Tuesday, January 15, 2008

Market and the FED Play Russian Roulette

Even two days after the game I still cannot quite believe the Colts lost at home to an ailing Chargers team. I guess that is why you play the games, you just never know. With a forecast of cold weather in the single digits for Sundays Patriots vs. Chargers game the New England crew should keep in mind how inspired the San Diego team is. I love the playoffs!

Citigroup "Earnings" - HA HA HA HA!
Last night I mentioned that the earnings report by Citigroup (C) could have an efect on the market today. I know, that was an amazing prediction! Well, Citi reported and it was funny in a sad, forlorn, and ugly kind of way. From Yahoo Finance:
Citi Loses Almost $10B, Slashes Dividend
Tuesday January 15, 4:15 pm ET By Madlen Read, AP Business Writer
Citi Loses Almost $10B in 4Q, Slashes Dividend, Gets $12.5B Investment After Hefty Write-Downs
NEW YORK (AP) -- Bad bets on mortgages led to a $10 billion loss for Citigroup Inc. in the final quarter of last year, the largest in its 196-year history. As a new wave of weak economic data intensified fears of a recession, the nation's biggest bank also cut jobs, slashed its dividend and turned to foreign investors for an infusion of cash.
The biggest hit came from a $18.1 billion write-down in the value of its investment portfolio. But the bank also set aside $4 billion on Tuesday to cover anticipated losses on loans to U.S. consumers -- a sign that deflated home prices, high energy and food costs, and rising unemployment are making it difficult for many customers to keep up with their payments.
The news sent Citigroup's shares skidding 7 percent, wiping away almost $10 billion in market value on top of the $125 billion the shares already have lost over the past year. Citigroup's tumbling shares helped send the Dow Jones industrial average plunging more than 230 points Tuesday when the government reported that retail sales fell in December and inventories of unsold goods piled up at manufacturers and wholesalers, signs that consumers are pulling back their spending.

Citigroup's chief financial officer Gary Crittenden startled analysts on a conference call by saying the bank doesn't expect the housing industry to stabilize soon. He predicted already slumping U.S. home prices could fall 7 percent further this year and by a similar amount in 2009.
That led some analysts to predict more write-downs could come this year. New Chief Executive Vikram Pandit acknowledged as much, saying "the environment continues to be uncertain" and that the company's results going forward "will definitely be influenced by the economy."

196 years in business for Citi? I did not know that. One of the Economic Disconnects that I have harped on is how out of touch with reality most financial analysts are. This is a prime example. Citi could very well go bye bye in the near future. Losses are not going to stop for the next two years. A company with a 196 year history is losing money hand over fist due to the first step of a home price correction. In aggregate, the picture tells the entire story of the debt bomb and creative finance mess that is the US economy. This report is a shocking, absolutely stunning development that should be calling into question the very soundness of the banking system.

Mr. Pandit chimes in at the end with the basic "it's news to us" kind of defense and mumbles something about things being uncertain. That's really saying something when an analyst will not go out and yell to everyone "ALL CLEAR TIME TO BUY!". Was the market action during the day a realization of the banking troubles? That will be discussed in my second point below. Take home point from the Citi disaster is that even as recently as 3 months ago Citi heads were guaranteeing that the dividend would remain intact. Here we are today with 40% reduction in the dividend as well as looking for cash from abroad. This is serious crapola my friends.

Market and the FED Play Russian Roulette
From Wikipedia:
Russian roulette is a potentially lethal game in which participants place a cartridge in only some—typically one—of the several chambers of a revolver. The cylinder is spun and closed so that the location of the round or rounds are unknown. Participants would then aim the revolver at their own heads and pull the trigger, risking a likely death from the gunshot wound. The term is also used in reference to any potentially lethal form of risk taking, where the person is in effect gambling with their life.

The Market went south today pretty hard. Headline is as follows:
Stocks Fall Sharply on Economic Woes
Tuesday January 15, 5:49 pm ET By Joe Bel Bruno, AP Business Writer
Wall Street Plunges As Weak Economic, Earnings Figures Stir More Concerns About Recession
NEW YORK (AP) -- A growing conviction that the U.S. is headed toward recession sent Wall Street plunging Tuesday, with weak retail sales figures and disappointing results from Citigroup Inc. exacerbating investors' pessimistic mood. The Dow Jones industrials tumbled nearly 280 points.
As with the Citi results above, the Market participants would like to have you believe that a new understanding and fear about the economic picture is driving stocks down. Since when does the stock market react to fundamentals? That makes me chuckle. What drove stocks down today was a hot inflation number for 2007. This would of course in any reasonable person's estimation limit the moves the FED can make with rate cuts. These are not reasonable times. Even Nouriel Roubini, who correctly saw that easy money and fast credit got us in the current mess, is calling for MORE easy money and fast credit to get us out. When a respected economist like him is on board for rate cuts you know something is broken.

The market wants rate cuts. Period. We can, and should, debate the merits of whether rate cuts will help anything, but what is clear is that the Market believes it will help. Which brings me to my point. The Market is playing Russian Roulette right now. Sell offs will continue, in an orderly and not too dangerous fashion, until the BernanSpan FED gives in and starts cutting very aggressively. Right now 50bps is expected, and 75bps is what is actually expected. The Market will continue to bleed in an attempt to scare the FED into action.

Why play this game? Isn't the FED on board anyway? The answer is yes. The FED indeed intends to do what the Market wants, but it will need a little cover as they torpedo the dollar. Even Joe 6-pack saw the inflation report today, so if the FED is going to slash and burn with rate cuts, the FED must convince people that inflation is a secondary concern. The Market is saying "Hey, We are going to shoot ourselves in the head here!" and the FED will have the chance to take the gun away. The problem I see here is this: the Market may not shoot itself in the head right away thanks to the FED, but the ship that they both are on is sinking fast anyway, so the end result is the same.

Market Meltdown - Tomorrow?
Karl Denninger feels like something serious is afoot. While the posts over at Market Ticker have slowed recently, they are always a great read when they come up. The Ticker believes there is as high as a 1 in 4 chance the markets will implode tomorrow. You read that right. Check out the whole post:

Could it happen? Dunno. It does not jibe with my theme that this is a temper tantrum by the Market to force the FED's hand. That said, there is a great many traders and institutions that make sells based on all kinds of technical indicators. If during the current fit the market screws up and breaks some kind of threshold for support levels, cascade selling could occur. Like I have said before, this is a very exciting time! I guess we will know by noon tomorrow.

Have a good night.


Anonymous said...

So what did I miss over the last three weeks????/


PS: Looks like the metals are strong! Oh yeah I missed this site!

getyourselfconnected said...

Glad you are back G!

Of course now that you have come back gold will take a pounding. Just kidding!

watchtower said...

I don`t know if anybody here has ran across these charts, although I suspect most have.
The chart at the top is one that I ran across awhile back, and I can`t seem to get it out of my head.
It's been said before, but sometimes a picture is worth a thousand words.


That is one massive credit debt bubble we have on our hands, and we have added to it since 2005.

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