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.

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

http://w4.stern.nyu.edu/news/news.cfm?doc_id=101914

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?

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aogzNoKnAFww

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?

Got QE?

More signs of deflation.
30 Year Mortgage Rates Drop to All Time Low of 4.60%

Not even record low mortgage rates are incentivizing consumers from taking the home owner plunge. Wasn't it Manifest Destiny to own your own home? 

This is Ben Bernanke's worst nightmare. What a complete disaster. Treasury yields hitting new lows. Mortgage rates hitting new lows yet no private end user loan demand. In the face of this outright deflationary backdrop, risk assets have no where to go but down and this means the Fed will need to start printing very soon.

Here comes QE 2.0 to the tune of $4.5-5 Trillion.

Watch Dollar Yen

The way to trade markets the last few months has been just to set your Algo's to correlate with these Cross Currencies:

USD/JPY
EUR/JPY
EUR/USD
EUR/CHF

The reason? Very simply the Carry Trade.  The most heavely carried trades are the USD/JPY and EUR/JPY couplings. As the Yen gains momentum it destroys the carry. One of the many reasons for the Flash Crash on May 6th was the sudden move in the Yen. Many people borrow in Yen and then invest in risk assets. When the borrowed currency suddenly appreciates you have leveraged losses.

 

The Next Time

As we move towards the final passages and subsequent gutting of any and all financial reforms what we are hearing from bank lobbysts are these tidbits:

"Breaking up big banks would actually increase system risk"
"Curtailing US Bank Swap/Derivative Activity would leave US Banks in a competitive disadvantage"

Now there is some truth in the above two statements but let me just state these facts:

Royal Bank Of Scotland at the height of the credit frenzy had a balance sheet that equaled 1.5X the entire British Economy.

Three Irish banks combined assets were more than 200% of the Irish Economy.

Icelandic Banking Institutions at one point were 11-13X the entire Icelandic economy.

What do all of these banking institutions have in common? They were all partially or in the case of Iceland fully nationalized.

We keep having Wall Street and the lobbyists alert us that the world will come to an end if any of these new rules are legislated. As a former bond trader let me tell you its a naked threat that make no sense. Wall Street is just trying to keep their ponzy game going until the next time. Its corporatocracy at its best and kleptocracy at its worst. To keep a ponzy/corporatocracy going we need the following:

1-Corporations - CHECK!
2-International Banking Institutions - CHECK!
3-Corrupt Governments  - CHECK!

Kleptocracy in all its glory is soon to follow. This is the blueprint that many civilizations have taken.
As we move towards another major win for Wall Street and the subsequent loss of another 25M more jobs in the coming depression, the failure of breaking up the big banks and shrinking their bank balance sheets will be the biggest domestic policy error in the history of our country.  The next time we have a crisis you don't have to look anywhere except DC and the Obama Administration.  This is Obama's mess front and center. It wasn't his fault that the economy fell off the cliff in 2008, but any future economic collapse has his fingerprints along with Geithner, Summers, and Bernanke all over it.

Questions & Then More Questions?

What to do?
The questions on many investors minds are:

What to do about the Euro?
What to do about the Yen carry?
What to do about the Euro debt crisis?
What about Spain and its banking crisis?
What to do about higher short term funding rates?
What to do about Chinese property and inflation?
What to do about BP?
What to do about austerity?
What to do about deficits?
What to do about housing?
What to do about Fannie and Freddie?
What to do about CRE?
What to do about Financial Reform?
What to do about the US Economy?
What about employment?

With all of these questions that are currently pressing one can deduce that equity and debt markets around the world are in stress. WAIT! Did not the S&P 500 close above its 200 DMA yesterday? Is that not a sign of strength? Is that not a sign that all of the bad macroeconomic news has already been factored in? Has not the Euro rallied the last few days? Didn’t the ECB just bail everyone out?

Yesterday marked the fifth straight day that most European Equity Markets rallied. One can understand that the DAX will rally with a weak Euro because it’s an export driven country but I am still trying to figure out why the FTSE continues to rally with all of the BP headwinds. BP and Royal Dutch currently make up over 50% of the dividend income for the entire UK stock market. One has to believe from the way Obama is hawking that BP will get sued into bankruptcy if they don’t eliminate the dividend. So why is BP delaying the inevitable? Is it that they are hoping that some oil lobbyist can somehow get enough hookers out of South Africa and into DC by the end of the week to appease our upstanding elected officials? Do they actually think that they are capable of stopping this leak? I don’t think so. It’s a natural stall tactic until BP finds some dirty pictures of Ken Salazar. But let it be known that Obama is on the run here and that no mercy will be shown to BP if they don’t voluntarily compensate for the spill. My thinking here is BP is a busted dead stock for the next year or so. They will eliminate the dividend and pay through their noses. In any case the Gulf has been ruined for generations to come and the collateral damage so soon after Katrina will be devastating for our Southern friends. I can’t blame Obama for putting a 6 month ban on oil and gas drilling. This is what happens when a President just looks away at obvious regulatory problems. The agency that regulates energy exploration in the outer shelf MMS has a huge conflict of interest. How do you expect these guys to regulate BP and others when they stand to profit when the industry goes and explores? This is the problem. Forget about Regulatory Capture for a moment, this is 100% sleeping with the ones that you are supposed to police. Guess what? Obama has known about this since he took office 16 months ago. Why did he not do anything? The obvious answer here is no one wants to be the one who stops the golden goose from laying eggs. Obama must know this and the drilling ban is going to hurt. You think China is going to stop drilling? Russia?
As you can see from the recent ramp in Natural Gas any drilling bans will just make it more expensive for the rest of us.

In equity land volume was nowhere to be found. This coupled with a stronger Euro and weaker dollar meant a return of the risk trade. All risk assets were equal 1 correlation. It was no brainer Delta One trading at its best. The money flew out of FI on the short end as the all important 3 Month Bill went up 2.5BPS. The 10&30 Year Treasury had selling as well. What’s important here is that both issues are near support and any break of these support levels will have rates go higher and a further move in risk assets higher. If the 10&30 can gain some footing risk appetite can be diminished and we may see yet lower equity prices. Remember that equities rallied all throughout 2007 even in the face of daunting global credit issues. Equity investors are not the sharpest tool in the shed and will look for exits if any risk avoidance is merited.

A few weeks ago I stated that the Euro was poised for a rally. We have gotten a nice Euro rally from 1.18 to 1.23. This has most equity investors happy but the recent move in the Euro is 100% technical in nature as there were huge short coverings executed. This looks to me as weak hands just being shaken out. The gloomy Euro Zone economies will pressure the ECB to increase overnight funding and ultimately $1.5T in Quantitative Easing will be announced. This will lead to another rally in risk assets temporally as this is the ECB’s version of “LETS BAILOUT THE BANKS.” This will punish the Euro all the way to Par vs. the USD. Let’s just say that the ECB needs a bigger BOAT and I don’t mean MiFID BOAT.

There is no magic bullet to save European economies. Austerity will kill growth at a time when many economies still have not recovered from the last credit crisis. European and US Markets are in a no win situation. Keynesianism worked. It averted a great depression, but at what cost? Government debt and budgets are obese and are about to burst to the tune of higher interest rates and overnight funding costs. We talk about run on banks all of the time, but a run on a country is a total game changer.

The S&P 500 did finish above its 200DMA, but the April-May-June distribution is very bearish. These are the type of rallies we see in secular bear markets. Markets always have huge rallies in bear phases because short players and sellers always overshoot and buyers have hope that better days are in front of them. The idea of not buying the bottom weighs on investors.

But what can’t be discounted is that credit is what makes the world go. Look to the credit markets to get an idea if what is really going on. If markets were on solid footing we would see Repo rates coming down not going up. We won’t be seeing haircuts on Repo transactions. We won’t be seeing O/N and 3M Libor/Euribor going up. Sooner or later equity prices will catch up to this just like they did in 2008. Widening credit spreads in the interbank and Corporate/CP/Treasury/HY is a harbinger of future problems. This is very bearish action.

Today we have the delisting of FNM/FRE. What will the Algo/HFT’s do now? These two garbage stocks are a gold mine for the machines. Have we finally come to the point that the exchanges think these entities are worthless and only stand as a piggy bank/dumping ground for Wall Street institutions? When will the government figure this out? The backstopping of losses and continued funding is so deplorable that only the banks think it’s a good idea to keep them around.

Tidbits and Food For Though

Now you know why we haven't caught Bin Laden.

 http://www.nytimes.com/2010/06/14/world/asia/14minerals.html?src=me&ref=homepage

This is just further illustrates that US forces will be occupying Afghanistan for for the next twenty years. I can just imagine hearing Obama justify extending the deadline for pullout indefinitely. "We have to stay in Afghanistan!, there is untapped trillions that we can steal to justify the trillions already spend." Watch for more no bid contract wins from the likes of Halliburton and Blackwater. I know Blackwater changed their name to XE, but their stripes have not. This will leave the left more infuriated while the right will continue to hammer Obama because that is the only way they know how to operate. US officials have tried to parlay this information as a huge positive, it may still be a huge find but it further illustrates how far beyond broken our political system has become.

Funny.....
http://news.yahoo.com/s/ap/20100615/ap_on_re_as/as_pakistan_bin_laden_hunter

At least someone is interested in finding and catching Bin Laden.

Wall Street back door bailout continues.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=an_hcY9YaJas

Does the American Taxpayer know they are financing Part 2 of the great Wall Street bonus machine? Part 1 was AIG.

When the Treasury gave Fannie/Freddie 2 years of unlimited funding on Christmas Eve, it was the greatest Christmas present to Wall Street since Greenspan. First the Fed expanded its balance sheet with the purchase of $1.25T in mortgage paper. Then the banks used Fannie/Freddie as a dumping ground for the garbage they couldn't sell the Fed. Does the word "Dumping Ground" sound familiar? AIG was the dumping ground for all of the subprime CDO risk on Wall Street. The dumping continued until AIG could no longer smell the stench of all those toxic CDO's. When will the Taxpayer start to smell the stench? I am thinking sometime in mid 2011. Where is the oversight? Where is the leadership? Why isn't Fannie/Freddie obligations part of the federal budget? Why are Fannie/Freddie still doing business? Why is there not a plan to wind down these entities? Why are we continuing to fund these morbidly obese housing structures that have become legal toxic dumping grounds? The answers are quite simple. The only reason these two structures are around is that the lobbyists and various Wall Street interests want them to be around. How else can they funnel there garbage at par? There is still some trillion bad mortgage bets on and off bank balance sheets. The Taxpayer is on the hook for this and Wall Street is laughing in the rear view mirror.

The banks have padded their books to this effect. On top of the fact that there is not one once of honest accounting left in the banking sector. 

http://tradersutra.blogspot.com/2010/04/living-dream.html

We have not even broached the subject of European Banks and sovereign debt. All of this sovereign debt is sitting on balance sheets that are insolvent. What we have is the US Banking sector is worthless mortgage paper that the taxpayer is custodian for. Even with this the banks are insolvent. How in the world can Treasury/Fed bail out these institutions once again? The ECB can't possibly bailout all European banks without totally destroying the Euro. They will not do this because the Europeans won't allow it.

We have to let debts be restructured. We have to let housing do its own thing and go down another 10-15%. We have to allow the orderly liquidation of bad companies. We have to make the banks accountable for the mess that THEY created.

http://tradersutra.blogspot.com/2010/05/capitalisms-kryptonite.html