Monday, June 30, 2008

Grasping at the Last Few Threads of Fabric from a Debt Based Economy

Hello all loyal readers, as well as anyone else that stops by. Last week was a very difficult time. It is hard sometimes to try and get back into your routine after losing anybody in your life. Everything can seem unimportant. But alas, we all must go on. I enjoy posting my ideas and thoughts on the economic issues facing us today, so back at it!

Last Week Wrap-up
There was a ton of action last week, and I cannot possibly recount it all here. Technical levels were breached. Talking heads finally were exposed as silly as they were changing their tunes almost daily from "the worst is over" to "second half recovery is a bust". The best full on wrap of the major issues going on right now can be found at Mish's site, this article in particular:

Yes, I am on board with Mish in the Deflation camp. His logic is sound and the evidence overwhelming. While oil, gold, and other commodities may rise even higher in price, the definition of deflation is a collapse of credit. That is exactly where we are going.

Indymac Bank Will Win the Dead Pool
In the last poll Indymac Bank (IMB) got two votes for most likely to go bye bye. One of those votes was mine, so there is one other genius out there that voted. The structural issues facing IMB are too serious to overcome. It is now endgame time. Can the FED prop up IMB? It is doubtful with most of their balance sheet already gone. Can some kind of merger be forced? Maybe, but what entity can take on IMB? JP Morgan is already looking pretty smug about their Bear Stearns gift, and Bank of America is going to have to litigate lawsuits for years over CFC. Who is left?

Perhaps the FED may have learned their lesson and will allow a terrible bank to go bust. This bears watching to see how the situation is handled. IMB will not be the last to go, so how the close out is done will be of value information wise.

Grasping at the Last Few Threads of Fabric from a Debt Based Economy
It has long been a central theorem here at Economic Disconnect that last summer the FED, the banks, the home builders, and the entire financial system tried to take a deep breathe and hold it as long as possible in a vain attempt to ride out a collapsing real estate debacle. I can kind of understand. The major players are well aware how ridiculous 80% of the mortgages written over the past 3 years are, they know how bad things will get now that prices are not rising. rather than attack the issue at the roots, everyone tried to pretend a miraculous 2nd half recovery would somehow, someway reignite the housing bubble.

Well, time is up. The FED is empty this summer. IMB is going down, and many others are not far behind. The stock market seems to finally caught a clue and is trending down. Home foreclosures are still accelerating. You know the drill. So what does this mean?

This summer will be a season of many firsts. Creative bank closures. Deleveraging of monoline useless insurance. Massive bank losses. Even more bone head moves by the US Congress.

There are still some out there that think continuing on in the same way that got us here is the answer. Even Robert Shiller, an early housing bubble caller, feels that stimulus plans should just be a perpetual thing to keep demand for junk artificially high. The US financial system is near a crisis because too many people felt they were entitled to live like a celebrity. For some time credit was easy enough to make a stab at it. Now too many are so deep in debt, there cannot be any reasonable expectation of debt payback. Exhaustion has finally been reached by the consumer.

And this will hurt. It will hurt everyone. Nobody likes a mess. I am not happy about what is going on. But the process must happen. It was delayed after the 2000 market bust, and now there is nothing to replace home equity. Nothing. What we need are grown ups that will steer the country through this mess and back to sustainable growth based on solid fundamentals. I have no idea where those people are going to come from, but rest assured none of them are in positions of power today!

I am looking for post ideas and topics as I settle back into writing, so leave a suggestion if interested.

Have a good night.

Monday, June 23, 2008


I will not be posting this week. A very good friend of mine lost his 2 year battle with cancer on Saturday June 21st, 2008. Help is required by his fiancee, understandably, during this difficult time.

From the initial hit the diagnosis took on him, through multiple chemo therapy rounds and finally surgery and more chemo, things looked well controlled. Even very positive. The type of tumors that came back were as virulent and aggressive as anything I have heard of, and I am in the biotech field. Sad times indeed.

Until next time, have a good night.

Friday, June 20, 2008

Glad The Worst Is Behind Us

I tried once again last night to get the wireless booster thingy I bought to work, but no dice. I must be honest when I say I HATE computer related stuff. It always seems to me that the design of all of it is complicated, not because it has to be, but because the loser geek types that make this crap like to make it that way. Whatever. I will have to decide this weekend what to try because my patience level is at absolute ZERO with this spotty internet deal. For only $120 a month you too can have useless internet usage! Thanks Comcast.

Richard Bove Still Making Sure He Stays in the News
There is a school of thought that any publicity, even bad, is good if it gets your name out there. While one can debate such thinking, one of Economic Disconnect's favorite analysts was out again today with a call on Citigroup (C):
UPDATE 1-Ladenburg's Bove widens 2008 loss view for Citigroup
Ladenburg Thalmann analyst Richard Bove widened his 2008 loss estimate for Citigroup Inc and cut his price target on the stock, after the largest U.S. bank said it could have substantial subprime write-downs in the second quarter.
Bove widened his 2008 loss estimate for the company to 36 cents a share from 19 cents and lowered his price target on the stock to $25 from $31.
The analyst said he sees another multi billion write-downs of Citigroup's super senior CDO (collateralized debt obligations) portfolio, which was marked down by about $6 billion in the first quarter, due to widening of spreads

More marks are expected on the subprime portfolio," Bove said, adding the $1.5 billion write-down due to the rating downgrades of monoline bond insurers might be matched by a similar write-down in the second quarter.
"Finally, there will be higher losses on the credit card portfolio and these losses will mount all year," said Bove, who maintained his "buy" rating on the stock based on the improved performance of Citigroup's core business and positive longer term outlook.

Richard Bove, welcome to reality. Mr. "financials are the at a generational buy" is singing a new tune. If the BSC guys can get indicted for lying, why not this dude? I have no idea. Compare the new Bove with the old Bove here:

Israel and Iran; What is Going On?
The buzz over the last week or so has involved a possible strike by Israel on Iranian nuclear facilities. What is my position on such a thing? Glad you asked! While I really do not understand why countries like Iran (or the former Iraq, Pakistan, North Korea) think a nuclear weapon is some amazing thing. Perhaps as a bargaining chip I guess they could be. Iran is run by crazies, is full of crazies, and is crazy after that. So my position is if it is at all possible, they should not have a nuclear bomb. So is it possible?

Iran must have known that a US or Israeli strike would be forthcoming when building their reaciors, centrifuges, bomb centers, etc. These structures are likely hardened and underground. I fail to see a way that an air strike can get rid of them. On top of that, with the US intelligence agencies so great at getting things correct (joke obviously) how in the world are they gonna know where to hit? IS the Israeli intelligence THAT much better? Who knows. I say hit it if possible, but I don't see how it is possible. All this is likely noise and bluster. Lets hope so. I used to use the Stratfor page ans the Strategy page for military analysis, but both sites are so heavily full of adds and require subscriptions to view the good insider material that I hardly check them any more.

Glad The Worst Is Behind Us
Another rough one for the stock market today. The DOW fell below 12,000 again and this was a big fear for those technical analysis types. Aren't ypu glad the worst is behind us? I am kicking myself for not putting money to work on several short funds I wanted to try, I would have been up pretty good. Oh well I am a chicken, I mean I am good at CAPITAL PRESERVATION.

So what does this mean? Well, with the monoline insurer downgrade, there stands to be another 100 Billion to be written down in the near future. The housing situation is going to get worse over the summer. Banks are goingf to have a tough time of it. We know all of this, though it is fun to see some in the mainstream finally getting a clue! What is the action going forward?

I would hazard a guess that things may be sort of stuck for the summer. I would say range bound between 11,500-12,300 on the DOW seems about right. Certainly there is no reason to be in stocks, but there is way too many people that will want to play bottom catcher for a big downside risk. The upside will be capped as news flow will be just terrible. Volatility will continue to be high, but I feel pretty good about those ranges. If the DOW gets to the 11,500 area, I will buy some upside bets.

Friday Night Entertainment
It is the weekend, so let's get relaxed, or excited, or just entertained, yes?

Great BBQ Smoking Site
I came across this guy's smoker site today, and his process is so simple and the food looks so good it makes me want to buy a smoker and get to work. Check it out here:
I wonder what smoked prime rib tastes like? Anyone ever try it?

Science Corner
Cornstarch and water make a cool non-newtonian fluid that can behave as a solid under impact force, but liquid as ground phase. Check out these crazy guys:

Recombinant DNA technology is my job, it is what pays the bills for me. Here is a quick little video sombody made that is pretty good at shoing what I do:

Have a good night.

Thursday, June 19, 2008

Thursday Bomb Dropping

This is going to be short. For the past few days my wireless connection has seriously degraded, disconnecting so many time that a blog post is taking me close to 2 and a half to 3 hours to complete because of how hard it is to have multiple windows open, etc. Very annoying. I am going to research my options. The wife bought a new laptop, and that thing works all over the house. I may just upgrade my entire computer. Who knows.

A New Way To Screw Yourself; Any Takers?
Came across this article today on CNBC:

The key excerpt:
"But they didn't want to get into a costly reverse mortgage.
Instead, the Dollars signed up for a relatively new product called a Rex Agreement.
It gave them $117,000 in cash to spend however they wanted, and they owe no payments until they sell the house.
At that time, they'll owe Rex & Co. the $117,000 plus half of the appreciation in their home's worth between the time they signed the agreement and the time they sell the house.
If the house goes down in value, Rex & Co. will eat half of that loss as well.
Since they signed the agreement last October, prices in their neighborhood have dropped.
So far, it's been a good deal for the Dollars (yes, that's their real name.) Rex is the first of several new products on the market aimed at this shared equity or shared appreciation concept

I did not mean the home owner here screwing themselves, I am talking about more dumb "innovation" from the financial community. Read over the whole thing and quickly you are going to see a system made to fail. Too funny.

With a Whimper, MBIA and Ambac Go Gentle Into That Good Night
I will not excerpt the AP story so I will not get sued, so here it is:

A while back we heard all the bla bla about how this downgrade would end the financial system. Well here it is and no reaction so far, though it has been only 30 minutes. We will see now just how all that insurance written by MBI and ABK will be revalued. Good stuff.

Still Not Getting It
I have CNBC on the TV behind me and I just heard one dummy on Kudlow and company say that the issue with housing is not that people do not want to buy, it is that the loans are not being made. He argues it is a liquidity issue. Sadly even now after all the evidence has been out there another commentator has zero idea on what is going on.

The only fools that want loans and cannot get them are the kind of loans that are defaulting en masse right now. That is a structural issue, not a liquidity issue. Some might argue that making bad loans will work so long as they never have to be paid back. Well, if everything went the way of a unicorn blessed fairy land, then yes we would have eternal rapture. Whatever.

I still am aiming for a Friday rock blog, so leave suggestions.

Have a good night.

Wednesday, June 18, 2008

"I Triple Dog Dare You!"

Another "unsettled" weather day. I sure wish things would settle into a nice warm summer pattern. That would be just aces. I may go to check out the 2008 Infiniti G35x this weekend as I need to trade my 2005 in pretty soon to get good trade in value. Seems like the longer I can wait the better deal I may get as car sales are collapsing all across the auto spectrum.

Countrywide Sweetheart Deals May be Too Common to Uncover
Picture this scenario:
You are the Republican party going into this years election. With approval ratings in the gutter, an unpopular president, a presidential nominee nobody is excited over, and the blame the incumbents mentality common to US voters, things are looking bad. Very bad. Along comes a story of a couple of DEMOCRATS that have received special mortgage deals from Countrywide Financial (CFC). What a break! With the whole "subprime targets the poor" and all that predatory lending anger, this is a huge story to hit with.

Only one problem: the republicans are in the same jam. Big surprise. Are you surprised because I know I am. From the great blogger, I saw this great piece on the current state of CFC mortgage investigation (from
GOP member calls for mortgage inquiry
By MARTIN KADY II 6/17/08 4:22 AM EST
A leading House Republican called Monday for hearings to determine which lawmakers received discount mortgage deals from Countrywide Financial Corp., but his colleagues in the House and the Senate don’t seem particularly eager to start turning over rocks.
In the wake of reports that Sens. Chris Dodd (D-Conn.) and Kent Conrad (D-N.D.) received special VIP discounts on Countrywide mortgages, Texas Republican Rep. Jeb Hensarling said Monday that he wants to know which members of Congress “might be knowingly or unknowingly receiving preferential treatment while millions of hardworking Americans struggle to repay their mortgage debts and cope with $4-a-gallon gasoline and soaring food prices.”
In what looks to be a rough election cycle for Republicans, a Democratic-focused mortgage scandal could be just the break the GOP needs. But no other Republican leader jumped on Hensarling’s bandwagon Monday, and aides said they were reluctant to push forward with a probe because they didn’t know what it might reveal.“You have to be very careful about opening Pandora’s box,” said one House GOP aide. “We could use it [politically], but we’d have to do due diligence on our side.” Added a Senate GOP aide: “You don’t see many people jumping on this, because you don’t know if anyone else is dirty.”

Color me unsurprised that the same congress we may need to investigate illegal mortgage practices cannot do so because, drum roll, they are part of the illegal mortgage game. This is especially galling seeing that both the banks and home builders are screaming for federal bailouts (and getting them) and some senators are on the hook for special treatment. What a mess.

"I Triple Dog Dare You!"
Flick: Are you kidding? Stick my tongue to that stupid pole? That's dumb!
Schwartz: That's 'cause you know it'll stick!
Flick: You're full of it!
Schwartz: Oh yeah?
Flick: Yeah!
Schwartz: Well I double-DOG-dare ya!
Ralphie as Adult: [narrating] NOW it was serious. A double-dog-dare. What else was there but a triple-dare-you, and then, the coup de grace of all dares, the sinister triple-dog-dare.
Schwartz: I TRIPLE-dog-dare ya!
Ralphie as Adult: [narrating] Schwartz created a slight breach of etiquette by skipping the triple-dare-you and going right for the throat!
-from the film "A Christmas Story"

It seems like some firms just cannot go gentle into that goodnight. The NY Times Gretchen Morgenson with Vikas Bajaj have a great story up today about MBIA. Full article here:

The boiled down version: MBIA has lost its triple A rating, and this will end their business pretty much. They will be required to raise large amounts of cash to cover their massive underwriting obligations, but instead of getting pushed into anything, MBIA can hold the spector of massive, and I mean massive, credit default swap implosion as a sword of Damocles. How big? Around $137 Billion in swaps are backed by MBIA. MBIA market cap today: 1.6 Billion. If you just whistled out loud, you are not alone. WOWZA!

And so what about all those intertwined positions? If Bear Stearns had to be bailed out by the FED to avert a total systemic collapse, surely the MBIA and matching Ambac blow up will have to backstopped by the FED, yes? The FED can ride to the rescue with their stash of treasuries. Oh, the FED has lent out 80% of those already? And they have a bunch of the toxic mortgage paper in return? Ouchie indeed.

Truly, only the very brightest minds could have come up with such an interwoven mess of junk. Wall Street designed a situation where they stood to collect huge profits, but need to pass any losses onto the taxpayer to keep the system running. Could not have made up a better plan if I had time to try. This is going to be a very interesting summer.

Have a good night.

Tuesday, June 17, 2008

JP Morgan to FED: Thanks Chumps!

Strange weather. Late night thunderstorms had the dog all riled up, which was not fun if you happen to want to sleep. It was mostly sunny all day, then as I was leaving work it got very dark and rained very hard for about an hour. Then light again. "Unsettled" is what the weather for caster calls it. OK.

AP Gets Crabby
I am not sure what to make of the whole move the Associated Press (AP) is trying to make. It seems they have taken umbrage to the fact that bloggers all over the universe use their stories in posts. I know I do. I guess there is some concern that AP is not capturing the revenue they are due by this kind of widespread copy making. I guess that is fair enough.

I like Yahoo Finance for most of the news stories I use because I feel that AP and Reuters represent the basic mainstream media reporting that bugs me. If my using the stories from there is not getting back to AP, then perhaps they need to better monetize their material. I think it is useless to try and stop bloggers from excerpting, there are just too many to follow up on. Until I get a clear directive from AP, I will continue to excerpt stories. This may change in the future. Geez, can't even use mainstream stories any more!

Financial Stocks Unhinged
If you have been following stocks like LEH, WM, and WB it has been revealing as an exercise. One day up 15%, the next day down 8%. Day after day. Week after week. What does this mean? Probably two things at least:
One: Wall Street has zero ability to price financial stocks. While this has always been true (due to funny money book keeping) there seems to be a sudden realization of this fact. Add to this the serial dilution that capital raising does and you see that this area is subject to quick and nasty repricing to both the up and downside. Like I have said, the value of an insolvent bank is zero, but a FED bailed insolvent bank has a value of X. Solve for X and you have a trading theory.
Two: How much is short interest playing a role here? Wild swings of 25% from peak to trough have been weekly pretty common, and those kind of swings smack of short covering.

In either case, it bears watching to see the levels of volatility involved here. In a finance based economy I wonder how long things can remain reasonably ok while the money machine companies themselves are broken. We may have one part of that answer this summer when the FED runs out of cash.

JP Morgan to FED: Thanks Chumps!
From my favorite department, the department of "you can't make this up", comes this story from CNBC today about the JP Morgan (JPM) buyout of Bear Stearns (BSC) that the FED felt was the key to keeping the universe from unravelling and the end of the world as we know it:
JPMorgan Chase: We Got Bear Stearns on the Cheap
By Charles Gasparino, On-Air Editor 17 Jun 2008 12:36 PM ET
JP Morgan Chase's top investment banking executives conceded yesterday that their acquisition of Bear Stearns was worth far more than the rock-bottom $10 a share price they paid, but that the market turmoil is still taking a toll on investment-banking profits and may result in further layoffs, CNBC has learned.
The executives—CEO Jamie Dimon, as well as investment banking co-heads Steve Black and Bill Winters—made the comments late yesterday afternoon during their first company address to the newly combined investment bank.
Bear was forced to sell itself to JPMorgan amid a run on the bank that nearly toppled the US financial markets as investors bet that bad loans on Bear’s books would leave the firm insolvent. Under the terms of the deal, the Federal Reserve guaranteed $30 billion of those bad loans, while JPMorgan agreed to assume the first $1 billion.
That said, Black, the investment banking co-chief, said the integration of the firm is proceeding "smoothly" and that JP Morgan "got something that has far more value then the price we paid," according to people who attended.

Not to say I told you so, but I told you so! The FED has no idea how sleazy these guys are. JPM not even a half year removed from getting BSC on a cramdown deal by the FED is already out gloating about it. If you were a BSC major stock price loser, you may be even more pissed off now.

I love this story. It shows how shameless JPM is, how foolish the FED is, and what a fix the rest of us are in!

Have a good night.

Monday, June 16, 2008

CEO Pay Breaks Records as Their Incompetence Shatters Assumptions

Cruddy rain for the next 3-4 days here. Cool and limited sun as well. Wonderful. Really should not complain, compared to the terrible flooding going on in the Midwest I have it perfect. I thought when major flooding occurred there was utter lawlessness and widespread looting? As far as I can gather from reports, there has been none of either. Makes you wonder.

Absolute Must Read
I will often excerpt or link to the best articles I come across if I fee; that the readers here would benefit from seeing the piece. Today there is an absolute MUST READ from the excellent site OC register. The post has a great slide show that investigates a bunch of SoCal foreclosure listings, as well as some interviews. Great stuff. Here is is, slide show is a bottom:

While some at the FED would have you believe that you cannot spot a bubble until it bursts, common sense tells us that is retarded. Whenever fundamental value is ignored, or easy money is raging into any asset class, there is a good bet a bubble is afoot. Looking at the last sale price for many of the homes on the slide show it is clear that some serious delusion was going on.

Richard Fuld Takes Responsibility
Today LEH released their loss report, and it was what they had already said last week. The CEO Mr. Fuld, who last month saw the bottom, took responsibility for the mess LEH is in. I certainly respect his courage! Though his golden parachute probably adds to his bravado ability.

What this means is that when housing gets worse and LEH is still hemorrhaging cash this summer, you will see Mr. Fuld take a walk into the sunset. The big "change at the top" will be the new "bottom is in" call, but that bottom is going to be a myth.

CEO Pay Breaks Records as Their Incompetence Shatters Assumptions
I cannot even excerpt this sick piece, so just read it already:

Basically, as the financial companies have lost billions of dollars and have had to be recapitalized by the FED (through our tax dollars) the CEO's pay has gone up without a hitch. GM, yes that same company laying off workers and losing money like mad, that CEO pay went up too.

At a time when inflationary pressures are hitting the wallet through the gas, food, and medical expense routes, this kind of thing really rankles me. The FED is bending over for Wall Street and is being made a fool of. I would not care but you and I are going to be on the hook for this money. I say we go collect some back from these fellows, yes? Perhaps they could contribute to the recapitalization of the taxpayer instead?

Have a good night.

Friday, June 13, 2008

Friday Night Ramblings

Friday has arrived yet again. Some weeks fly by, while others grind away. This week went by pretty fast. Tons of yard work to do tomorrow. I wanted to say a special thanks to the Boston Celtics. Thanks for sucking me into watching the entire game last night. Great comeback and they now sit at the edge of a championship. Hopefully they will finish the series soon because these midnight bedtimes and 5am wake ups are rough stuff.

We Have Lost Tim Russert
Tim Russert has died today. The longtime "Meet The Press" host was the epitome of integrity and class. I remember stating up all night during the election of 2000 and Tim was up all night as well going over the dry erase board with various election scenarios. His unbiased hard questions were the best in the business. If a politician would not go on Russert's show, that politician was dead in the water. Regardless of your political affiliation, losing Mr. Russert is severe loss for the entire political analysis side of television. He was a true journalist, and I think the readers here understand how rare real journalists are these days. A huge loss.

Banks and Housing Stocks Whistling Past the Graveyard
LEH was on fire today, and homebuilder stocks have been on a tear. Does the market know a turnaround is at hand? Is this the long awaited "bottom" that everyone has been dreaming of?

Probably not. Here is a list of today's headlines that shot the markets up big today:
-US foreclosure filings surge 48 percent in May
-Inflation jumps by biggest amount in 6 months
-Corn jumps to record for 6th day on Midwest floods

The new bullish mantra goes something like this;
The FED will raise rates in August or September. This will push UP the dollar and CRUSH the price of oil. This will allow gas prices to go down. This will in turn reignite both the consumer and housing purchases.
Sounds pretty good. Almost makes a type of linear thinking sense even. What is the "monkey in the wrench"? If you guessed that the FED cannot raise rates you are a big winner! All this crapola about the FED getting tough on inflation would be funny if it was not so sad. With Oil over $130 a barrel, gas over $4 a gallon and the dollar still near all time lows, the idea that the FED has now seen enough is comedy. While I do not give stock recommendations here, today's big run up was the move I wanted to see before I put some cash to work in SKF and SRS, two short funds that specialize in banks and real estate. With gold taking a pounding, the miners are starting to look attractive to me as well.

Bank Dead Pool Guesses
Seeing that management cannot be trusted, Level III assets have no known quantification, loans are going bad so fast no models can predict losses, and so on the banking industry today is capable of imploding any day. Or maybe never. While I cannot be sure of bank failures, nobody can be sure bank X has no issues, there is no way to tell.

So I will start my own banking dead pool. You can name yours in the comments section, and vote on likely candidates in the new poll. My dead pool players are:
-Indymac bank (IMB)
-Lehman Brothers (LEH)
-Washington Mutual (WM)
This means I predict these firms will not make it out of 2008 as independent firms. They will either:
-Go bust and close
-Go bust and get a FED bailout
-Get forced down some big banks throat as a merger
Make your own list!

Friday Night Entertainment
Time to unwind and get into the weekend frame of mind.

Comic Relief
Keep your eyes where they belong!
more cat pictures

Film Recommendation
One of my all time favorite films was "Excalibur". This film had many of the best actors of the day in the film (a young Helen Mirren included) as well as the great sword plunged into stone scene. Here is a trailer put together by a fan:

Musical Interludes
Everybody knows the song "Eye of the Tiger" by Survivor featured in the film Rocky III. The question is have you ever seen the terrible original video for the song?:

The all star group The Highwaymen with their great song "Highwayman":

I love the band Heart, and their later songs were still good, especially the vocals. Check out "Alone":

Have a good night.

Thursday, June 12, 2008

Socialism is Close at Hand

Judging from the lack of comments as of late I must be putting together crappy posts. Sorry if the material has not been interesting. I am really fond of the post Tuesday night where I put the idea:
"..there seems to be a real struggle right now trying to value insolvent banks. As their true value is of course ZERO, their value as a FED backstopped institution is unknown."
Watching the wild gyrations of the financial stocks seems to back up that line of reasoning. Anyways, hope the material is still entertaining and value adding.

Budweiser- Say It Will Not Happen!
The Belgian super sized brewer InBev submitted an unsolicited take over offer to Anheuser-Busch Co Inc. I am not going to comment on the deal, as I have zero interest in the details. I just want to go on record with the statement DO NOT CHANGE BUD PLEASE!. Yes, I am a Budweiser drinker. Yes, I know it is trendy to make fun of Bud and say it is piss and all that. I like it. I like the crisp taste. I love how consistent the beer is from package to package. I like UFO Heffenwizen, but every 3rd or 4th six pack tastes so bad I cannot drink it again for a while. Never happens with Bud. If InBev gets BUD, please do not change a thing.
Note: Late tonight the Mexican firm Modelo has said they have been approached by BUD as a possible blocking move to the InBev deal. I will keep an eye on this one!

Socialism Making a Deep Push Into the Collective Mindset
The key to making people as a group do something that you want, you nee to do two things:
1.) Make the desired outcome seem preferred to the group
2.) Limit or close off alternate options
This is how communism and socialism get a toehold. No sane person thinking rationally would ever choose socialism (or communism for that matter), yet Europe is dominated by socialists, and even modern day communists are just over eager socialists.

In America the whole capitalism thing is under attack right now because the rising prices of some items that people do not want to be more expensive is causing some irrational thought. The whole Bear Stearns bailout will be seen as THE inflection point where something got broken. The next step will be the housing price attempted floor setting.

Not to be outdone, why not just control, well, everything? Take a look at this headline and see how bad things have become:

Oil is too important to leave to market forces
A six-point plan is needed to see off the latest threat to the economic stability of the world
Anatole Kaletsky
Full Article:

I will not even excerpt this terrible piece which basically says oil and gas are too important to let free markets decide the prices. Home prices were ok to let the markets set them as long as they were rising, but now not so much. Oil is an important world need, so more regulation is needed. You know the drill.

I am shocked daily at the kind of pure socialism thought that is rampant right now in the US. While I am a firm believer that you get exactly what you pay for as well as exactly what you deserve, I realize this was probably inevitable. It is still as sad process to watch though.

Raise Interest Rates
Today saw more talk about inflation and raising the FED rate in August, or September at the latest. Longtime readers know what I think of that line of thought, but just for new readers I will tell you what I think about the idea that the FED will be raising rates anytime this year:
Got that? The markets keep wriggling around as if some comments form some FED officials make policy. Actions speak louder than words and August will be here soon enough. We shall see who is right, and who is gullible.

Writing Interlude
I had recently come across a few poems that I remember from High School English written by the great Edwin Arlington Robinson. He wrote two that I remember clearly, "Richard Cory" and "Miniver Cheevy". This remembrance also put me in the mind of the Edgar Lee Masters work "Spoon River Anthology" which I also loved, and am now in the market for a good copy of (preferably old and valuable). Here is "Richard Cory" for review:

Richard Cory
Whenever Richard Cory went down town,
We people on the pavement looked at him:
He was a gentleman from sole to crown,
Clean favored, and imperially slim.

And he was always quietly arrayed,
And he was always human when he talked;
But still he fluttered pulses when he said,
"Good-morning," and he glittered when he walked.

And he was rich, richer than a king—
And admirably schooled in every grace:
In fine, we thought that he was everything
To make us wish that we were in his place.

So on we worked, and waited for the light,
And went without the meat, and cursed the bread;
And Richard Cory, one calm summer night,
Went home and put a bullet through his head.

As always, I am open to Friday night entertainment ideas for the blog, so leave a comment.

Have a good night.

Wednesday, June 11, 2008

We Have Nothing To Fear but Inflation Psychology Itself!

It cooled down here today. The humidity went away, but the temps stayed high. I have no problem with that. Crazy storms went through last night when the cooler weather smashed into the hot and humid air! Lots of lightning, thunder and wild winds.

Merrill Lynch cuts Lehman Rating a Week After Upgrade
I know I would never buy a stock just because some guy on tv ( hello Cramer) or a investment firm said to. For some reason markets do tend to move when the "buy, hold, neutral, sell" ratings are changed one way or the other by analysts. Enron was a buy of course the day before they closed the doors forever, so you can guess the value of these ratings. AAA all the way!

I mention one of these changes today only for the context it provides to my theory that the usual suspects have no idea what they are doing right now. As if we needed any more proof, look at this from Yahoo Finance (Reuters):
Merrill cuts Lehman rating a week after upgrade
Wed Jun 11, 2008 3:39pm EDT
NEW YORK (Reuters) - Merrill Lynch downgraded its rating on Lehman Brothers Holdings Inc (LEH) to "neutral" from "buy" on Wednesday, just a week after upgrading the stock, and Lehman shares fell 8.4 percent.
Merrill analysts Guy Moszkowski and Patrick Davitt lowered their price target to $28 from $36, saying Lehman's "business mix is poor for this environment," according to a research note obtained by Reuters.
Lehman's shares, which were already down after a report that it may look to raise more capital and amid a broader decline in financial stocks, fell to $2.33 to $25.17 in afternoon trading on the New York Stock Exchange. The stock fell as low as $24.97 during the session.
"Clearly we don't like removing the Buy rating just a week after putting it in place, and at a price 10% lower," the Merrill analysts wrote. "But it seems clear to us now that the move to Buy was premature."

But Moszkowski and Davitt said they expected the brokerage would survive because of a strong liquidity position and access to the Federal Reserve discount window.

MER analysts were wrong by a long shot just last week, but this new report should be taken seriously? In the words of John McEnroe "YOU CANNOT BE SERIOUS!" And what is with a "neutral" rating for a firm the writers of the report themselves pin the survival of on continued access to the FED discount window? Without the special emergency facility of the FED, LEH would be finished? What happens after August when the FED's cash is all done? I guess there will be another report at that time.

We Have Nothing To Fear but Inflation Psychology Itself!
On June 3rd I included a quote from Mr. Bernanke that clearly showed how he saw inflation as an issue. To recap:
"A rough stabilization of commodity prices, even at high levels, would result in a relatively rapid moderation of inflation, consistent with the projections of Federal Reserve governors and Reserve Bank presidents for 2009 and 2010"
Here we see Bernanke is not concerned with high prices we get stuck with per se, just that those increases may not "moderate" and thus will stoke "inflation expectations".

Today Federal Reserve Vice Chairman Donald Kohn had the same theme running as well, from Reuters:
Fed's Kohn says risks of inflation psychology higher
Wednesday June 11, 11:40 am ET
WASHINGTON (Reuters) - A steady rise in energy prices has fueled an inflationary psychology in the United States and could be a problem if it does not reverse, Federal Reserve Vice Chairman Donald Kohn said on Wednesday.
"Repeated increases in energy prices and their effect on overall inflation have contributed to a rise in the year- ahead inflation expectation of households," Kohn said in remarks prepared for delivery to a conference organized by the Boston Federal Reserve Bank in Chatham, Mass.
Kohn said evidence that longer-term inflation expectations have edged up is a particular worry.
"Any tendency for these longer-term inflation expectations to drift higher or even fail to reverse over time would have troublesome implications for the outlook for inflation," he said.

Besides the usual roundabout, broken sentence way of saying things that Kohn has, you see once again that the FED types have no moorings in reality. They are worried that the doubling of your energy bill over the past year, in no small part due to the FED's own mistakes, will become something you actually think about! Imagine if people began to assume that the prices of food and gas and other items will keep going up! Inflation expectations running amok! Oh No!

To the FED, that you are paying $4 a gallon for gas is not important. What is important is that you do not fear you will be paying $5 a gallon in the near future! Too funny. If you screwballs at the FED had been up to the task, I would not have to fear $5 gas, or $4 gas, or even $3 gas. Keep the acronym lending facilities open. Keep accepting "AAA" rated mortgage crap paper for treasuries. Keep bailing out firms that deserve to fail and I can guarantee inflation psychology will keep going up. And up. It is called looking around and seeing what is going on around you. Some people do it. The FED should give it a try.

Have a good night.

Tuesday, June 10, 2008

Is the FED Backstop Causing the Current Volatility?

Heat wave here in Massachusetts. It has been 90 degrees plus since about noon Saturday. Had to run out yesterday and buy two air conditioners because our dog (a pug) cannot tolerate high temps. Late tonight a cool down is expected.

Rare Four Standard Deviation Event
With that kind of teaser, I must have your complete attention! Mish over at his amazing site has been on fire as of late, and his discussion of widening yield spreads across various bonds. I will not pretend I have full command of these issues, but the key point is that when a rare event like a 4 standard deviation occurs, something is going on. Something big. Read the post here:

Any institution or major player that has a big position that is wrong is looking at serious trouble that came about over the course of a very short time. Stress on the street must be at a level not seen is some time. I wish I could get a graph of alcohol sales for the Wall Street bars and liquor stores over the past year, I bet it is spiking this week!

Lehman Brothers a Disgusting Joke
The whole sorry parade that is Lehman Brothers (LEH) makes me ill. Seriously ill. If you wanted to you could not make up a story so crazy and dumb as the real time progression has been for LEH. Disgusting.

LEH had said that they did not need additional capital. They blew 500 Million buying their own stock on the open market trying to stem a move down. They complained about short sellers. They went out and reported a quarter that erased 8 YEARS worth of earnings, and went out to get 6 Billion in capital they said they did not need. Whatever. This company is a joke.

Just who in their right mind is buying in to LEH's offering? I mean, unless you are a firm believer that LEH is either going to survive and prosper, or get taken out by a larger entity, buying at the offered $28 is a HUGE risk. Even a FED bailout is highly unlikely to make that buy whole again. There must be some devil in the details that I do not know. Or more risk taking. Go figure.

Is the FED Backstop Causing the Current Volatility?
The FED's terrible BSC bailout will have consequence on many levels for many years. I will not bore you loyal readers with another sorry rant about moral hazard, you know how I feel about those punks at the FED by this point.

What I want to put out there tonight is an observation about the markets, mostly the action in the financials. Pull up any chart since January, and you will see wild volatility and crazy swings. Watch LEH just on Friday of last week, and Monday-Tuesday this week and you can see what I mean.

I am wondering if players out there are at getting aggressively short various banks/brokerages to push the share prices down. Historically this kind of run would cause a "crisis" like the one at BSC, but in the new era of "bailout nation" no collapse occurs. These same players may be opposed by bottom guessers that are trying to figure out where a FED backstop would put a floor under a stock. Or the same shorters could be doing both. Either way, there seems to be a real struggle right now trying to value insolvent banks. As their true value is of course ZERO, their value as a FED backstopped institution is unknown. The action right now in stocks like WM, LEH, and WB seem to be a tussle to figure this value out.

The FED has no idea what kind of dirty Wall Street is. They would indeed be betting on a FED backstop. They would even be using the same cash the FED loaned them to push a troubled bank into a crisis so the FED has to act, thus making cash on the way down, and on the FED rescue. Thanks gentlemen. You are all wonderful people.

Have a good night.

Sunday, June 8, 2008

Sunday Mixed Bag

Fishing trip was fairly productive. A little earlier in the summer than I am used to, but I was still able to find some fish. Hot here today, around 90 degrees and humid. Will be this was until Tuesday. I will never complain about heat.

Obama vs. McCain; Any Difference?
Luckily for the USA, Hillary Clinton ended her run for the presidency this weekend. The match up is Barack Obama (D) versus John McCain (R). I like to keep the politics out of the blog, but when they have an economic angle, I throw it in there. That said, there is not too much difference between the two candidates. I imagine Obama might have more spending ideas, but after the last 8 years who can say with a straight face that republicans spend less than democrats?
Keep in mind that if the nuclear fallout of the housing and credit bust gets as bad as I have forecast, whomever wins in November is likely a on term chief. Not that it would be their fault, but when is the public a fair judge? I am leaning towards Obama, as he certainly would be a fresh face and he has a ton of energy. If McCain adds Mitt Romney to his ticket for VP then I am with McCain.

Monday Open
So what is going to happen tomorrow? A huge gap down followed by panic selling that kills the indexes by 5% or more? A vicious rally up recapturing Friday's losses? Who can say. I will venture a guesstimate of a pretty good "UP" day, about 150 points on the DOW. Tuesday may have a more important commentary on the stock market going forward, as Monday will be too closely watched to be real.
Friday was a rough session. The oil issue is not going away. The home price meltdown is not going away. Banking issues are not going away, though some banks may indeed go away! The FED has almost done away with their entire balance sheet.
The macro picture is so bad, that I feel that things like the stock market and data sets like unemployment do not reflect the situation. I think things are bad for the first time since the early 1980's and people are still in denial. We are getting closer though to realization.

Have a good night.

Friday, June 6, 2008

Market Meltdown, June 6th Edition

Weather looks like it be OK for a shot at fishing tomorrow. I have to pack up gear and make lunch tonight, so blogging may be a little short. I have not watched NBA basketball in years (since the last days of the Partrick Ewing Knicks) but I did watch game 1 of the title match last night between the LA Lakers and Boston Celtics. Great game, with plenty of great players. It was actually enjoyable.

While I Was Watching LEH, Washington Mutual Has Almost Failed
I am now convinced that LEH is not going to go bust. Why? Because while all the talk and focus has been on them, another good sized bank Washington Mutual (WM) has had back to back 10% plus down days and the stock now sits at lows not seen since the early 1990's! Downside volume has been enormous, and this has all the markings of a bank run. Also pay notice that unlike BSC and LEH, WM is totally silent right now. They must really be up against it to not even try to lie about their position. I would expect some kind of news out on WM next week.

Market Meltdown, June 6th Edition
So what happened today to cause such a stir to the downside? The DOW was down almost 400 points and closed on the lows of the day. Why today? Lets recap some data points:

Unemployment Numbers: The BLS showed about 50k jobs lost, and a bump in the unemployment rate to 5.5% from 5%; a 10% jump most in 22 years. So what? Estimates were for even more job losses, so why the reaction? Maybe the jump in unemployment is spooking the markets because if that number goes over 6%, the average joe and jane on the street is going to get upset. Very upset.

Oil Running Away: After a rest yesterday, Oil was a running bull today closing up almost 11 dollars at $139 a barrel. We have been told that high oil and gas prices will not hurt the consumer, so it is strange that this action would scare the street. Maybe that nugget of thought got put to rest today.

So in short, I do not think anything data wise was the culprit today. It is my position that those "in the know" have been unloading their stock holdings to those "not well informed" over the past few months. I imagine there may not be much support under the market at all. All those calls to "buy financials" or "buy stocks now while they are cheap" worked to setup the suckers to foot the bill for today's big move down. Tough times indeed.

Today had a scary feel to it. While I am very bearish on the US economy and the banks in general, the runaway free fall that stocks had at the close and the vicious upswing in oil prices had a feel of helplessness that I found a bit alarming. The problem with a broken system that is filled with so much bad data, bad analysis, and a general lack of understanding as to the severity of the credit crisis makes days like today both possible and likely to repeat. Suddenly someone gets a clue and dumps, then all hell breaks loose.

Monday is a big test. With a full weekend to digest the monoline insurance rating change, oil prices, unemployment numbers, and possible bank failures we will get an idea how people feel about stocks. Should be a good time.

I would never have a Friday without the entertainment section of the blog! I enjoy the Friday night fun stuff and I hope you do too.

Funny Picture
Sometimes a lobster comes from the wrong side of the tracks and resorts to violence to survive:
more cat pictures

Film Recommendation
If you have not see the original "Escape from New York" with Kurt Russel, you need to. It is a true classic. Check out the scene where Snake is made an offer:

Rock Blogging
An old school MTV video of the J. Geils Band and their tune "Freeze Frame":

One of my favorite ladies, check out Joan Jett And The Blackhearts with "I Hate Myself For Loving You":

Take a listen to Ozzy Osbourne with "Killer of Giants". Great tune and good words to boot:

Have a good night.

Thursday, June 5, 2008

All the Big News is Bad, The Tiny News is OK

If the weather does not improve quickly, my fishing trip may be on hold. The weather report on the local news was so off the mark for today it now calls into question the great Saturday weather forecast. Maybe meteorologists should get a job at the FED.

FED Member Jeffrey Lacker is Honorary Member of Economic Disconnect
Jeff Lacker is my new hero. After I have been repeating the major issue that moral hazard represents when you are dealing with people with NO MORALITY (like Wall Street) we finally get a serious thought on the subject from someone in a position to perhaps do something (however small) about it. Lacker, in a speech in London, was sharp with his critic of Boom Boom Bernanke's alphabet soup of lending booths. From Bloomberg article, key parts:

""The danger is that the effect of the recent credit extension on the incentives of financial-market participants might induce greater risk taking," Lacker said in a speech to the European Economics and Financial Centre in London. That "in turn could give rise to more frequent crises," he said.
The central bank has introduced three programs since December to help counter the credit crisis. Along with the Primary Dealer Credit Facility, the Fed lends Treasuries to dealers in exchange for mortgage and asset-backed debt through the Term Securities Lending Facility. The Term Auction Facility offers cash loans to banks.Lacker indicated skepticism about the value of the programs."It isn't clear what kind of market failure is being addressed" with the TAF, he said. Central bankers should be wary "that they can substitute their own judgment about the fundamental value of financial instruments," he said.

Note that Lacker has dissented on rate cuts in the recent past. Here he hits it exactly. By going ape shit and spreading the FED balance sheet across a bunch of retarded banks, Bernanke has not saved the entire financial system from collapse, he has practically ensured it will be bigger when it does happen. Wall Street simply is not able to reform, and giving them free money from the taxpayers to recapitalize them after losing their asses is not going to help anyone but the bank executives. Thanks Mr. Lacker. I appreciate your comments today.

All the Big News is Bad, The Tiny News is OK
I am not going to try and comment on today's market action. Stocks have long been off the reservation as it relates to to the macro picture. Today could have been more delusion, a short squeeze, a Thursday bored office of brokers decided to buy, whatever. Compare today's headlines and see what you think matters the most.
Big News
AP - Foreclosures hit a record high -- and more coming
Reuters - Oil posts record $6 gain on weak U.S. dollar
CNN Money - Household net worth drops by $1.7 trillion
AP - S&P cuts ratings on MBIA, Ambac

Tiny News
AP - Retailers report May results above expectations
AP - Jobless claims drop unexpectedly but key indicator of unemployment hits four-year high

You decide which news items mean more going forward. Foreclosures hitting a record high, and accelerating in the PRIME LOAN space is pretty bad. Downgraded monolines was supposed to mean the end of the known universe, now just a small headline. Retailers like low cost bulk stores Costco and Walmart had good sales, other stores not so much, but hey focus on the good stuff. And unemployed people ran out of benefit weeks and dropped off the payroll, so that is great news. Exactly.

Shorts got Killed on MBIA and Ambac
You know I love message boards, and today was great fun! The downgrade news on MBI and ABK must have made some shorts cover their positions, and thus the stocks rallied pretty hard. The message boards were awash with calls the "Shorts got their asses handed to them" and the like. I wanted to put up a couple of 1 year charts so you can see that, yes, shorts have gotten killed on these stocks!
So ABK has gone from $89 to $2.60 and MBI has gone from $68 to $6. Yeah I would say shorts have been cleaned out on these two stocks, yes? Maybe the shorts from early this morning got hit, but seriously, anyone long this stock is both wasting their money and ignoring reality.
As always leave music, film, or other entertainment ideas in the comments section for Friday Night.
Have a good night.

Wednesday, June 4, 2008

Lehman a Confusing Soap Opera

50 degrees and rainy here today. But it will be around 90 degrees this weekend! Crazy weather swings are a New England norm. I may be venturing out to the "Gray Lady", Quabbin Reservoir this weekend for my first trip out there for the year. Huge smallmouth bass, some very good largemouth bass, a shot at a lake trout, white bass, crappies, and huge yellow perch make a trip out there a great day as there is always something biting!

Off Balance Sheet Tomfoolery to End? Only in Your Dreams!
There was a bunch of mileage across the blogosphere given to this story:

Full disclosure, I have zero understanding of the dynamics of this stuff. I zone out when too many acronyms are involved, and that story sure has a ton of those!

That said, my understanding is that the regulatory powers that be want a better accounting of what the banks they oversee are holding in off balance sheet vehicles. They are throwing out the idea that this stuff come onto the balance sheet of the banks. HAHAHAHAHA! Fat chance of that happening. There is simply NO WAY this is going to happen. People getting excited about this are wasting their time. With the current "teetering on the edge of economic Armageddon" baloney there will be no move to make the banks instantly insolvent and on the prowl for more cash. Simple as that.

Lehman a Confusing Soap Opera
Trying to follow the Lehman Brothers (LEH) action over the past month has been like trying to stay on top of a soap opera and all of its twists and turns. If you are a regular reader you will remember this post: which detailed LEH CEO Richard Fuld's call that the "worst is over" back on April 15th. Well since then there has been plenty of action.

If you believed Mr. Fuld and bought LEH on April 15th at $39 a share, you are looking at a 20% loss at today's prices ($31). Good call, bad call? Short term it looks pretty bad!

So basically LEH is in great shape and does not need to find additional cash going forward. Except they are currently looking for a cool 6-8 Billion, hopefully from Korea. Oh yeah, on top of the 6 Billion they have raised already this quarter. On top of the 2 Billion they raised last quarter. Oh yeah, and they have actively been buying back their own stock. Inquiring minds may want to know if LEH has been doing stock buys on the OPEN MARKET with CASH they got at the FED when they swapped their toxic paper there. I would guess they absolutely did not do anything of the sort. No way.

So why would a company buy back stock at the same time they are looking for big money at bad lending terms? I am gonna guess because they need it. Badly. You would think that with BSC still a fresh memory people would stop getting excited when LEH says they are in great shape. Only time will tell the real story. Until then we can only guess.

Have a good night.

Tuesday, June 3, 2008

Bernanke Gets Too Cute By Half

The ankle was less swollen and less painful, so I was able to go to work today. Late in the afternoon it seemed a very bad idea to have gone to work! Oh well, pain reminds you how good you have it when things do not hurt. I am warning in advance of today's post; I was close to attacking the computer screen with the absurd lines that were spewing forth from financial players all over the spectrum. The post may be more like a rant, you are warned.

Bob Toll Makes Me Sick
I cannot stand Bob Toll, CEO of homebuilder Toll Brothers (TOL). This spectacular buffoon was the man that stated the good old "dancing on a bottom" of the housing market LAST YEAR. With brains like his doing the homebuilding I can only recommend checking your Toll home roof for leaks, regularly. After reporting results that were shameful (but beat the street, whoopee!) Mr. Toll sadly was part of a conference call where he had the nerve, the balls, and the lack of any shame to put out the following bailout plan idea:
"We believe Congress should jump-start demand for new homes with an initiative that will bring buyers off the sidelines and into the market, and thereby stop the downward spiral of home prices. As we have said before, we favor a tax incentive for all those who buy homes within nine months of the Bill's passage; this would create a sense of urgency. Interest rates are low, supply is abundant and a buyer's market prevails. With a little motivation, the new home market could turn around, which would have a very positive impact on banks, bond prices and many other areas of the economy. Once home prices stabilize, Congress could then more successfully address mortgage issues; however, without stabilization of home prices, trying to address mortgage issues may be difficult at best."

Sickening. Shameless. Disgusting. Mr. Toll now favors a regulated home buying industry. He would no doubt love some kind of artificial stoking of home demand. At what level would the "fix" be set at? 2005 bubble heights levels? 2003? 2000? Who knows.

I wonder if Mr. Toll would have been receptive to government regulation of home prices and home demand if they were limiting both during the boom, but we know the answer to that. Here is another good idea Bob, and one you can control all by yourself; You and your brother can take your enormous stock sale profits from the 2003-2006 time frame and subsidise home sales all you want! You will not even need approval of congress or anything. Come on Toll, save the economy already! Oh, that money belongs to you? How does it feel to have some fool deciding how to spend YOUR MONEY MR. TOLL? If you do not like it, then please stop telling the government how to spend my tax dollars.

Bernanke Gets Too Cute By Half
Whenever I get to see Ben Bernanke talk, his smugness really irks me. You can tell he thinks he is very smart, but really how smart can you be if you work for the government? Bernanke gave a little speech today and while the entire thing is worth a look, one snippet in particular set me off to an angry place. Take a read of this one:

"A rough stabilization of commodity prices, even at high levels, would result in a relatively rapid moderation of inflation, consistent with the projections of Federal Reserve governors and Reserve Bank presidents for 2009 and 2010"

Mr. Bernanke is an academic, and as such we cannot expect the man to have any real world experience or any ability to be able to apply knowledge in any practical way. Read the line again, and then reread it.

So this is how Bernanke sees things:
Say Oil spikes to $200 a barrel and gas goes to $7 a gallon and stays there, in Bernanke's world inflation has moderated simply because the price has stopped going up! With those set high prices, would you feel that inflation has moderated?

Bernanke is basically absolving the FED from any need to answer for a complete failure of their job, namely to keep inflation low. Bernanke is saying high prices are here to stay, but that they should stop going up super fast, so the FED has succeeded, and the mythical "moderation over the coming quarters" for high inflation is now pushed out to late 2009-and 2010. What a complete f%cking charlatan this guy is. I am convinced Bernanke is every bit as lost in the job as Greenspan was, and time will show this to be true. Just a total shocker of a line that I cannot let go of. Vote in the new poll for leader of the dumb statements so far this year.

Another Economic LOL Shows People May Have Half a Brain
Like last night I am including a LOL Cat that has economic overtones. The point again, in addition to being funny, is how widespread the idea that things are bad has become. If you think things are going to continue to slowdown as a function of psychology getting bad, these small signals are important. Enjoy.
more cat pictures

Also check out this post of mine from October 9th, 2007 which has some choice FED inflation quotes which make them even worse now:

Have a good night.

Monday, June 2, 2008

Banking Crisis More Dangerous Now Than Ever

No blog since Friday. Busy weekend followed by severely twisting my ankle yesterday left me in pain and unable to concentrate. A bit better today, so I will give it a go.

Cosmetic Changes Not Having the Usual Effect
You have seen the game before. A troubled company replaces the CEO or chairman (with a big fat severance deal) and pretend that things really have changed. As if ONE MAN could be responsible for the collective failure of an entire business institution. Sadly, this show is one of Wall Street's favorite plays, and usually is good for a nice stock price pop.

Today brought two such tricks, but without the pop. Wachovia Bank (WB) axed their CEO with a force out and Washington Mutual (WM) split the chairperson position from the CEO spot for their current title holder. Both stocks were flat to down today. While the financials were in the toilet for most of the day, the CEO shuffle was especially ineffective.

WB and WM are in rough shape. They are like a 3-13 NFL team, you would call them "in the rebuilding stage" as they try to regrow their operations. I think the whole "bottom is in for financial stocks" folks still do not get this fact; Even if (huge if) the worst was over as it relates to the losses and writedowns, this does not mean the stocks would then go straight back up. The financial engineering that gave us the mortgage debacle will not easily be replaced by another growth area for banks. Substantial pressure will be on the financial sector for the next 5 years easily. The bottom is in? Maybe, but if it is, it is here to stay for a long while.

Banking Crisis More Dangerous Now Than Ever
There is a general thought that the worst of the banking crisis occurred right at the BSC bailout and has improved to some degree since then. I disagree totally. Back then there was the hope that BSC was one bad apple, but the bunch was basically ok. There was optimism that the FED could save the day. There was a belief that the floor was put in for struggling banks. How is all that working out?

It seems that the entire financial industry is a mess. What is the difference between a busted BSC and Lehman Brothers right now? Nothing. No difference. If anyone wants to pull their trades and cash out of LEH it will collapse in one day.

The biggest problem was that the FED was limited in what they can do. I think the FED gambled that if they provided cash (through giving away their treasuries) that things would get better before they ran out of money. Time is almost up and nothing is any better. Market Ticker tackles this issue very well today with his parsing of a Bloomberg article. Key excerpt:

"The real nasty in that article though is here:
"The Fed is selling Treasury bills at the fastest pace since it was founded in 1913 to support bank- lending programs meant to boost confidence in financial markets. The Fed owns $34.3 billion of the securities, down from $267 billion, or 27 percent of the market, in December."

Uh, wait a second. Dr. Spinmeister, please stop and tell the truth.What truth? Try this. From $267 billion to $34.3 billion is a decrease of 88%. Yes, it was 27% of the market back then and is much less now, but the more important fact here is that The Fed has sold off 88% of its Treasury Securities and replaced them with garbage CDOs and other toilet paper from the banks! What happens when The Fed runs out of good collateral to sell?
Uh, gee, you think that day has basically arrived?"

Complete post:

The FED is about out of cash and time. By August they should be empty and will have to ask congress for more coin if they want to continue the bank giveaway. And what have they accomplished by destroying their balance sheet? Bought 6-8 months before a major market issue? Whoopity Doo!

Out of control is the phrase that comes to my mind when thinking about the last 6 months. Over reaction was followed by poor decisions, which was compounded by terrible policy. This summer is going to get right interesting by mid July into August. I can't wait!

Subprime Permeates Public Thought
The subprime debacle is fully enmeshed into the psyche of even casual observers. When the butt of jokes is about mortgage products, you know the issue is huge. Case in point, this LOL cat from today:
more cat pictures

Have a good night.