made any type of push higher impossible. I have not even gone into the Macro Issues that the market is currently facing.

Has anything changed?

The Geithner Plan is slowly hitting the news wires. The important facts:

1- Expansion of TALF to $1 Trillion.
2- Only certain MBS Securities are eligible - BAD NEWS!
3- All of TALF to be financed/funded through TARP - BAD NEWS!
4- Comprehensive Housing Program - No Details - BAD NEWS!

This Bailout Plan won't get through Congress. Not a chance.

Not friendly news as the market is sinking fast. Sell the News

More on the Moose...

Morgan Stanley or "The Moose" as us Traders so affectionately call them, rallied nicely intraday yesterday, after not participating in Friday's financials rally.

The Moose has been strong of late (Good Looking Chart), but does that mean that the company no longer needs to do the following?

1-Stop Write downs and Reserve Build Up?
2-Raise significant amounts of cash so they can pay back the TARP money?
3-Cut the dividend?
4-Reduce leverage?

Chief Executive John Mack was on Bloomberg (Give him some credit) stating the dividend is safe, what else is he going to say? If The Moose wants to pay back the TARP money as they have publicly stated, they need to raise significant cash. Why would Mack say he is cutting the dividend in front of a public offering? Think people!

Lets give the Moose some credit, they have made strides with their liquidity and have reduced their leverage, you have to remember, they have filed to become a Bank Holding Company, so technically this was a must. But what is worrisome is that there is talk that they will go back to re-leverage themselves after they pay back TARP. Have they not learned the lesson of too much leverage? Also is The Moose not immune to the same disastrous end of year mark downs in leveraged loan positions, correlation trades, Commercial Real Estate, and CDO/CDS positions like Merrill Lynch. Is the worst over?

Are they immune to the global economy which is getting worse? Their commercial real estate portfolio is large and is the next major danger area in my opinion.

Monday, February 9, 2009

Funny Stuff from General Motors...

Just reading that Vice Chairman Bob Lutz feels comfortable handing over the keys to Tom Stephens. "Tom will do a great job ensuring the continued excellence of GM's new cars, trucks and crossovers, and he has a great team already in place to help and I remain as confident as ever in the future of General Motors and the continued excellence of its products,"

He has a great team all right - The U.S. TAXPAYER!!!

Has Bob Lutz been in a coma for the last 6 Months? Has he noticed the stock price? Has he noticed Rick Wagoner pleading to Congress on his hands and knees?

How much more lipstick do you need?

Sometimes you really cant make things up.

Bank Of America's Real Problem.....

We all thought that the Merrill Lynch deal would be BOFA's Waterloo, it still should, and will eventually bring the nationalization of this institution, but new information has come out on the Countrywide and LaSalle Financial deals that BOFA completed. I don't understand when Ken Lewis (CEO) says that business at Countrywide is on "fire". What does he mean by this statement? Is it on fire enough to wipe out close to $33 Billion in potential losses that various Analysts have currently modeled for Countrywide? This is roughly $10 Billion more then what BOFA has taken provisions for. Where is the money to cover these incremental losses? How about the LaSalle Financial deal? This deal has BOFA exposed to billions in commercial real estate losses.

Also, Lewis currently thinks that unemployment will peak at about 9%, most economists think 9% is the best case estimate, with estimates peaking at 12-14%. So does this mean that BOFA is only internally modeling 9% worse case unemployment with regards to their internal projections for:

1-Credit Card Losses
2-Potential Reserve Build Up
3-Auto Loan Delinquencies
4-Mortgage and Home Equity losses
5-Commercial Real Estate

If this is the case, BOFA is in more serious trouble then previously imagined.
All of this leads me to believe that Ken Lewis is giving us the same chatter that Dick Fuld & Alan Schwartz gave us just days before Lehman and Bear Stearns imploded.

Don't believe a person who would come on TV and make excuses for his lack of due diligence, while only making derogatory remarks about the current BOFA situation.

He offers no real plan to save this institution, only to give BOFA some time and things will work out eventually with regards to the Merrill and Countrywide Deals.

Hmmm...TIME...if that's what it really takes, wouldn't that be what Bear Stearns, Lehman, Wachovia, Fannie, Freddie, AIG, and WAMU really needed in the end?

More On the Bank Bailout.....

Investors are cautiously waiting for the word on the potential bailout for the banking system that is currently scheduled for tomorrow morning.

I have previously stated that what ever is announced, how potentially ground breaking it is, how it may make bank balance sheets look better, how will it make the banks start lending again? The economy needs to liquefy, meaning credit has got to start flowing to ever day people. Currently the LIBOR to OIS Spread is still suggesting that large investors and institutions are not willing to borrow.

Once they get the details of the bailout, what makes people so sure it can then be pushed through Congress? From looking at the fighting over the Stimulus Bill, this is going to be an up hill battle for Obama and Geithner. Even after getting it through Congress, it will then have the same problems that TARP had...mainly:

2-Proper Due Diligence
4-Accurate Pricing of Securities.

What makes investors more nervous, is this particular bailout only deals with mortgage assets on financial balance sheets...We have not even begun to investigate the potential meltdown of the following instruments:

1-Commercial Real Estate
2-Home Equity Loans
3-Credit Card Receivables
4-Auto Loans
5-Student Loans to some certain extent.

Commercial Real Estate is just becoming a problem as Moody's is already investigating the possible downgrade of tens of billions of bonds secured by real estate.

All major financial institutions have already started to factor in double the losses thus are taking double the reserves for credit card losses.

The main idea that has not been discussed or not at the fore front, is a modified mortgage plan for Home Owners, that would enable them to sty in their homes. The government is working on some sort of plan, but its not aggressive enough.

Sunday, February 8, 2009

Obama's Stimulus Package.....

...."You're gonna need a bigger boat"

I remember the late Roy Schieder's famous line in JAWS, when he first saw the shark.

This is what Barack Obama, his administration and our elected officials soon are going to find out about the problems the economy is truly facing. I still don't think people are taking the problems the economy has seriously. How else do you explain and or reconcile what is going in Washington DC right now?

The Democrats are stuffing the Stimulus Bill with classic absurd liberal spending , that is forcing the Republicans to take on a opposition stance. This bill if passed, will not be the Obama Stimulus Bill, it will be the Nancy Pelosi/Harry Reid Bill. Not good for Democrats when mid term elections come around. Both parties are wrong.

What is happening right now is we are in a recession, not a horrible one yet, but still a painful one. We are headed for a big recession, (not a depression), if the powers that be don't realize that the Stimulus needs to be in the range of $2-3 Trillion, If not, this Stimulus Plan will also be a waste of money.

Just think about it, how much money has been lost the last 6-12 months from the wealth effect? frozen credit? loss of jobs? loan activity? Any type of Stimulus would nearly have to equal what was lost correct? From what we have seen its all partisan politics to give special interests what they need at the expense of the ones that were hurt most - Home Owners and the Tax Payer.

In actuality, $2-3 Trillion probably would not be enough anyway, but it would send a strong message that they at least are taking the issue seriously.

Geithner And The Bank Bailout

Treasury Secretary Tim Geithner was supposed to announce his Bank Bailout Plan Monday Morning at 9am, but that has been delayed so that there can be more emphasis on passing the Stimulus Package. This is not good news. Stock index futures have dropped about 7 points in response to this announcement. The administration believes putting to much out their for people to chew on was not feasible, so they are sticking to getting the Stimulus Package passed, which is not looking good currently, as Congressional Republicans, weary of 8 years of George Bush, have gone back to their traditional roots of tax cuts, limited government, and fiscal responsibility. Lots of Republicans are still feeling the effects of TARP gone wrong, so they will be very diligent in any new spending policies.

Geithner's original plan for the banks was centered on using private sector money along with TARP money to create a "Bad Bank" scenario to buy toxic troubled assets from financial institutions. It was believed that private sector money would be used to get more accurate pricing for these mortgage securities.

But again...the problem they are encountering is how to get accurate and honest pricing for these securities. If the Treasury paid to much for them, its a waste of tax payer money, if they get too little for them, the banks would have to take further right downs. Considering that Round 1 of TARP has screwed the U.S. Tax Payer, why not price the securities below the worst level of pricing out there? Let the Banks take further write downs, they are insolvent anyway with these securities on their books, without them, they are at least viable institutions, let them then go to the equity markets to raise the cash. They need to do this anyway currently, it would be much easier to raise money if your balance sheet is free and clear of these toxic illiquid securities.

But what is certain is that some sort of "Bad" or "Aggregator" Bank is going to be set as soon as possible. What is also on tap is more equity funneled to the banks, and some sort of additional help for the homeowner.


Housing...The Key to the Turn Around?

I have been speaking to my dad as well as ten other friends and family about when the Stock Market would turn. I got to the point of continually repeating myself like a broken record, that I finally said "enough is enough". (The reason this BLOG exists). These are the facts, and don't shoot the messenger.

1- The economy lost 598,000 jobs last month. The November and December Unemployment numbers were also revised up, meaning this months dismal numbers will look even worse next month. This is the most job losses since the mid 70's (When the NY Islanders were winning). The unemployment rate rose to 7.6%, the most since 1992(The last time Baseball's Pittsburgh Pirates had a winning season). There is no reason to believe these numbers are turning around anytime soon, just from looking at the daily headlines of layoffs, office/store closings, bankruptcies.

2- GDP revisions are still coming down not only in the U.S., but globally. Watch the price of Crude Oil! All recent rally attempts in Crude have been wiped out as investors have abandoned the global growth thesis, and been forced to liquidate positions and or waiting to liquidate holdings they have purchased at higher levels. But as soon as Asia, especially China (Wild Card) start to have confidence in their economies, you will most likely see a surge in Crude Oil. The Shanghai Stock Index has rallied very nicely this year, although its one of the worst performing of the major indices.

3- The Financials still have considerable headwinds. Will Geithners Plan stop the pain?

The above three reasons have all contributed to low or non existent Investor Confidence. Markets don't rally when people don't care. Markets rally when people have confidence in the system. Anybody who tells you anything different, doesn't know his ass from his elbow.

I am not surprised that the market actually rallied Friday, it looks like 8000 on the Dow is holding for the time being. You may see a nice rally up to 8500-8750 in the Dow, if the Obamo Stimulus Plan is approved by the House and Senate(Major If), coupled with Tim Geithner's Plan for the banks coming out Monday morning. (More on this in a future post).

But Gun to Head, the single most important event that would change all of this for the better is the Housing Situation. If Housing can somehow stop going down, just stabilize so home owners can take a breathe and move away from the ledge, so financials and banks can properly price their toxic securities on their books, trading desks can have go out and make proper bids and offers, the securitization market can go back to what they do, and most importantly Banks can once again do what they do best - Which is to LEND. Right now as housing is still in a free fall, its nearly impossible for any one of these scenario's to take hold. Home prices in many markets are still being based on the foreclosure price. This is the single most devastating issue that is effecting housing. How do you stop this? How do you stop people from walking away from their homes? How do you stop the banks from foreclosing on home owners? I don't have the answer to these questions, sorry, partly due to the fact that the government is still convinced that fixing the banks will fix housing, wrong!....Fixing or trying to find a solution for home owners will fix the banks, thus stabilize housing. This unfortunately will only dawn on Obama and Geithner towards the end of this year after this round of stimulus fails, and its going to fail.

Why hasn't the treasury further worked on refinancing existing under water mortgages? Work with Fannie and Freddie to reduce mortgage costs? Make it easier for home owners not to walk away? This is the U.S. Government we are talking about, they have toppled other governments. They cant find a solution for their own taxpayers? Surely it sounds easy, but the fact remains, Congress and the powers that be do not want to be the ones held responsible for a total whole sale bailout of the U.S. Home Owner!...There is no money in it for them in terms of campaign contributions, thus no motivation for them to do so.
Remember...PACS, lobbyists, and special interest groups run DC, not Ralph Nader. Wall Street and the financial institutions have huge lobbyists who are in meetings and conference calls all day making sure that they get bailed out not the Home Owner. Follow the Money!

So in the absence of doing the right thing, you have to leave it to time to heal all wounds (Doesn't it always anyway after considerable needless pain?), which will be sometime in 1st-2ND qtr 2010 when housing stops accelerating downwards.

Obama seems to be a pragmatic guy, but he is walking on egg shells as he tries not to upset the delicate balance in DC. I am sure he will find a way, but it may be already 2 outs no one on base bottom of the 9Th inning.