Analysts! Who Needs Them!

A few months back I blogged about how analysts are so wrong most of the time. Even when they are right they are tragically wrong.

http://tradersutra.blogspot.com/2011/01/why-have-stock-research-analysts.html

These guys are nothing but snake oil salesmen, in fact calling them as such is an insult to snake oil salesmen.

S&P, Fitch, and Moody's all got credit wrong. Bottom line! After the fact they went out of their way stating that everyone else was doing it so we just got caught up in it. Not withstanding yesterdays gutsy call by S&P, they all should be shot point blank. No judge..No Jury..No Wake..No Funeral..No Proper Burial..Into a potters grave they deserve to rest in pieces.

Analysts on Wall Street are completely useless. Their worthless analysis has caused trillions in losses. All the way these guys were laughing to the bank.

These guys wait to find out which direction the wind is blowing then and only then do they change their opinions. Of course this is after the public has taken it squarely in the ass.

Today's edition of worthless analysis comes from BOFA Merrill Lynch. Yes the same corrupt outfit that infected the global economy with CDO's packed with trashy mortgages. The same corrupt outfit that was A#1 in fleecing institutional investors and pension funds out of their hard earned money when they knowingly sold toxic structured products. At least Goldman Sachs had the brains to hedge their toxic bets, these idiots didn't even do that. They then cried and limped to BOFA, another corrupt toxic banking institution.

Today Merrill Lynch has thrown in the towel on ClearWire Communications. Yes. The good fight is over. We were wrong all the long.

http://blogs.forbes.com/ericsavitz/2011/08/09/clearwire-merrill-now-sees-going-concern-risk-target-50-cents/

We loved it $9 when they needed to raise capital for a dying crappy business. We loved it 8 when they needed institutional support. We loved it at $5 and $6 when they needed again to raise cash. But....When the stock is clearly going out of business and is trading at $1.52, we no longer like it. Why? Very simply..A dying crappy business that is going bankrupt cant fleece investors anymore, thus there is no need to have a buy rating on a company that can't raise capital and garner fees for Mother Merrill.

What Elaine Bennis' father says is correct! ANALYSTS! THOSE BASTARDS!

Or another wise man missive..."Analysts! They are useless in bull markets and worthless in bear markets."

Or was it Confucius? "You don't need them in a bull market and don't want them in a bear market."

Small Props Only - Bravo S&P!

I have been no fan of the ratings agencies. You can do a simple search for "Ratings Agencies" on this blog and read what I think of them. They are the single biggest reason we had the economic calamity that we had. 


http://tradersutra.blogspot.com/2010/05/enabler-from-omaha-speaks.html
http://tradersutra.blogspot.com/2010/02/glass-steagall-was-early-warning-sign.html
http://tradersutra.blogspot.com/2010/02/here-comes-volcker.html


These are just a few of the choice words I have for them. 


But......


I give them props (albeit small) for their ballsy call on US Debt. I believe its not a referendum on the ability of the US to pay its debts but a stab at the rotten to the core Political System that has parasitically eaten into the fabric and soul of the country. America pure and simple has become a Kleptocracy wrapped within a Corporatocracy. It is way beyond toxic. Pay Option and ARM Mortgages wrapped in CDO squareds have nothing on Washington DC. 


The great irony of the whole situation is that the ratings agencies like I previously stated are the biggest reason we had an economic crisis in the first place. All these guys had to do was say no to Wall Street. But they didn't. All they had to do was their jobs. They didn't. All they had to do was sound credit analysis. They didn't.They happily took the money from the banks in exchange for AAA ratings on crap mortgages. All of these ratings agencies are corrupt to the bone. They should all have been thrown to the wolves AKA bankruptcy court. They should have received the same penalty as Arthur Anderson. AA enabled Enron to commit shenanigans that cost shareholders and citizens billions. 


For these reasons no matter what S&P, Fitch, and Moody's do from now on it doesn't matter. They completely wrecked the country. The reason we have huge deficits is because of them and their utter cowardly  indifference to any type of ethical behavior. 


But I offer them small props for their debt downgrade. Only small props. My reasoning goes like this. They still should get the death penalty and I will gladly flip the switch. 


As I previously stated this is more of a downgrade of the political system not the US Treasury. The US Treasury can always pay their debts. Its fundamentally impossible for the government not to pay. The only reason they wouldn't pay is purely technical via hyperinflation, money supply expansion (Money Printing), and basic stupidity of not raising the debt ceiling. The debt ceiling argument was about paying the debts that are already on the books and Congressionally agreed to not about future expenditures. It is Congress that legislated two wars, two tax cuts, one massive bailout, and one absurd Medicare prescription program. All of these actions were to the benefit of the status quo aka business elite. 


Then to make matters worse, the idiots in Congress just spend the last two months threatening to technically default on the debt unless a minority of the minority party passed a measure to balance the budget in a balance sheet recession. You simply can't make these things up. We have the holy trinity of nitwits here:


1-Congress
2-Tea Party
3-Obama


Let me be clear. We have a subprime political system in our country and these economic terrorists must be shown the door. 


We can hope that S&P's downgrade forces these morons in Congress especially the GOP to take a stand against the Tea Party/Ant Tax Fanatics. We can hope that Democrats who are inept but seem to be competent only compared to Republicans see that entitlement and immigration reform is badly needed and the keystone of any type of long term deficit reduction. The Obama Administration states that S&P had a $2T mistake in their calculation, but the real math mistake is to think that Medicare, SS, and Tax Reform are not central to the argument. When I say tax reform I don't necessarily mean tax increases but more closing tax loopholes. 


As we saw today, S&P's downgrade on US Debt is meaningless. Agencies are not the final arbiter of financial asset prices. Its the market that does that. 10 and 30 Year Bonds were flying today because in the midst of a balance sheet recession where there is no aggregate demand the final outcome will always be deflation. It’s clear that the bond market right now is focused on the prospects for global growth and its deteriorating outlook. In terms of the pressure now on DC to step up and address the country’s balance sheet, no amount of taxes will solve our excessive and growing debt obligations, it will only be dealt with thru a change in the trajectory of medicare, medicaid and social security spending. Politicians will have to put aside their constant desire to get reelected and be honest with the American people and the promises that were made and cannot be kept.


Many people just seem to think that Ben Bernanke won't let this market drop further. I say that the reason we are in this mess is because of Ben Bernanke's absurd policy choices. The Fed is almost out of tricks. They cant stimulate demand and credit expansion at zero rates? Yes this is true to anyone who understands what a balance sheet recession is.


It looks to me in the short run that Congress and Obama have no appetite for further debt. The government cannot tax an economy that is so precarious. Cutting federal programs will never occur with our form of tenured elected officials. We have to admit to ourselves that our economy has been hijacked by a kleptocracy. The ills in our economic system will only be addressed if the markets punish the system to force change. I have no faith that our elected officials and government employees can fix the system unless the market incurs punishment first. For this reason only I give props to S&P on their ballsy move. 


Now that I have given them props....Please go get your shine box S&P. 

How ZIRP Is Killing Us All.

I have stated in the past that the Federal Reserve Board needs to move to a more normalized short rate policy. Its no good and suits no one except the financial elites. ZIRP only robs the poor and pays the elites. Its the ultimate RRH (Reverse Robin Hood).

I have also stated that this is not good for the banks as well. Their net interest margins are collapsing at an alarming rate.

Now we have this.

BNY Mellon to Slap Fees on Some Big Deposits Amid Global Race to Cash

http://online.wsj.com/article/SB10001424053111903366504576488123965468018.html?mod=googlenews_wsj

Having a ZIRP is ruinous and completely impotent in a balance sheet recession.

It was just a matter of time before the unintended consequences of the Feds actions reared its ugly head.

Now the banks are charging customers who hoard bank deposits. Granted its only for extreme high net worth individuals but this needs to be taken seriously. When the whole planet sells risk assets and goes to cash and short rates are almost negative, something has to give. The Banks pay the FDIC 10 basis points for deposit insurance and short rates grow at 13 basis points. Its just not worth it for the banks as you can see.

So technically the banks cant make money at zero rates. This is truly the Frankenstein monster that Ben Bernanke has created.

Yes People! This is our banking sector and economy.

Fed Policy = Global Slowdown

Yesterdays US PMI was a disaster. This is a key manufacturing index that was supposed to rise this past month. If you remember last month this unexpectedly rose triggering a nice market rally. The figure came in at 50.9 vs expectations of 54.6 and is a drop from a strong 55.3 in June.

What we have seen over the past 24 hours are CHINA, US, and the EZ all reporting respective July PMI's near the magic 50 level. Anything below 50 and manufacturing is considered contracting. The UK PMI came below 50 - How is Austerity going?

Is this directly related to the ZIRP policy by the Fed? Does QE have anything to do with this?

You can look at it a few ways. The US has had an easy short rate policy since the end of 2008. This basically exports our inflation to emerging markets. Hard US Financial assets are in deflation mode. Housing is bleeding, short term deposits are yielding nothing. Most Americans are trying to dig themselves out of debt after years of binging on cheap credit. The US Economy is going through a classic balance sheet recession. No matter how low interest rates are it wont stimulate aggregate demand. The financial system is in a liquidity trap as trillions of dollars are sloshing around in the banking sector. Does this sound familiar - Japan?

Monetary policy in a balance sheet/liquidity trap environment is completely impotent. A ZIRP just exports inflation to emerging markets.

What have we seen in China and India? Explosive asset price inflation. Rising commodity prices. These are real serious problems for the Chinese and Indians. So much that India and China are in massive tightening mode to stop the flow of cheap dollars into their economies.

ZIRP and QE has created a massive USD carry trade bubble. As Asia has been the driver of global growth for the last few years any slowdown will be felt globally most likely in the US and EZ economies. The Asian economies got way to hot and now need to cool down.

What we have seen for the better part of this year and last are Asian economies drastically trying to slow their economies via the interest rate channel. In China they have gone one step further by increasing bank reserve requirements. In short the entire Asian continent is in tightening mode. Asian currencies are pegged to the dollar creating massive trade imbalances. European and US export markets were all strong because of this. All good things need to come to an end, and from the global PMI prints this is happening. Where are we in the Asian tightening cycle? 4th inning? 7th inning? bottom of the ninth? I would venture a guess that we are n the late innings but it all depends on what type of economic policy comes out of developed nations. We have seen what austerity has done to the EZ peripheral nations and what it has done to the UK. It now looks like the US is moving into that mode. Its an ass backwards policy. The only way to get out of this mess is to grow your way out of it not by raising taxes and cutting spending. We need to have normalized monetary policy that fosters job growth not that fosters speculation.

 Asian currencies are way overvalued compared to the Euro and USD. These structural imbalances are causing massive headwinds for policy makers globally.

What I see happening is a global slowdown which means more QE from the Fed as of course its a supply problem ain't it? We will see another reflation starting with the Asian economies going into easing mode later this year. Its the hamster running around the wheel.

So what we have are overheated Asian economies being the fuel for global growth via a ZIRP/QE policy. What goes up has to come down. Those economies are slowing down because they have to. All of this is happening as QE ends? Funny ain't it. So the Fed will see this as we are the only ones who can actually reflate anything so lets do one more round of QE.

When the reasons and cure are the same we all need to duck for cover.

Why No Jobs?

Why No Jobs?

Other than structural problems I offer you this:

Just 6 months into the Great Recession in Mid 2008, the typical American Family earning less than $90K a year spend on the average of $105 bucks a day. One year later they are spending only $60 bucks.

What did they spend in May 2010? $60 Bucks.
How about May 2011? Say it again....$60 Bucks.

We are in the midst of a balance sheet recession. Yes! This is the problem. Too much household debt not enough aggregate demand. Monetary policy is completely impotent in this economic scenario.

Its not a supply side story as there is no demand. Tax cuts across the board would help only pay down household debt basically shrinking the economy further.

So whats the frequency Kenneth?

One Word.....TIME!

Time to pay down household debt.
Time to work through excess housing inventory.
That's it.

QE2 Ends

OK!
QE2 is in the books as of June 30th. Its pretty obvious that this whole experiment didn't generate any growth in the economy, assist in adding jobs, or help alleviate the housing pain. The only thing it did was succeed in  ushering in animal spirits within speculators who then bid up and piled into risk assets. Bernanke and his acolytes wanted risk assets to get a bid and wanted to stoke the speculative juices of traders everywhere. In that case QE2 worked brilliantly. In essence QE2 really is not money printing nor is it monetizing the debt of the Treasury. What it ultimately ended up was an asset swap. The Federal Reserve took out interest baring securities from the banking sector and replaced it with money funds that are depreciating on a daily basis. How in the world this was to jump start the economy I don't know. Its the reverse Robin Hood way of conducting monetary policy. Steal from the poor and give it to the Wall Street speculators. The grand scheme of QE2 was for the banks to take the money from the Fed and lend it out. Basically conduct the same absurd lending policy that got us in this mess in the first place. Bubbles Bubbles Bubbles. The Fed wanted to re inflate the housing bubble with a serial influx of cheap dollars. What they re inflated was every risk asset most importantly commodities.They couldn't stop the bleeding in the housing market as that is in a long term secular bear market. There is too much excess supply, not enough worthy homeowners, and not enough jobs being filled to justify 15-30 year housing commitments.

Fortunately for the banks and their shareholders and unfortunately for the Fed and poor home owners, the banks have kept the excess reserves in house. Why? Not even the banks are that stupid. They need the excess reserves in house to soak up potential losses in their MBS portfolios. Granted that all of their loans (1st and 2nd lien) have not been properly market down and that a gutted FASB has allowed then to mark to their imagination, this is still a serious problem that will ultimately pose billions more in capital raises and future mark downs. The excess reserves proved to be a great boon for the banks as those reserves padded the books as well as give the banks another added subsidy via Interest On Excess Reserves. The banks would borrow money overnight at the General Collateral rate and park them at the Fed gaining an easy profit. This trade is no longer a feasible option however since the FDIC has instituted a higher deposit insurance rate. The banks got away with ripping off the tax payer for a good two years as they had cheap financing and a built in arbitrage profit center. They still have cheap financing but the arbitrage trade is gone. What will they do? So far we have seen some loan growth this year but FNM/FRE/GNM have all greatly made getting approved for a mortgage loan very difficult.

What does this mean for housing?

We won't see increasing home prices until we get higher wages and much lower unemployment. Which at the moment have their own structural problems. The Obama administration has so far been totally clueless in the jobs area. Given the Obama governing style which is Talk Big - Then Fold Early  & Often, I don't think we will see any type of real job creation. You need to spend money on job programs most notably the crumbling infrastructure of our country, but Obama has no stomach to deal with this fight in Congress. It always seems like Obama looks at these fights as major nuisance. Instead of spending trillions on wars and defense build up why don't we actually try to fix the roads, bridges, and tunnels? This will put people to work. But Alas Barack doesn't want to fight the good fight for the general public. Not withstanding last months surprising rise in the Case Shiller Home Price Index, housing is still in despair. Foreclosures are still abnormally high and don't get me started on employment.

Back To QE2 for the moment. The media keeps getting this wrong when they all say that QE2 was a failure. This is just not understanding the current monetary plight of America. America is in a balance sheet recession. No matter how much free money is out there people will not take it as many are still trying to deleverage and pay off debt. This was the primary problem in Japan during the 90's. No matter how expansionary the monetary policy is for a sovereign nation if the private sector is over leveraged with debt its not going to make a difference. We end up with a liquidity trap. It happened in Japan and its happening here. The debt and obligations are being put on to the backs of the public sector from the private sector. 20 Years later Japanese public sector debt is reaching 200% of GDP and the USA is already at 90% of GDP.

As I said QE2 wasn't money printing in the classic sense. It was an asset swap. No net money was added to the banking sector. QE2 wasn't monetizing the debt either. This would actually be good for the economy and or national deficit. Think of it this way. The Fed reports to the Treasury. The Treasury pays interest on Treasuries to the Fed. The accounting cancels out. Why doesn't the Fed/Treasury just monetize the debt? In this way some $2 Trillion in US Government Debt gets retired right off the bat, this alleviates the current debt ceiling problems as the national debt gets reduced by that nominal $2Trillion. The Treasury can just credit the Fed electronically or just retire the treasuries as they already been paid for in the open market.

A Simple Thought On European Debt

I will have a more thorough analysis of my thinking on the sovereign debt crisis in Europe but over the weekend kicking around some ideas with some friends, I had this one thought which pretty much encapsulates the environment.

I am under the assumption that European Power Brokers and Policy Makers just want to kick the can down the road just a little more. To buy some more time as to say that time is in infinite supply. This just reminds me of Wile E Coyote in suspended animation running off the cliff. They (The Audience) all know that poor Wile E is  going to crash to the bottom of the canyon but if he can just stop time maybe he doesn't crash after all? We all know how this ends for the lovable Coyote.

The point of all this is that policy makers in Europe which basically are from the French & German persuasion want to just pile all of this bad debt which can't and won't ever be paid off unto the backs of the taxpayers from the banks books. The meme will be that they need to recapitalize bank balance sheets so that any future crisis can be contained. The real meme here is we need to maintain the current elitist banker status quo. Any bailout of any sovereign nation to maintain banker status quo will only be achieved if the peripheral economies actually grow. The taxpayers will stupidly support this only if they see growth in the economies. But how to get growth when it looks like austerity is the current peripheral business plan?

Its a total scam.

XERXES Bernanke Strikes!

Cash is definitely trash

Negative yields on 1 Month Treasuries.

Bid Yield  = 0.015
Ask Yield = -0.015

If you want to park your money in US Treasuries for the next month, you would have to pay Tim Geithner for the pleasure.

This is what happens when you have a centrally planned economy. 

Basel Speaks And Its Not Non Sense....

Over the weekend global banking regulators came to an agreement on a proposal to hit bigger TBTF financial institutions with an extra capital surcharge. What does this mean? Will this be a panacea to stop all of the banker shenanigans? Of course not! But its a strong first step. Let me tell you why. We all know that there are many forces in play when we talk about systemic risk and economic catastrophe. There is not just one policy decision that can make every one feel warm and fuzzy inside, thinking as such is just short sighted, but this decision is very important as it sets up future policy recommendations. Basel has proposed a surcharge (extra) that will range from 1% to 3.5% the amount of capital a TBTF bank has to hold on top of their normal capital requirements. This was in line with the current expectations, this is no surprise, but what was a surprise was the quality of capital  the surcharge has to be comprised of. Banks can't use contingent capital. The sliding scale is also an important factor as this will take away the incentive for these institutions to get bigger.

Again, this wont end TBTF and its not a magic bullet, its a strong first step. Capital surcharges and levels will not prevent forest fires like Smokey says. Basel needs to institute toothy leverage caps and hammer down on off balance sheet/SIVS, with the eventual idea of having all of these banks properly price their inventory to proper marks. Once this is established:

1-Leverage Caps
2-OBS/SIVS take down
3-Hard Capital Requirements
4-Proper Marks on Inventory
5-Hard and Clear liquidity rules.

We can be on our way to having a more robust banking sector. Remember this. Capitalism needs to go back to being capitalism. Failure has to be dealt with. We are not going to have a financial world that is going to be an less safe for failure. This is not happening. What we need to do is - punish stupid behavior. Failure needs to be acknowledged and yes it will come. What we can is once failure does happen its not catastrophic in nature.  Markets are always pro cyclical, changing this changes the very nature of capitalism and human behavior.

Instead of incentivizing TBTF, we need to dissuade these type of actions. In short we need to make getting bigger less profitable.

The advantage of getting too big is that everyone knows that Joe Taxpayer will bail out ludicrous financial dealings all through the world, but now there is a major price to be paid in terms of these surcharges. In short a very strong first step of reigning in TBTF. Banking Institutions are like people because they are run by people. They can't be changed just like you can't change people's actions and behaviors.  They need to change themselves and only within changes in themselves will there be true change everywhere else.

Watch The Transports

One of the main beliefs and principles of the Dow Theory is that major stock market indices when powering higher need to confirm with each other.

So far we have seen more of the same in the Dow, SP, and NASDAQ. All moving higher and making new highs. BUY THE DIP!

But one of the most widely used and followed tenets of the Dow Theory states that when the Dow moves higher and is hitting new highs It should be confirmed with a higher Transportation average.

What we have been seeing of  late is that the Transports have been lagging the major indices. This can be for many reasons such as higher energy prices or I can be that we have a major divergence.

So when the SP is ramping and hitting new highs the Transports should also be powering higher and we have not seen that as of yet, in fact the Transports are now below its 50DMA. This to me is disconcerting.

What to make of this? We an go obviously two ways here. Either this is a temporary blip for the Transports due to the ramp up in Oil because of whats going on in North Africa and the Middle East or this will just lead to a general breakdown for the SP.

Also of note, going back to last Fridays sell off. That day was one of the first real distribution days in the market for some time. There was almost 90% more selling going to the down stocks then up, this also needs to be monitored because generally after a distribution day, the averages tend to rally for a few more days until they don't.