Thursday, July 29, 2010

This Rally Likely Over

Weekly initial claims were slightly better than expected as they came in at 457K, but its still to high at this point of the economic recovery. This really should be below 400K, and the print that we saw this morning is a serious concern. What's worse is that initial claims have been stuck in neutral for the last 8 months or so and suggests continued economic weakness. I am sure that this figure will start to print near 500K in the future. Let me say this. This market is not pricing in claims above 500K.  SP Futures rallied strongly after the claims figures came out printing all the way to 1112 in the pre-market. As soon as the market opened it looks like they are pairing back all of its gains as we are even for the day at 1102. Bond futures where the smart money resides are also higher as 10Y futures are up 14 ticks, pushing yields below 3% to 2.98%.

 I have stated that yields are going lower as risk aversion will take hold going into the fall. Even with equities catching a risk bid, bond futures are stubbornly strong. In short, bonds are not falling for the global growth story. They are much more in love with the idea of much slower growth, deleveraging, and deflation. These three themes are kryptonite for equities. I expect both the 30Y and 10Y bond futures to hit new highs going into the fall. This will have a calamitous effect on the risk trade. Like I said earlier. When Bonds are rallying and the US Dollar is weak, you better run for the hills and out of equities. We have found out that the USD rally we saw starting in mid April was basically a weak Euro story. The USD was simply a less ugly currency than the Euro. The Euro and the USD are fundamentally weak currencies. Trichet and his ECB cohorts are not living in reality. They talk about austerity but somehow how been convinced that looming debt problems are easily taken care off by the printing press.  Over on this side of the pond, it just seems to me that Geithner and Bernanke are hell bent on taking the country over the cliff at any cost. The Euro is fundamentally and structurally a weaker currency that the greenback, even though the USD has lost some 90% of its purchasing power since 1900.

Today was looking like a big day for equities. Claims figures were pumping futures higher ahead of the open, but I am thinking that the dual hydra of a weaker dollar and stronger bonds have taken a toll on risk. Its a big day but also a scary one because my view is crystal clear even though its at odds with conventional wisdom. I am putting myself on the edge. The Euro which has had a major run from 1.19 to 1.31, is about to get hit as continued funding problems in the inter market lending arena will make credit very scarce. I am sure we will see USD gains simply on the fact of Euro liquidation. There have been rumors that the Swiss National Bank has been selling Euro's. From this I see commodities like Crude and Copper to come under pressure, although  I still like Crude because of geopolitical issues in North Korea and Iran.

I am looking for a medium turn reversal here in equities as well as credit going forward. During the last severe correction in the SPX towards 1010, we actually saw credit outperform equities. This emboldened the bulls to run up the SPX to 1121 this week. As I wrote yesterday, you have to respect credit and risk at the moment. Euribor and Euro Libor lending markets are getting no respect despite the Euro Stress Tests and equities are indiscriminately being bid up in Europe. This is simply lunatic behavior.

The major correction in this market I believe begins after labor day. There will be a return to dark times in September and October, with a sharp decline driven by liquidity and solvency issues likely to set the world back on a recessionary course.  The widespread conviction that the 2008 recession is over and that the global growth story is back in gear is simply wrong. All the forecasts of the G-20 governments are completely off base, which means that the politicians are not prepared for another downturn. Can the US sustain another leg down? How about Europe? Do central bankers have enough bullets?

The financial underpinnings of the Euro zone do not look as though they can tolerate a recession in the coming year. The recent bogus Euro stress tests has shown that an economic decline would be disastrous for the banks. Even though the tests were easy to pass, only marking down the small fraction of sovereign debt held in the trading accounts, among other things, many of the banks still had low tier one capital ratios. If even one Euro zone government finds itself unable to roll over their debt, the whole system will come tumbling down. You have to be negative on the Euro based on this as there will be a structural restructuring of Euro Zone Debt across the board starting in 2011.

A recession in the US might imply a collapse in the municipal market as many states and lesser jurisdictions will find themselves forced into bankruptcy, but the banks and major corporations are more liquid in the US and therefore stronger, than their counterparts in Europe. Bad loan write-downs are a joke for both European and US Financial institutions, but US banks have at least admitted to bad loans. The recent stress tests in Europe highlight this.

The US will come out better than Europe when its all said and then. In either case, a severe downturn will hurt global economies. Deleveraging will be the primary theme going into 2011.

I shall leave you with a link about stock markets and astronomy/astrology.

The greatest trick the devil ever pulled was convincing the world he didn’t exist. Central Bankers like Bernanke and Trichet's trick is to convince us that the debt doesn't exist or worse doesn't matter.

Wednesday, July 28, 2010

Europe Interbank Lending Rates Still Rising

The MSM has been spewing how great the European stress tests have been. How investor confidence has been restored. Well if that was the ultimate motive of the stress tests then they did succeed because it was all one big PR Hoax.

Again, as I have been posting over the last year, equity investors are generally the dumbest investors out there. So far the last week, they have been running up European equities like its 2007, but one only has to look at where the real money is invested.

European Interbank lending rates continue to rise. If the stress tests have in fact been successful, why then are the 3M Euribor and 3M Euro Libor rates still rising?

European CP rates are also rising. The Euro has been strong only because of speculative short positions need to be bought back. As soon as this short covering spree is over I see the Euro back down to $1.20.

CNBC, GE, And Jim Rodgers

CNBC has been on a personal jihad against all that think that they are nothing but useless pustules. They have been producing more and more "hard" hitting documentaries. From the Mafia on Wall Street to Counterfeiting of goods, we have been alerted by these pustules that they indeed have something to say.

Well, if CNBC is really serious about investigative reporting, how about doing an in depth, hard hitting, on the seat of your pants documentary on this little story about their parent company?

GE pays $23M to settle Iraq kickback charges

Do you think Carl Quintanilla or Becky Quick can muster the courage to do a piece on GE?

I don't think so, it just means we will see more poorly produced documentaries in the near future. If CNBC sticks to the script, look for a documentary on how the International Banks gutted the global economy in about 10 years. That is pretty much the time gap that CNBC is on.

The following piece by Jim Rodgers is classic. He was on CNBC yesterday.

The best part is at 2:48 of the piece where the two bimbo CNBC hosts start to talk about the European Stress Tests. They try to explain to Jim Rodgers that the stress tests were legitimate and that all is well in Europe. Jim Rodgers has this smile on his face like "You two really are easy to convince."

CNBC along with Bloomberg News are nothing more than a PR Agency for Wall Street and Big Business. 

Monday, July 26, 2010

Don't Believe The Hype

Last Tuesday I had posted that the market was about to bottom short term.


The SPX is currently hugging its 200DMA at 1113 after a big rally that started Thursday. The Wednesday downdraft at the moment looks like a bull trap as more bogus economic reports came out of Europe. What the sheep don't understand is that Germany and to a lesser extent France are the only countries worth a damn in that continent. If you back out Germany and France, you basically have Berlin right after WWII ended. Europe has massive mid/long term fiscal problems. They must get their act in order. The Stress tests are bogus. We all knew this well before Friday.

In fact the below video from PBS will let you know all you need to know about the finances in Spain. This pretty much is the story across Europe.

If you thought Enron, Worldcom, and Adelhia Cable were bad you have not seen anything yet.

So what we currently have are surging markets worldwide. Everywhere I read its the same. The Markets are ready for a technical breakout. The markets have discounted the bad news.  Europe is coming back as the Stress Tests are not as bad as previously feared. China has slowed down its economy. Its the great moderation in the Far East. Where have we heard this before?

Well I am here to tell it like Public Enemy. DON'T BELIEVE THE HYPE.

Forget the double dip recession talk. We were never out if the first recession. In fact I am telling you we are in the middle of a depression.

This rally is doomed to fail because of the following:

-Last week the market rallied when unemployment insurance was extended. This was the seventh time benefits have been extended the last two years, all at a time when almost half of the ranks of the unemployed have been looking for a job for at least a half year.

-The unemployment rate for adult males (25-54 years) hit a post-WWII this cycle and is still above the 1982 recession peak, and the youth unemployment rate is stuck near 25%. These developments will have profound long-term consequences – social, economic and political. Did I mention that most of the recent college graduates have student loans up the wazoo? There will be a massive student loan bailout program subsidized by you know who in the future.

-The White house just raised the deficit for 2011 to $1.4T. This is from $1.267T. Hey whats an extra $133B? Oh yes...$133B figure was exactly the deficit in 2002. You can't make these things up.

-The FDIC seized and shuttered another seven banks, making it 103 closures for the year.

-How do banks that have not been folded surviving? Not by making loans or doing normal banking business, but by bleeding back loss reserves unto their balance sheets. The banks have reduced loan loss reserves and this is why they have made their quarterly numbers. These are not real earnings and the banks know it.

-Household Debt/Income ratio is at 120%

-25% of all consumers have a sub 600 FICO score. Fannie/Freddie won't look at you at this level. Good luck in trying to modify your loan or get a mortgage.

-If the FED thinks we are in a statistical recovery, why is Bernanke still openly contemplating QE and other ways to stimulate growth?

-Bank Credit and M1-M2 Money Supply growth still contracting. The Velocity of money is non existent.

-Bank wide consumer credit outstanding fell $2.2B, real estate lending contracted $9.2B, and commercial & industrial loans slid $5.B. This is not Monopoly money folks.

-The Fed taking down the reserve interest rate to 0% is so laughable. The banks will not lend. Why would they with the above referenced stats? They are doing just fine parking their money with the Fed as well as the Treasury. The Fed is not going to take away the free carry trade from the banks. Take that away and its GAME OVER!

-The securitization market is dead. FINREG did a huge service to the country by making the Ratings Agencies accountable but this will hurt bond offerings and securitizations going forward.

-After $1T in deficit financing to try to kick start the economy we still have rates headed lower. The 5Y is at 1.734% and the 10Y is at 2.994% The bond market is not buying it. When all else fails listen to the bonds. There are many structural issues that are evident in bond land. Securitiation is again non existent so money is flowing to the most liquid tradable securities. The US Treasuries are clearly the least ugliest house in a flat out fugly neighborhood.

-US Dollar weakness with bond market strength is deadly for risk assets. REPEAT! Deadly for Risk Assets.

-Housing is still a black hole. This will be like this for at least another 5 years. Who cares if mortgage rates are low. The Fed owns hundreds of billions of high coupon MBS. As rates drop these securities lose value via negative convexity. This is inherently deflationary is it not? By the time the Fed gets around to dumping these securities it will far to late in the game. The NPV losses will be staggering.

So what we have here is the momentum crowd pushing stocks higher. Fundamental analysis went out like Barry Bonds a few years ago. Its all about sentiment and momo.

Program trading, HFT, ALGo's, momentum trading, and technicals are all in play at the moment. Meanwhile, the Treasury market has refused to budge from what is reality. The bond market is a lot like my dog Mikey. Mikey was my beloved German Shepard who knew trouble when he sensed it. He knew as soon as I made the turn into the complex where the Veterinarian was that there was trouble ahead for him. He didn't budge from the car. This is how our bond markets are. They know trouble and they sense it. Even today real rates are lower at this moment.

I am amazed that this market can't see through this crap. Earnings are so manipulated and managed. The ECRI just hit -10.2, a figure that screams economic trouble ahead.


The Fitch Shrug

I lamented on the GM buy of AmeriCredit last week.

I don't know whats worse? Is it the GM purchase? Or this?

Just a little background for the cave dwellers we call the electorate.

GM is in bankruptcy. It is only doing business because of the kindness and stupidity of the tax payer. GM wants to come out of bankruptcy and complete fraud by doing an IPO as soon as possible.  GMAC the equally incompetent former lending arm of GM which also has been propped up by the tax payer was brought down by sub prime pending. Lets be clear GMAC had  residential real estate subprime problems. Their auto lending wasn't as bad, so the media/analysts are spinning this buy as a smart move for GM. GM is buying Americredit because they need to fatten their books with loans because no one will buy their cars otherwise. The other thing here is that auto dealers have been exempted from any regulation in the recent FINREG bill. This is a perfect time for GM to swoop down and pull the wool over everyone's eyes.

I thought this was the worst thing I heard last week....until I heard Fitch was completely dumbfounded whether this buy was actually good for Americredit? They are unsure of this helps or hurts? Unbelievable!

I giant incompetent auto company with nearly $75B in cash and investments wants to pay a premium (IN CASH) for an equally incompetent auto lender and Fitch is completely clueless to figure out if this good or bad?

The US Treasury pushed for this deal. They do not want GM to be a private company. They need positive press and to dress the IPO as best as possible. If New Century and Long Beach Financial were still around I am sure Geithner would be pushing for GM to buy them too.

Lets figure this.

GM doesn't care. Its not their money.
Treasury doesn't care. Its not their money.
Americredit insiders are jumping for joy as they get cashed out.
The Tax Payer doesn't care because they are too busy watching Big Brother.

This is the state of America in a nutshell.
And they tell me I am too cynical.

Thursday, July 22, 2010

Why Is GM Buying Americredit?

Is it April Fool's Day?


This is why I am so cynical about everything. After all that we have known about sub prime and high risk lending, all of the right offs, charge offs, and foreclosures. Why is GM a company that was propped up for years by the government, a government that still has some $50B invested in GM, buying a sub prime mortgage company? Are we right back to the days of 2005-2006 when Lehman, Merrill, and other banks were buying sub prime outfits? Why are we continuing to leverage credit when the American consumer is deleveraging.

This country has lost its marbles.

GM is going public and the pressure to pad its books is great. They can't afford a bad IPO, so the Bankers are just window dressing the company. I guess the bankers have never heard of GMAC?  Its just more fees for Wall Street. More fees for takeovers that should never happen. More destruction of capital.

Isn't this deal so convenient? I mean it comes right after the Auto Dealers were exempted from the Finance Reform bill? This was outrageous! If there is one entity that purposefully rips off the consumer its the Auto Dealers.

How long do we have to extend and pretend? How long will we keep stuffing stuff under the rug?  When are we going to learn that the middle class is a dinosaur? The honest vibrancy of the middle class has been totally wiped out. This is the class that matters and you can't run the country via sub prime lending.

The Auto Lobbyists have done a great job of explaining to Congress that they are a big part of the middle class and that regulation will only harm the middle class. This is totally farcical.

I am cringing at this announcement. I am speechless. This announcement only makes me more diligent in my opinion that there is no hope for this country.

Tuesday, July 20, 2010

Is The Market About To Bottom?

When ever the herd/sheep/momo crowd get too overly bearish I tend to cover my short positions. This has worked for me in the past. It most probably will work for me in the future.

As I walked in this morning these two news items hit me in the grill.

PIMCO Sells Black Swan Protection

CBOE developing tail event index

This two articles scared me. I have been on the short side since late last week. The markets are on edge. JP and BAC's earnings were crap. IBM, TXN, ZION, and Atheros Communications numbers were in line but their guidance and or hard numbers were not great. Quite simply the revenues are not there. How much cost cutting can you do before you get real revenue growth? Texan's number was very good but the guidance is cloudy as Nokia their biggest customer has curtailed orders. IBM is an extremely well run company but very difficult to gauge with all of the moving pieces. Currency is a huge piece of the IBM Story. If the USD keeps going down you would have to be a buyer of IBM. ZION is a crap bank and should die. The CRE losses they have on their books is a disgrace.

So I came in this morning and noticed that the futures were down to 1055. This is a full 13 points below FV. Of course the media (CNBC/BBG) gets it wrong when they say the futures are down 8. They are down 8 from the Globex Session which opens at 4:30pm. The SP Futures closed at 4pm NYC time at 1068. IBM reported earnings right after the close and the futures dropped to 1065 before the regular session shuts down at 4:15pm. After they opened again they traded down to 1061 down 4. But really they are down 7. When the nitwits on TV tell you that the futures are down 8 its bad information. I can't believe that after all of these years the MTM still gets this wrong.

GS then reports on the surface a big miss. They come in at .78 instead of the $2 FC Est. The futures and GS both immediately dump. GS down to 140 and the futures own to 1051 or so. I am tempted to actually short more but I do read that the GS number is not clean. The actual clean figure is $2.75 a beat on the top line. Very good for the boys at GS. But the bottom line is not great as trading is way down for the quarter. What to do? I then wait until 8:30am for the housing starts figure. I know that housing is in the toilet and soon to be flushed, and they don't disappoint as they are down  worse than expectations. Housing starts like Non Farm Payroll is a lagging indicator. The Building Permits data which is a leading indicator is better than expectations. The market trys to figure this out and it rallies back to about 1055-1056. I cover some of my shorts at this point as bulls and bears prosper as pigs get slaughtered. So I am thinking we have all of this headwinds and the futures are down 13? HMMMMM. I would think the market would at least test 1040 on all of the macro news but its hanging in there. Its at this point I actually start to read the above two articles on Crisis Derivatives. These type of articles only show up when everything seemingly is going to hell. Why were these derivatives not created when the SPX was pushing 1220 at the end of April?

Net Net, this is just another case of a complex exotic and toxic product that are being created that never should be created in the first place. Instead of stabilizing the market they will just destabilize them. Its another huge bonus pay day for some banker/trader somewhere. I know this because I used to be one.

Its at this time my little friend who sits on my shoulder alerts to me....COVER YOUR SHORTS. And so I do.

Now I am not saying we are going to rally. We may go down to 950-1000 on the SPX before we rally. I doubt that as the tape is very negative at the moment and we have Apple, Microsoft, Amazon, and other reports coming up soon this week. I am thinking that the mood is so negative after JPM, GOOG, and BAC reported their results, especially after we got such a great report from INTC which put the bulls on good footing. The atmosphere got very negative very quickly. I think the mood can switch again to positive with Apple tonight and Microsoft on Thursday. This is just my thinking. My intermediate/LT has not changed. This market is not pricing in a double dip recession which is 2/3rd's assured. It's not pricing in a earnings slow down from such a DD recession. We have too many Yahoos who keep claiming that the market is cheap. This is entirely based on a still recovering market. Housing is having another leg down and employment even though not a disaster is far from healthy.

Too many negative MD/LT headwinds, but there is also too much ST negativity at the moment. So a rally back to 1080-1100 is not out of the question. I will just reload on the sell side at 1100.

How about this one?

Barclays Lists ETN That Rises When VIX Declines

Do we really need an ETF that does the opposite of the VIX? The Leveraged ETF business is huge, especially the leveraged inverse 3X and 2X universe. I trade them all the time. The trick is to buy and sell them intraday as they work brilliantly in this strategy. Holding them over a period of time is hazardous to your health as many have told me. They tend to dissolve like a TUMS in your account. But come on! Inverse VIX Futures? Most people don't even know what the VIX is. They think its market volatility. NOPE! Its the 30 Day Market Volatility. This is a huge distinction. XXV has only been trading for a few days so there is not much hard trading on it as of yet but it does well in a steadily rising stock market as then Volatility drops. The stock market has become one big shout out to George Costanza as when George did the opposite things worked out well for him. Well, until it didn't.

Monday, July 19, 2010

Consumer Sentiment

Further to my post on Consumer Credit last week.

Fridays release of  preliminary Consumer Sentiment for June came in at 66.5. This was an awful print and a bad miss. Why in the world we still try to predict these things is mind boggling. I can't figure out what's in my wife's mind let alone what's in the mind's of hundreds of millions of people. Why do we have monkeys who try to predict a survey?

The only thing to look at is JOBS! What is the unemployment rate? What are the weekly unemployment claims? The U of M survey is valuable but the market should already reflect the bearishness. When we have monkeys predicting a bullish print and the figure is bad we have extreme selling in the markets. The reason the volatility and swings are prevalent is because we have these said monkeys who think they can predict behavior. Have we not learned from CDO modeling that it is next to impossible to do so? Why can't we just wait for the print without these predictions?  Its the lack of proper predictive tools that makes the volatility not the hit or misses.

The last time the University of Michigan Consumer Sentiment reading was at its current level outside of recessionary periods was smack in the middle of the non-recessionary blip in the early 80s. So in short, even though its just a survey these type of prints just don't happen often. When it does happen it happens right before a recession.  If you remember double dip recessions never happen except for? You guessed it the early 80's, 1982 to be precise.  So the last time this indicator was this low it portended a double dip recession.  How will the severe weakness be read now? You guessed it. A double dip recession that is almost a certainty because the ECRI is also collapsing at the same moment.  This economy has many head winds. Housing, Jobs, Credit. Deflation, collapsing bond yields, and lousy consumer sentiment.

Net. Net. We are at the same level we were at a year ago. At that moment we didn't know if we were out of the recession or not.  Also of note, the data is the sharpest drop MTM since October 2008. These type of drops MTM have occurred only some 7 times out of 390 total readings so take it for what its worth. 

Many market participants like to make correlations between sentiment and stock prices. Sell when sentiment is high and buy when its low.

Did I happen to say that market participants are sheep? All I know is that buying stocks going into a recession is a recipe for death. Buy stocks at our peril.

Thoughts On BP

The news of BP capping the well in the Gulf of Mexico last week had shorts scrambling and credit traders frantically trying to offset liabilities. BP has risen some 48% since the lows of late June as many are now forecasting that the worse is over. Where have we heard this before? Bear Stearns? AIG? WAMU? Wachovia? How could we forget Lehman?

The action in BP over the last 3 weeks is typically of what happens when stocks get severely oversold and or over shorted.  Just like the companies I mentioned above when bad devastating news come out many stocks don't tend to go down as bad as first as many are either not following the news flow, just listening to the media who by the way are agents of such companies, analysts who are whoring around for the next I-Banking deal, or just cant believe the news. They simply don't know whats going on. On April 20th, the Horizon Deep Water Drill that is owned by Transocean and leased out to BP exploded.  Transocean or RIG as we call it in "Trader" land was humming along near its yearly highs. In fact the stock hit 92.67 on that day and closed at 92.03 up all most two points from its close on the 19th. The stock closed at 88.29 on the 19th. Incredibly on the 26th of April (which also happens to be my birthday), a full 6 days after the explosion RIG was trading a full point and half higher (89.54 Intraday High) than its close a day before the explosion. This after the news was already out. What was happening was the media (MSNC, BBG, CNBC, FOX) were covering up for its corporate benefactor's and Wall Street (GS, MS, BAC, JPM, others) were covering up for its clients. They simply didn't know enough so they lied and told everyone that its wasn't such a big deal. There is nothing wrong with saying "I Don't Know" or "Let Me Do Some Research", it is all about the spin. This was a serious explosion that everyone in the media missed and badly botched up. Thank god we have blogs and real investigative journalism. Twitter was first on this story the day it happened. People from the Gulf were "Live" Tweeting this story but many of the Sheep that make up the vast majority of our country simply didn't listen or pay attention to the real media which are blogs and Twitter. After the media had badly under reported this story they got in hyper gear and started doing their jobs. That is when both BP, RIG, the entire energy sector, and the broader market started to cascade down. The same stock analysts and media outlets who were telling you that the spill was only 1-5K barrels a day were now telling you its 25K or 50K a day. The only number that was going up was the estimates for the damage. BP themselves stated that the damage was contained and that the spill rate was 1-5K a day. This is the same kind of rhetoric that Lehman and Bear Stearns used to make their companies stock from going down. They wanted to stabilize the losses bu plainly lying.  How many times leading to the crisis did we have stock analysts and the media tell us that Sub Prime was not a problem? That potential losses were contained? We don't have that much exposure? Derivatives? What are they? We don't have many bad mortgages. We have sufficient capital to cover losses. Well at the end of the day all the banks had were bad mortgages and even worse losses. This was the story that was told by the bank executives. This was then spoon fed to the sheep by CNBC, Bloomberg, and other corporate owned media outlets.

The BP fiasco is 100% no different. Analysts from Goldman Sachs, Morgan Stanley, Deutsche Bank, and BAC firstly all said that the spill was not a problem. The spill was contained. After we found out that the spill was not contained the real lying and spin began. This is no different from finding out that sub prime and housing was indeed a problem. Generally what happens is that the powers that be firstly flat out deny that a problem exists. After they can't deny that there is a problem, the same original problem that didn't exist is not as big as its being portrayed. This is just like housing/sub prime if you remember. After there is no denying the extent of the problem is when it really gets interesting. Interesting in the sense that the lies get bigger and more out of control, all done to keep a rotten to the core system, a system that now has been exposed for being a fraud upright. The entire BP scandal is no different than what happened with housing, or the dot com meltdown, or even the savings and loan mess of the late 80's. Once the Tasmanian Devil is out of the cage everyone is in the mode of letting everyone know that its not a Tasmanian Devil but a cute little kitten. Its a total disgrace that the sheep keep falling for. I can only hope that with the advent of Twitter and the many real investigative blogs that the media will wake up and start reporting the real news. Hope is a dangerous word in a democracy that has been over taken by lobbyists and corporate media.

But the bigger picture here is that even after BP has capped the well there are numerous potential issues that BP and the public has not taken into account. How about this story?

Or this....

BP is following the same deadly script that many companies have followed. That script always lead to bankruptcy.

How many times did we hear that Lehman or WAMU was out of danger? How many times that Lehman will survive if they can raise some cash or better yet receive a take over? We heard that WAMU was saved when PE firm TPG bought a huge stake in the company. WAMU subsequently doubled after this announcement. TPG was wiped out when the FDIC heisted the company and handed it over to JPM. BP is following this lead. All the information that is "Flowing" out about BP is just a way for long term investors and insiders to dump stock before the inevitable happens. Just like WAMU and Lehman. Use every opportunity to dump BP at higher levels. This company is absolutely finished and has no future.  Obama might have been lax in his early handling of the BP affair, but he has done a very good job of making BP accountable since. Being President is a thankless job. For every action Obama does there are 25 counter actions that say he was wrong. You simply cant do that job in a vacuum. Obama was unable to act on BP and the spill earlier because everyone on the right would have blistered him for over reacting and not letting the free markets handle it. Every one on the right has been on the Socialist tilt since the day we found out who Barack Obama is. He simply had to wait it out a few days. There was no option for him.

Like a "free" market actually exists. That in itself is a myth. There is only one market and its hardly free by the way.

Again the bigger picture is this. The  way Lehman was handled was devastating for the global capital markets. Lehman should have been allowed to go into liquidation and bankruptcy in an orderly fashion. The way Lehman went into bankruptcy was in itself a preposterous situation. There were simply too many moving parts and too many unknowns for it to simply file for bankruptcy on that Monday morning.

BP is a potential Lehman in the works. In fact its going to rock the world. Rock the capital markets. Rock the banking establishment. BP as an energy company has direct access to hundreds of billions in cash at its disposal. Energy companies are cash havens. They are huge players in the OTC swap markets. Huge players in the Libor/Euribor/SONIA funding markets. Trillions in counter party exposure is tied up in BP paper. Most of this counter party risk is centered around the big multi national banks. The potential counter party dislocations are site unseen. You heard it hear first. When BP goes and its going the carnage that will be felt will make Lehman seem like a walk in Central Park on a sunny day.

I surely hope that regulators, policy makers, bankruptcy lawyers/judges, and  most importantly central bankers are ready for this earth shattering event. My guess is that all of these entities that are supposed to know what is going on are simply acting like ostrich's with their heads in the sand. You can't keep printing money. There are not many trees left in this world and the electronic digits will just throw back a Visual C++ error when the next round of global QE begins.

Heck! These guys still don't believe we have a global sovereign debt crisis so why would a potential BP bankruptcy surprise them.

Wednesday, July 14, 2010

Consumer Credit

On the heals of Intel's blowout quarter, stock index futures mostly surged overnight. Nasdaq 100 Futures were up over 1.2% and S&P Futures were up 3/4 of a percent.  European markets started out strongly but have erased gains and are firmly in the red led by the banking sector. Maybe this is technical selling and locking in profits as profits have been few and far between for the bulls since late April.

Everyone seems to believe that INTC numbers are a proxy for global growth and more importantly US Consumer growth. How sad a point is being made here. Most of Intel's progress is in Asia. SURPRISE! SURPRISE! As the Asians are the ones with all of our money it would be nice if they actually spend it on our industries. But how does this help the US Economy? How does INTC blowout quarter give us a better insight into US Consumer spending patterns?

Retail Sales are on the tape and they came in -0.5% which was worse than forecast because lets be frank the forecasters should, would, and could be the same ones washing your car on the weekends. What the hell do they know? Very little but the following charts are quite alarming and cant be set aside just because INTC had a great quarter.

As we all know The US consumer is credit and debt addicted.  If anyone wants to know why The US Economy has exploded since the early 80's all you have to do is look at the below graphic. Credit exploded. It wasn't lower taxes although that helps. People started to live way beyond their means a long time ago and the bill has come do. Many used the equity in their homes as an ATM. That ATM says insufficient funds at the moment. As a former mortgage trader I can tell you that when securitization was first developed in the late 70's / early 80's it was like crack cocaine in the inner cities. It was open season on Wall Street.

Now that banks are doing what most rational sane enterprises should be doing in a recession we have a problem in that the US Economy is a ponzy scheme economy. Pay old investors with money borrowed from new investors.  Don't let anyone tell you any differently. Bernake and Geithner have nothing on Madof. All of that was and is done with debt and credit. US Monetary policy has been a joke ever since "Tall" Paul Volcker left. Greenspan just inflated asset prices and pandered to power so that he can demand $100K a speech after his reign of terror. Bernanke has doubled the monetary base of the country in the last 2 years. Just sit back and absorb that last statement. America just celebrated its 234th birthday and one man has single handily doubled the money supply base in 2 YEARS! Its beyond imagination. All of this to keep and preserve the rotten to the core global banking institution which supports a cesspool like shadow banking system.


Now that consumer credit is shrinking. US consumers have to come out of their debt zombie/slavery trance.There is no other way for the majority of Americans to live. The forced deleveraging that is happening at the moment is a deleveragng of survival and necessity not convenience. Many are worried about the future. Worried about retirement. Worried about sending kids to college which in itself is a scam but nonetheless its keeping many up at night. The banks are doing the country a favor by not extending credit. Give them props for that. The banks are actually for once doing what is rational. This is good. Why are we busting the banks chops for not extending credit when the real employment rate is probably hovering 20%? The banking sector needs to rebuild their balance sheets and grow reserves.

We are in a secular bear market where we will get sharp rallies. These rallies may last some 12-16 months but they have to be thought of in this secular bear market thesis.  We have so far seen huge snap back rallies after huge declines. This is exactly what we see in bear markets.

I expect consumer credit to keep declining for the foreseeable future. This is very good for the country long term but will hurt the US Economy short and medium. Japan had a corporate deleveraging that lasted 20 years. Their economy has paid the price. US citizens ran up debt in the 80's and 90's and gorged on cheap credit during this decade. It will take probably a generation at the earliest to get back to equilibrium. What Japan was going through in the 90's was a balance sheet recession where monetary policy is basically useless. You are telling corporations to spend but they cant even in the face of ultra low rates because they are so extended, so far from shore that they need to paddle back to the beach. This is where we are in this country. Every one wants to sucker you into saying that this is an ordinary recession that it was inventory led. So wrong. The US is going through a vicious balance sheet recession that is far worse than Japan's in that US consumer spending is 2/3 of the economy. When 2/3 of the economy is in the open water with sharks swimming around it is best to do a Michael Phelps and swim back to shore. Why is this so lost on the Obama Administration is beyond me.

As long as consumer credit keeps sinking the recovery is in doubt. In fact we never had a recovery in the first place. Housing still sucks. Job losses have turned the corner but job creation at the moment is a myth. We need to create some 125,000 new jobs a month for the foreseeable future just to get back to where we were before the recession. We are no where near that figure for many structural reasons.

All of the countries polices are wrong or misguided.

1-Defense Policy
2-Foreign Policy
3-Monetary Policy
4-Fiscal/Tax Policy
5-Entitlement Spending Policy
6-Immigration Policy
7-Legislative Policy

Can anyone say with a straight face that these policies are helping America?

Lets add one more policy that is misguided. This preposterous housing policy that is basically subsidizing bad bets made by homeowners. More on this soon.

Monday, July 12, 2010

Slow Motion Quick Sand Crash

The market is already crashing its just that most people don't know it.

Many people have noted that in early July the S&P had achieved its "DEATH CROSS". This means when the 50DMA crosses the 200DMA to the downside. We also saw the 50DMA cross the 100DMA on the downside as well in mid June. What also is notable is that this happened when both moving averages were sloping down. Double Ouch! Can and will this be an early warning sign of an impending market collapse?

Lets take it back to last year at this time.

You notice that in mid May 2009 the 50DMA had crossed the 100DMA on the upside and that the 50DMA was upward sloping. Very bullish. The S&P had a run from 900 to 950 before coming back down to 900. Its at that moment in early July that the 100DMA crossed the 200DMA to the upside as well. This led the mkt to surge pretty much the rest of the year through January 2010. From 900 to 1150 on the SPX. That's an impressive run up after getting the early cross signal in mid 2009.  The market was already rallying.

What do the cross's tell us today?

If history is in any guide it tells us that the market has already moved to the downside. The crash is happening before our own eyes yet we still listen to the idiots on CNBC and Bloomberg who tell us that the market is hanging in there. The market is cheap. The market has already discounted a recession.

The market does what it does regardless of race, creed, religion, and sexual orientation. It doesn't care if you are a nice guy or a bad guy. It is like the great white shark. Its the ultimate killing machine. You just better be on the right side of it when it decides to go in for the kill. You better be near the shore when Jaws dorsal fin leaps out of the water. The markets dorsal fin was spotted a few weeks ago when the death cross happened. Why are people still in the water? Do you have to ask?

You are seeing a rally at this moment after the death cross because the market is very much oversold and a bounce was expected. You are seeing such action. My best guess is that we probably saw the highs for this move this morning. The eyes of the storm are the rapidly downward sloping moving averages in the S&P 500. The PPT will be there to soak up the sellers again I am sure but then again that just adds more dorsal fin's to the water.

Thoughts On Tesla

The IPO for Tesla Motors was a resounding success. In fact the most successful thing that Tesla has done so far is the actual IPO. It had been a dead year for IPO's and Investment Banks went "sailor postal" over Elan Musk's concept auto company. Tesla was priced at $17.  It ran up to 32 a few days later and has since dipped back down near its pricing point of 17. But that is neither here nor there. The price of where it was allocated, or the first print, or where it is at this moment is secondary to the fact that this is what Wall Street should be doing. This is the primary function of Wall Street Investment Banks. Its not high frequency trading nor is it complex derivatives creation.

Tesla at its highest had a $3.3B market cap. Give Tesla and its bankers which was led by Goldman great amount of credit. To take an auto company public after what has happened to GM and Chrysler is impressive. Even Tesla haters have to admit that the IPO was a success. The simple fact that a concept car company was able to raise $226MM is quite impressive. This is what Wall Street is supposed to do. Allocate and create capital in the most efficient manner. Regardless of what you may think of Tesla, their IPO was badly needed at this moment only to let the masses know that this is what Investment Banks should be doing on Wall Street.

I actually like this company although I drive a Porsche 911 myself. I have always been into Porsche's since my early youth and most likely drive them the rest of my life. Not withstanding Tesla has something here. If they can streamline their manufacturing, lower the cost of ownership, and stay a float long enough to keep the wolves away, they can find themselves very valuable to a global auto maker. GM is not going anywhere. Ford is not going anywhere. Toyota and Honda are not going anywhere. If Tesla does the right thing they can probably sell themselves to GM in 5-10 years time. This is the best scenario for them. 

Again regardless of what you think of Tesla, it was a great day for capitalism. Regardless of what Tesla's challenges are and there are many it was a reminder of what the true function of  Wall Street is. The allocation and creation of capital is what made our economy what it is today. Program Trading, HFT, Dark Pools, and Co Location even though are viable real business's don't do much for our economy other than make Wall Street rich at the behest of the rest of us.

You Got To Love The Irony

It was Greenspan's incompetent monetary policy that made John Paulson an obscenely rich man so it is only just that Paulson give $20MM to endow Greenspan at Stern.

When Will Blankfein and Dimon do the same for Greeny?

Greenspan Legacy Destruction Tour Continues

Why oh why do we still listen to Alan Greenspan?

We all know that regulating the banks will hurt credit creation. What do banks do for a living? LEND! If you curtail them from raping you elsewhere they have no motivation or stomach to expand credit. If the banks can't fatten their check books with fees and the such they will not issue more credit cards and loans. You get it? Risk and Reward.

Lending is a tough unpredictable business. This is why the banks try to make up the cost of issuing loans in other places like ATM fees and overdraft charges. If you stop them from doing so the banks will not lend money. There is absolutely nothing wrong with this. Banks need to start running their business like they know what they are doing. The banks need to go back to responsible lending. They need to go back to basics. They need to get out of the derivative business. This is not easy and will be painful for both the banking sector and economy. Here lies the dilemma of extend and pretend.

Greenspan simply is scaring credit addicted consumers into thinking that any type of regulation is bad for them. Well of course when you are an addict any threat of taking away the candy id going to make you want the candy more. Greenspan is a hack. He is simply using scare tactics to achieve what the banks want and that is to continue with predatory banking practices.

Greenspan knows we are in a deflationary environment where the US consumer is in secular deleveraging mode. The banks need to deleverage massively and are just extending and pretending that trillions of bad loans still don't exist. The banks can lie all they want as Greenspan along with Bernanke and Geithner will be Wall Street's wingman in this ludicrous journey to the bottom as the taxpayer will be there to pick up the pieces.

Stating otherwise is intellectually dishonest.

I always leave out hope that Alan Greenspan will have his Lee Atwater moment well before his last days on Earth. When is the question?