Friday, April 24, 2009

Station Break Until May 2nd

A little market based observation, then I am calling it a week and getting into vacation mode.

Running of the Bulls
All I need to know about the market is summed up by the American Express news today. Loss estimates upped to north of 10% and a debt downgrade led naturally to a 20% run UP in the stock. Either AXP was priced for bankruptcy 20% ago or, well I have no real "or" on that one.

The Treasury was out in force calming the masses about the governments full pledge to bailout anything and everything come hell or high water. At least they are consistent on that message.

The president has yet another press conference scheduled for prime time next week. 100 days in office, 300 TV appearances. Somebody should tell him that words are more effective when they are used sparingly, not as background noise.

This indefatigable (I like that word) rally is starting to reach a critical mass where I think the markets can continue to rally, perhaps quite hard, but the indices are failing the laugh test. Everyone knows stocks are way out of control, but nobody wants to get steamrolled either.

My final take as I head off for the next 7 days: Sometimes you have to let children make mistakes so that they learn. While they may never really learn, you still have to try. Chasing up stocks in the teeth of the mortgage foreclosure wave and commercial real estate bust will end in pain, but there is no fun in staying in cash for some players.

The blogroll on the left, while it could never replace Economic Disconnect, should suffice for the week!

The wife and I are very fond of the Bahamas. We were married there. While I have not travelled extensively, my favorite is the Bahamas.

People ask me "what are you going to do, what are you going to see on vacation"? The answer is simple: pretty much nothing. I am not one of those types that go on vacation and go crazy doing all manners of things. I am going to settle in at the beach or pool, make numerous stops at the bar, nap a lot, and then go out at night and make numerous stops at the bar. I will try to play some poker at the casino, but No Limit poker with drunk tourists is like the stock market right now: You know how to torch the dumb players, but the cards are not falling your way.

I did find a coin shop in Nassau called Coin of the Realm in which I hope to find some cool stuff.

I do not bring a laptop, and I will not access any computer. I will get a Miami based newspaper every day, but thats it. Basic shut off which kind of stinks because the NFL draft is this weekend as is the NASCAR race at Talladega. Well, maybe I will sneak a quick peek to check on those!

Friday Night Entertainment
A little fun to to end the week.

Film Clip
As I have yet to really grow up, I cannot wait for the Transformers II fim to come out this summer. Check out a clip from the first film where A-10 Warthogs and an AC-130 Gunship go all out against a robotic scorpion:


Rock Blogging
Music and lyrics to start your weekend off.

As I will certainly be changing my latitude to a more southernly vector, listen to Jimmy Buffet and "Changes in Latitude" by request:

One of my favorite albums is "Jar of Flies" from the tragic band Alice in Chains. In a song you would not expect from them, take a listen to "Don't Follow":

One of Ozzy's least liked albums was "Bark at the Moon". I never understood why as there are several quality tunes on the record. One of my favorites is "Waiting for Darkness" with lyrics like "I know what they'll find, It's in their mind, It's what they want to see":

Somebody posted a song from a local band I really like called "Must". The song is called "Freechild" and I have no idea what it is about but the vocals are amazing as is the movement of the song:

I have no idea why, but I have always liked David Bowie. No, not like that! Take a listen to "Let's Dance": and see if I am crazy:

Last one for tonight!
While I usually hate remakes, some stand out as pretty good. Think Jimi Hendrix taking over "All Along the Watchtower" from Bob Dylan. The band "Ugly Kid Joe" redid the classic "Cats in the Cradle" and it was not half bad:

Take care all, I will return!

Have a good night.

Thursday, April 23, 2009

Caught "Invisible" Red Handed

I would like to say how wonderful it was that in the comments section from last night's pot, the writer for The Automatic Earth stopped by and left a comment! It is not everyday that one of your favorite writers leaves a personal note. It seems I had mixed up the morning/evening post time lines in how I posted them, but no harm. Thanks again to Ilargi for the visit!

On another great note, I finished two big projects at work today before I leave for my week long vacation! It was a goal of mine to get those two items done before I left and it worked out.

I am not sure what kind of time I will have to post tomorrow (last minute prep for trip), but get your Friday Night Rock Blogging requests in and I am sure I will be able to have some entertainment up.

If Every Government Official Took a Long Nap We Might Have Progress
Today featured a meeting at the White House with the president and his team hosting the credit card companies. At issue is the time honored tradition of the credit card folks screwing the card holders in many creative ways. While I do not expect much to come out of this, there was some comic relief.

from Clusterstock:
via Marc Ambinder at The Atlantic;
According to a pool report, Summers nodded off at the gathering of administration and credit card company officials, "doing the head on the hand and then head falling off the hand thing," as observed by Keith Koffler, White House reporter for Roll Call.

Click the link for a Larry Summers asleep picture. Lifted from the comments section:
John said: Apr. 23, 4:21 PM
Don't knock it. if he's asleep he actually causes less damage

Hats off to John@4:21pm! What a great way to make progress, pass out Ambien to all government officials!

Interesting Currency Fact
Earlier this week I was paging through the marked pages of a book I read a while back titled "Gold: The once and future money" by Nathan Lewis. Now this is not going to be a gold post, I got tons of comments over at Seeking Alpha for the blurb I posted last night.

I had marked this section for further thought:
A staff member of the IMF estimated that as little as 10-15% of all the US Currency held outside of banks is used inside the United States. The rest is being used outside the country--by foreign central banks, in dollarized countries, by travelers, smugglers, drug cartels, tax evaders, and foreign commercial banks--as the international currency of the world. Roughly two thirds of all the dollars in the world are in the form of $100 bills, a denomination almost never seen in the United States.

I guess the dollar really is the reserve currency! That passage is interesting on many levels and I encourage discussion in the comments section.

Caught "Invisible" Red Handed
There was once a large section of the investment population that regarded charges of a "plunge protection team" or PPT at work in the markets was for tin foil hat types and conspiracy theorists. Now it is a well established fact. There were and still are plenty of market observers that think the way inflation, unemployment, and other data are calculated by the government use the very best models available and not just the models that present the best results. There are still some adherents that think we are operating in an open market with transparent rules. Today you can stop pretending.

The work done by New York Attorney General Andrew Cuomo is a watershed event. You can see all the relevant paperwork via Clusterstock.

What this boils down to is that the FED and the Treasury strong armed Bank of America into completing the deal for Merrill Lynch late last year even as the MER losses started to accelerate rapidly. Ken Lewis wanted to invoke the "Material Adverse Event Clause" (MAC) and dump MER. The FED and the Treasury threatened Mr. Lewis with being fired, along with the entire BAC board if they pulled out. Further, they explicitly demanded Mr. Lewis keep quiet about the escalating losses as not to panic an already shaky market. They in fact asked BAC to lie to shareholders and take more government cash in return.

Keep in mind that this story is moving fast. Already today Hank Paulson went on the record saying that FED head Bernanke made him tell Lewis the news. Bernanke was reached for comment and said he never said any such thing. Not a few hours later and Mr. Paulson's memory was different and he said Bernanke did not ask him to tell the BAC head what he did. As this story is still evolving, and I am off on vacation after tomorrow I will limit the specifics discussion and focus on what this all means in a macro sense.

The Treasury and the FED have been caught red handed here. They willfully and purposely forced a private company to misrepresent information and omit events that were crucially important to the company. There will be lawsuits and plenty of them. While I am always a bit critical of our quick to sue society, this time I hope the lawyers are unleashed in a big way.

The blatant attempt to manage the markets comes at a bad time for the government. An already suspicious public now will have really no reason at all to believe any "stress test" results. If BAC cannot even report MER losses that were getting worse, the "stress tests" certainly are not going to be harsh in tone.

As for the players themselves, I think Ken Lewis is the odd man out. The days revelations made me think of a part in the film "Clear and Present Danger", the Tom Clancy based spy books. Relevant scene:
Jack Ryan: I didn't sign up for this. This is someone's bulls&%t political agenda. Who authorized this? Cutter?
Ritter: Cutter couldn't tie his own shoes without permission.
Jack Ryan: If I go down you're coming with me.
Ritter: Wrong again. I have an *autographed get-out-of-jail-free card*! "The President of the United States authorizes Deputy Director of the CIA Robert Ritter to conduct 'Operation Reciprocity' including all necessary funding and support. This action is deemed important to the national security of the United States etcetera, etcetera, etcetera." You don't have one of these, do you Jack?

In the original 3 paragraph, I mean 3 page TARP proposal Hank Paulson had specific language in the document that precluded any prosecution for any actions taken by Treasury officials during "Operation TARP". At the time I wondered why such clear language was needed. Man, I am naive! So Mr. Paulson gets a free pass as I am sure this language made its way into the final TARP bill.

Ben Bernanke will get a pass because it would be very "destabilizing" for the head of the world's biggest central bank to get dumped in the midst of a crisis. that said I think Bernanke will be damaged by this and his career lifespan may be getting shorter.

That leaves Ken Lewis of BAC. Mr. Lewis had a chance to become a hero. Faced with strong arming by the government, Mr. Lewis should have called them out. Lewis should have revealed the terrible MER losses and invoked the MAC clause. What could the FED/Treasury do? If they removed Lewis it would be clear they did so only because they wanted that information kept hidden. It would have been a "systemic risk" to remove the BAC board at that time, so in effect the government had little leverage.

Mr. Lewis is going to have to answer for his actions. He has no "get out of jail free" card. He is not he FED head.

If these guys were stocks my recommendations would be:
Hank Paulson: Stock Delisted; no longer actionable
Ben Bernanke and Ken Lewis: Strong Sell
Option Play: Ultra Short Bernanke and Lewis futures contracts; no hedge needed

This story needs to grow legs and get the best exposure possible. Hopefully the blogosphere and even the mainstream media will find it compelling enough to keep the pressure on.

Have a good night.

Wednesday, April 22, 2009

Best of the Web

Between a long day at work and having to run out and do errands before the vacation week, I am out of time for a well reasoned post this evening. I cam across several truly outstanding articles today that I thought I would pass along if you are so inclined.

Housing Related Articles
What you have to understand about every government action since last summer is that they are operating under this assumption:

Home prices, and thus every instrument tied to them, are depressed only temporarily. If "liquidity" can be supplied in enough size and over a long enough period those prices and instruments will recapture their full value and there will be no crisis.

That's it and that's all. Now of course this assumption is wrong, but what can you do?

If anyone in the government had a spare 20 minutes, I would ask them to take a history lesson with Doctor Housing Bubble who captures in a recent post just how riddled with fraud and pure insanity some housing markets became.
History lesson here.
I would also add my own history lesson. After the 1989 real estate bust, it took about a DECADE for the home prices in my city to recover their dollar value. Adjusted for inflation, it took well over 14 years. Think about that and then think about how long the "liquidity" may have to flow.

If you are still not convinced, one of my favorite writers on all things political, financial, and life in general is Charles Hugh Smith. Mr. Smith explains in easy terms so even the Treasury could understand why housing is simply not coming back any time soon.
Full explanation here.

Spend a Day with the Automatic Earth
I have to say that the site The Automatic Earth is my favorite read for the day. The intros by writer Ilargi are often the most well thought out works of writing I have ever seen, until the next one comes out! The collected news stories are often the most pertinent anywhere.

The Automatic Earth has recently gone to two a day posts and I could not be more appreciative. Spend this day looking over the posts and see if you agree with me.
This morning's missive.
This evening's take.

Gold Related Item
Minyanville's Kevin Depew's daily piece "Five Things to Know" is always a great read. Kevin was even so kind as to include some content I had found a while back.

In today's post Kevin goes after the metal gold in the number 5 item with the same old complaint that it is useless unless the world ends, and then it is not as good as a gun (or other various items).

His summation line is thus:
Just about every scenario I can think of where gold is useful -- for purposes other than admiring it -- also requires a life raft. Just about every scenario I can think of where gold has great worth means that anything else I own has little, if any, value - but hey, at least I have a pillowcase full of gold.

I understand this line of thought. As good Americans, most of us scoff at gold. After it was all taken from the public in any real tangible sense in 1933, most never thought about it. After Nixon junked the gold standard, Americans fell in love with paper money as their purchasing power was destroyed. We were indoctrinated that "stuff" and paper money was "real value" and that gold was a shiny metal good for rings and printer cable connectors.

Now you may ask yourself who would want you to believe those things.

Mr. Depew is right; in a real life "end of the world' situation I would rather have an army of 3000 armed men, well supplied, in a great defensible location with clean water etc..(you get the idea) than all the gold in Fort Knox. Gold would indeed be "useless", until some order was restored that is.

There are many levels of "end of the world" events however. The complete collapse of the US is not necessary for gold to have real value. I do not have the time to go over all the very real scenarios where life would not change to an obscene degree where having gold would be very lucrative.

Either you "get" gold or you don't. The best example I have ever seen (I cannot find where I read it, so no reference) is this:
In 1900 an ounce of gold bought you a very nice suit. In 2009 an ounce of gold buys you a VERY nice suit. The $20 dollars in 1900 for the suit cannot even buy 4 value meals at McDonald's in 2009. Still think gold is stupid and worthless?
Reread that last example as many times as needed for the truth of it to sink in.

Have a good night.

Tuesday, April 21, 2009

Roller Coaster Ride of Perception

What started off as a regular Tuesday morning quickly morphed into a news and information packed day. There were so many items of note and cross currents of information that trying to focus in on a few choice bits is hard.

Deadbeat Disabler Devices
I came across an interesting article that highlighted a growing trend in the car sales world. It seems that bad credit car borrowers can be submitted to a computer device that can disable the automobile they have should they get behind on payments:
Payment Late? lenders Can Remotely Disable Your Car
Repossessing cars is so old-fashioned. All that driving, locating people's houses, towing the cars away... with the mess credit markets are currently in, who has time for that? Car lenders don't.
That's why engine shut-off devices, or car disablers, are a hot new trend in car accessories. Less useful than a GPS and way less fun than a DVD player, the devices allow lenders to disable a car's engine remotely when payments are overdue. Yes, it's legal.
According to an article about the devices in the Kansas City Star, drivers have a few days' warning before the ignition is disabled:
"With brand names On Time, PassTime and PayTeck, car disablers are wired to the ignition and typically provide motorists three or four days' warning, with flashing lights (green to amber to red) and quickening chirps as drop-dead payment dates near.
They will not shut down a moving car, manufacturers note, but will render starters silent the morning after the warning light turns red."

Economic Disconnect advises researching these type of device makers as I am sure it will be a growing market!

I could never understand the huge difference in the way that loan defaulters get described and treated depending on what they are defaulting on. Auto defaults and credit card quitters are basically spit on while home mortgage droppers are treated with kid gloves and a multitude of excuses. Perhaps someone can design a doorlock that will lock out deadbeat mortgage holders from the house!

Economics is Not a Real Science
As a molecular biologist I was schooled in scientific theory. I use the experimental method and collate data to solve problems with what I am working on. Biology, Physics, and Chemistry are real sciences. Economics is not.

Mish has a brutal takedown of a high end economist, Greg Makiw a professor of economics at Harvard University. Full piece can be found here. While I have little to add to the Mish article, I did want to point out a couple of telling quotes from Mr. Mankiw that show what passes for mainstream economic theory.

From point number 5 of Mr. Mankiw's blog "Observations on Negative Interest Rates":
5. If we want to prop up aggregate demand to promote full employment, what is the alternative to monetary policy aimed at producing negative real interest rates? Fiscal policy. Essentially, the private sector is saying it wants to save. Fiscal policy can say, "No you don't. If you try to save, we will dissave on your behalf via budget deficits." That fiscal dissaving would push equilibrium interest rates upward. But is that policy really welfare-improving compared to allowing interest rates to fall into the negative region? If people are feeling poorer and want to save for the future, why should we stop them? Unless we think their additional saving is irrational, it seems best to try to funnel that saving into investment with the appropriate interest rate. And given the available investment opportunities, that interest rate might well be negative.

The line "we will dissave on your behalf via budget deficits" implies some economist has any idea whether the public should save or not. Surely it is clear to all that the best minds in economics know no such thing.

Add to this the line "it seems best to try to funnel that saving into investment with the appropriate interest rate" which states that not only would an economist know if saving was good or bad, but they would also know the perfect interest rate to set regardless.

From experience we know that no such knowledge exists. It is silly for anyone to pretend they "know" the answers to any of this.

Surgical Bankruptcy Costs Keep Mounting
Lost among the general market mania today was this little automaker related news item:
GM, Chrysler to get $5.5B more in government loans
Government to loan GM up to $5B more, Chrysler to get $500M as automakers race to restructure
DETROIT (AP) -- General Motors Corp. could get as much as $5 billion more in federal loans, while Chrysler LLC could get $500 million as they race against government-imposed deadlines to restructure, according to a government report filed Tuesday.
The quarterly report by a special inspector general on the auto industry and bank bailout programs says the money will be made available for working capital. GM has until June 1 to complete restructuring plans that satisfy the government's auto task force, while Chrysler has until April 30.
A person briefed on the plans said Tuesday that the exact amount of the loans have not been finalized and will be worked out with the companies. The person asked not to be identified because the negotiations are confidential.
GM already has received $13.4 billion in government loans, while Chrysler has received $4 billion.

Another wad of money goes out the door to the automakers without debate or a vote. Why bother trying to "restructure" or attempt a "surgical bankruptcy" when you can just get handed all your operating expenses on a monthly basis by the government? Why indeed.

Roller Coaster Ride of Perception
The big news of today was two fold. First up was Treasury Secretary Tim Geithner remarks that almost every bank is "well capitalized" even if we are going into the second Great Depression. While this may or may not be true, the markets ate it up and banks rallied hard to the upside.

The second item was an AP exclusive that detailed how the "stress tests" were crafted to favor huge Wall Street banks and their holdings. Please note that just yesterday the Treasury made a formal statement which downplayed a supposed "leak" of test results by making the assertion that no results were in their possession to leak. Today we get something totally contradictory. While Wall Street does not seem to care that we live in a Banana Republic, it should make everyday people nervous.

Instead of rehashing what the "stress test" slant means, I wanted to instead take a look at what the power of perception means in real time. A few kind words by Geithner, without any facts to back them up, can cause wild swings in the markets.

The example tonight is Huntington Bancshares Inc (HBAN). Full disclosure: I do not have any position in HBAN or any other bank stock.

HBAN closed Monday trading at $3.11. First thing in the morning the stock gapped lower to $2.30 (down 26%) on the back of a terrible earnings report. If you were of the sort that thought the green shoots would help the banks, the report was proof positive the banking sector still has a long ways to go.

But what about Geithner's statement that the banks are good as gold? Well, just as his prepared remarks were hitting the tape, the roller coaster of perception went on a ride! With the new (less than an hour old) view that the banks are in relative good shape, again without facts or data, HBAN went moonshot. Here is the one day chart:

The stock closed at $3.45 for a move up of 11% from the previous close, but an amazing 50% move up from the intraday low!

This kind of market mania cannot be explained and I am not attempting to do that. I am presenting HBAN activity as evidence that perception and headline reaction is the ONLY catalyst for the market right now. Technicals are useless. Fundamentals are useless.

Bears are wrong that all bank stocks are going to zero. Bulls are wrong that all bank stocks are going to $1000. Beyond that, the only thing that is known is that nobody knows what is going on.

Have a good night.

Monday, April 20, 2009

Playing Musical Chairs of the Deck of the RMS Titanic

I just got the new Allen Brothers meat catalog in the mail today. Looking through that thing makes me so ready for the outdoor grilling season. Soon, very soon.

I Love the website LOL FED, which uses pictures and captions much like the LOL Cats site "I Can Has Cheezbuger". Today's post on the Bank of America Earnings was classic! Here is the picture with caption:

Full post here.

Treasury Department Operates as a Rogue Branch of Government
The ever evolving plans and actions by the Treasury Department would in normal world make anyone with a brain run for the hills, and thus far away from any US debt offering. Since we live in a world based in make believe, things have gone fairly smoothly thus far.

The Treasury (and by extension the FED and the administration's entire economic team) has so badly managed the economy that not even a Congress that cannot say no to any spending request has made it pretty clear they are done approving blank checks for the time being. It is indeed a sad day in history when you cannot count on the US Congress to rubber stamp a spending request.

Faced with, GASP!, restrictions on what they can do the Treasury has resorted to using clever tricks to bypass a vote in Congress on additional funding. The opening shot was using the FDIC to administer the PPIP program, forever corrupting the FDIC and damaging their credibility. The second salvo was fired today.

The New York Times has the details of the new scheme to give banks more help by converting TARP loans to banks into common equity:
U.S. May Convert Banks’ Bailouts to Equity Share
WASHINGTON — President Obama’s top economic advisers have determined that they can shore up the nation’s banking system without having to ask Congress for more money any time soon, according to administration officials.
In a significant shift, White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, simply by converting the government’s existing loans to the nation’s 19 biggest banks into common stock.
Converting those loans to common shares would turn the federal aid into available capital for a bank — and give the government a large ownership stake in return.
While the option appears to be a quick and easy way to avoid a confrontation with Congressional leaders wary of putting more money into the banks, some critics would consider it a back door to nationalization, since the government could become the largest shareholder in several banks.

There are quite a few well reasoned opinions about whether this move is "good" or "bad". I would like to focus instead on the following thought experiment as I think a very real chance exists that the Congress is going to have to stop an irrational arm of government very soon. Consider:

-Assume for the sake of argument that the conversion of loans to common equity is the single worst idea ever put forward in history. What could be done to reign in a Treasury Department that is out of control?

I am not as well versed in civics as I would like, but I would advise the US Congress right now to become well aware of what options are available to them to enact a "cease and desist" order against the Treasury. The Treasury crew are making it up as they go along and now every effort is being made to make sure no further Congressional approval (oversight) is needed. This is a dangerous development.

Playing Musical Chairs of the Deck of the RMS Titanic
There has been discussion about the latest market rally and how fake it all seemed. Zero Hedge has been covering the angle of "Quant Momentum Funds" and the general lack of real participation in said rally. The position here at Economic Disconnect has been that the current rally was engineered to pump up banking stocks so that secondary offerings could be made. If today was any indication, that goal may have vanished for all but Goldman Sachs who moved fast enough to capitalize (pun intended)on the fake rally.

Evidence of just how skittish the markets are about the banks, the very sector leading the rally to this point, was on full display today. Early in the morning there was a supposed "leaked" memo detailing some results of the bank stress test. I will not direct any further traffic to that site as it is clear the writer has serious issues with their credibility. Even in the face of a blog post by non credible source, the banks were taken to the woodshed and pounded.

Adding to the drama, the Treasury Department came out and said they had no information on the stress test results, and thus no details could have been leaked. While this is obviously a boldface lie, it serves to show how nervous all involved are that an official denial was forced by a blog post. The comedy show that is the US system has reached new levels.

Over the last two weeks we have been told that the worst is over and that the banks were well on their way to recovery. Several sketchy earnings reports and some serious stock price movements to the upside seemed to offer some hope.

And then today happened. One blog post and a BAC earnings release that was in no way any less fictional than the GS and C reports and market players were rushing for the exits. Now some "profit taking" would be understandable after such a rally. But BAC was chopped almost 25%! Citi was lower by 20%! Losing a quarter or a fifth of your value in one day is not "profit taking" it is acknowledging that the entire game may be up.

Think of it as a game of musical chairs:
Musical chairs is a game played by a group of people (usually children), often in an informal setting purely for entertainment such as a birthday party. The game starts with any number of players and a number of chairs one fewer than the number of players; the chairs are arranged in a circle (or other closed figure if space is constrained; a double line is sometimes used) facing outward, with the people standing in a circle just outside of that. A non-playing individual plays recorded music or a musical instrument. While the music is playing, the players in the circle walk in unison around the chairs. When the music controller suddenly shuts off the music, everyone must race to sit down in one of the chairs. The player who is left without a chair is eliminated from the game, and one chair is also removed to ensure that there will always be one fewer chair than there are players. The music resumes and the cycle repeats until there is only one player left in the game, who is the winner.

The part about this game being played by mostly children is especially fitting.

The bank rally is fake. There is nothing behind it but another looting run. Traders and market players were playing "bid up the banks" until the music skipped this morning and then they all rushed for a seat. I am sure there must be a player somewhere that was eliminated from the "game" today.

What these "smart money" types cannot see, because they are of the micro view sort, is that they are destroying whatever credibility the market has left. There is no private investor any where that is going to want to take a substantial stake in the banks when their stock prices are going up 200% in 3 weeks only to dump 25% in 10 minutes of trading first thing in the morning.

While many may think a game of musical chairs is fun, especially if you KNOW you will get a seat should the music stop, they may be missing the bigger picture. If you are playing musical chairs after your ship (the RMS Titanic for example) has smashed an iceberg and water is flooding the holds it will not matter that the chairs are reserved for you. You are still going to sink.

The lack of faith in the banking sector is going to rule out any substantial private investment. This leaves only the US government to be the "buyer of last resort" for bank cash infusions. With the section above about Treasury bypassing Congress for funding approvals, I think you know how this is going to go.

Have a good night.

Friday, April 17, 2009

Terminator Banks: Nothing Can Stop Them!

It actually got into the high 60 degree range today. Still a bit breezy which kept it cool, but nice anyway you slice it. Of course this being Massachusetts it is going to be in the low 40's for the next 5 days. Too bad I will beheading out to the Bahamas on the 25th. How will the loyal readers survive without Economic Disconnect? How will I survive without posting? Big questions indeed.

Sorry to hear the news for Loyal reader G, but keep on keeping on my friend and it will work out!

Terminator Banks: Nothing Can Stop Them!
I was going to write about the Citi C) earnings report but really if you thought the Goldman Sachs trickery was something you would have to give C the top honor. I thought I would focus instead on a recurring theme so far through the bank earnings parade.

After reviewing the conference calls by JP Morgan (JPM) and C I came away with a particular mental image. Here it is:

The Terminators!

Where the more naive of us, myself included, thought that the banks were in bad shape and were in need of billions upon billions of taxpayer dollars to survive, to hear them tell it there is nothing that can phase their bullet proof business. As the character Kyle Reese would say about the banks path to record earnings:

"Listen and understand. That terminator is out there. It can't be bargained with, it can't be reasoned with. It doesn't feel pity, or remorse, or fear, and it absolutely will not stop. Ever."

To see what I mean consider the following items from the past two days:

- JP Morgan CEO Jamie Dimon says they have no "toxic assets" they want or need to sell in the PPIP program. JPM also can pay back the TARP anytime and wants nothing to do with government partnerships.

Treasury Head Timmy G was so sure the PPIP was the touchdown pass the banks needed, yet JPM will not even run their receiver route to get to the ball. They are a machine! Coated with living tissue!

Now perhaps JPM and GS are just the two best banks on the block. Maybe they are in a better spot than others as GS is the government and JPM is the FED's bank of choice. fair enough. But what about the red headed step child of the finance sector, Citi?

If you thought they were in trouble, you did not review the conference call from this morning! Consider these items relayed by C CFO Ned Kelly (CFO Vikram Pandit did not participate for some reason?):
- 9:00: Questions and answers begins. Kelly begins by saying he's been through an immersion process that might make it difficult form him to answer some of the questions.
9:01: Guy M. first, as always. Asks about credit card reserves, which have declined. How's that happen? Kelly tells Guy that credit cards came in better than expected, outpacing loss reserves already made.

Citi's credit card business is doing better than expected? Even JPM said theirs was going south in a big way. Capital One as well. Maybe Citi is collecting payments in person in full robot terminator mode?

Then there was this one:
- 9:10: Meredith Whitney asks about the trends in the mortgage portfolio. How much was the effect of foreclosure forbearance? Not much at all, Kelly says.

A 2-3 month mortgage foreclosure moratorium made no substantial difference to C's bottom line? That has got to be the biggest whopper this earnings season! We will revisit that one now that the foreclosure wave is rolling after the moratorium have ended.

In short, the banks are all powerful machines right now. Nothing can stop them and business has never been better. How long can this charade go on? The terminators power cell in the movie was good for 10 standard years. I will guess that the bank days of sunshine will not make it even 1/10th that time.

Friday Night Entertainment
Home a bit late, and so on to the fun!

Film Scene
The great book "The Red Dragon" by Richard Harris is an all time favorite. The first time it was made into a film it was called "Manhunter". In this scene dtective Will Graham (played by William Petersen) uses pure brilliance in deductive reasong to figure out how the serial killer "the tooth fairy" is selecting his victims:

Music for One and All
My father (now passed on) used to play this song on his 12 string guitar all the time and I never knew who's song it was. While my Dad's 12 string version was better, listen to Don Williams and "I Believe in You":

If you can never get enough Steve Perry vocals, and really who can, try out "Oh Sherry":

The band Quarterflash is a Youtube "embed disabled" offender, but I was able to find this live version of "Harden My Heart". I love saxophone!:

Last one!
Iron Maiden is a live show phenom. Take a listen to the powerful cryptic lyrics and all around rock out performance of "Revelations":

Have a good night.

Thursday, April 16, 2009

Top Ten Reasons Market Rally is Confusing

Get your Friday night entertainment requests in. I have a feeling some relief will be needed tomorrow night.

Gold and Silver Thoughts
Loyal readers know I am a huge fan of both Gold and Silver. I was stopped out of my latest positions a little while back (first time ever) in Goldcorp and Kinross Gold for a minimal gain. It seems the miners never really took part in Gold's upside from around $850 to $1000 but rode the drop back down very hard to the downside. Quite a mess.

Today was another hit to both metals. While not a technical fan, the charts are not favorable and as long as this market rally has legs pressure is going to mount on the precious metals.

With an eye towards S&P 1000 and DOW 9500-10,000 I can see gold falling to the $750-$780 range through early summer, think July. Silver may see $8 in the same time frame. If those targets are met, I will be loading the boat on both through various channels, much like I did in the 2002-2003 time frame.

It kills me to write so harshly about my favorite market sector, but everything is telling me this is the way it will be. Not investment advice as usual, but a glimpse at MY plan going forward.

Top Ten Reasons Market Rally is Confusing
The current market run has many observers a bit confused, Economic Disconnect especially is included! Trying to assign reason to any real time market action is guesswork at best and foolish at worst. It is what it is.

In a David Letterman like manner, I will present the top ten reasons this market rally is confusing:

Reason Ten: The shadow world of "Quant Funds" is WAY over my head. Tyler Durden at Zero Hedge has some compelling data about volumes and market trades exploding among quant funds. This may mean something, or maybe not but either way it adds to a confusing picture. Latest quant post here and backtrack from there.

Reason Nine: Goldman Sachs reported great earnings (with some sleight of hand for good measure) and stated they really never needed government bailouts. JP Morgan was out today and one upped Goldman with the firm statement that JPM has NOTHING to sell into the new PPIP program. They did add that the program itself may be good for the markets, but again they do not need it. So what is the deal? Systemic banking collapse or over-reaction by the FED and Treasury? Who knows, but certainly it adds to the confusion.

Reason Eight: Every stock rising on any news and rising like crazy. See Liberty Media Corp through Slope of Hope today.

Reason Seven: Strange bull market behavior. Lifted this comment from an article over at Clusterstock: Professor says "Sustainable rallies "climb a wall of worry." This rally is climbing a wall of giddyness." true usually, but not this time.

Reason Six: Nouriel Roubini is getting little time on air and in print with his "We are in the middle of the recession" talk. I mean that is ultra bullish for that guy, and yet not much coverage.

Reason Five: After the Tech crash of 2000, nobody I know even mentioned stocks for over 3 years. Then they just talked about granite countertop 2x ETF's. Right now everyone I know is only talking about stocks and never stopped even after a 50% haircut. Bottoms tend to be more discouraging. Confusing again.

Reason Four: Ok, I will play "second derivative" and "green shoots" for a moment. If I submit that jobless claims are getting worse at a lower rate, what would be the area of employment that will make unemployment go down? Confusing indeed. Maybe less folks get canned, but they sure are going to be hard pressed to find other work!

Reason Three: If banks have turned the corner, did anyone notice the credit card loss estimates for JPM and Capital One escalating at an increasing pace? How's them second derivatives!

Reason Two: If banks were in such great shape last quarter, have they allotted for the huge wave of foreclosures set to pour in? Oh, remember that foreclosure moratorium from December to March? Yeah, it's over now. Get ready for some monster jumps in foreclosures. Will this matter? Not by the market reaction so far. Confusing again!

Reason ONE: Nobody knows how to price the markets. Some would have you believe that S&P 666 was the market pricing for the end of the world. So is S&P 865 only for kind of the end of the world? The banks are not all going to zero. But are they going to go up 20% a day forever? GM may or may not have a "surgical bankruptcy". The take home point is that prices right now are not tethered to anything and thus can go anywhere. This makes the rally, you guesses it, confusing!

Addendum: You simply must read The Automatic Earth introduction for tonight. Like, right now.

Have a good night.

Wednesday, April 15, 2009

Rate of Change Declines and Asymptotes

I am sure nobody that reads this blog is unaware, but today is indeed the final day to submit your 2008 tax returns. As collections are running pretty low, you should do all you can to support government bailouts, I mean public services. You know ALL those services you use every single day. Like.., well I mean..., well there must be some!

Macro Versus Micro Viewpoints
While many seem positively giddy about all the "green shoots" of slowing contraction sprouting up all over the place this may be a good time to compare and contrast what I call "macro" and "micro" viewpoints.

Trading types and technical analysts are good at micro views. Swift changes, wild swings, and sentiment figure into their methodology more than fundamentals and forecasting. Micro viewpoints cannot answer the questions of "why" or "what will be the end result" and they do not profess to care about either to be fair. This type of market technique is great for the nimble and those not interested in big picture analysis.

Macro analysis looks at data, long term trends, and basic rules and attempts (at least tries real hard) to formulate a viewpoint of where things will stand at some point in the future. This type of analysis can offer answers to the questions "why" and what will be the end result".

Both investment strategies are solid when done well. Both have their own peculiar issues that are drawbacks. This is not a commentary on either mode of action, just an observation.

With this in mind, one of the best long range macro views I have seen in a long time was featured over at Jesse's Cafe Americain today. The article was issued by Delta Global Advisors and I urge you to read the entire thing. Key summary excerpt:
Thus, our economy has become more addicted than ever to low interest rates. But because bank assets will now be collecting income at record low rates, when and if the Fed tries to raise rates it will only be able to do so on the margin. If Bernanke raises rates substantially to fight inflation, banks will be paying out more on deposits than they collect on their income streams. Couple that with their already distressed balances sheets and look out!

Additionally, not only do the consumers need low rates to keep their Financial Obligation Ratio low, but the Federal government also needs low rates to ensure interest rates on the skyrocketing national debt can be serviced. Our projected $1.8 trillion annual deficit stems from the belief that the government must expand its balance sheet as the consumer begins to deleverage. In fact, both the consumer and government need to deleverage for total debt relief to occur, else we're just shuffling debts around and avoiding a healthy deleveraging entirely.

In order to have viable and sustainable growth total debt levels must decrease, savings must increase and interest rates must rise. But that would require an extended period of negative GDP growth-a completely untenable position for politicians of all stripes. Ben Bernanke would like you to believe inflation will be quiescent and he can vanquish it if it ever becomes a problem. Just make sure you don't invest as though you believe him.

Great piece.

My only addition to it would be another example of the restrictions the FED is now shackled with in regards to credit costs. Take home prices for example. With 30 year mortgage rates at anywhere from 4-5% there may be some ability to put some kind of artificial floor under housing. How would one ever get out of such easy money policy? At a minimum the FED rate must stay at the 0% level for at least 3 years. This must remain so even in the face of Trillion dollar deficits. Looking ahead, imagine what mortgage rates of 7-9% would do to any home price recovery. It is easy to imagine the FED funds rate to stay at 0-1% for 8 or more years. This is clearly going to be an issue. Not today, not next week, but rest assured it will be an issue.

Micro Analysis Textbook Case
As a contrasting way to look at things, take the exuberance displayed today at the FED Beige Book report. Reading the headlines about all the "hope" and "signs of recovery" I was very interested to check over the text myself.

I found it to be less than reassuring, but it serves as a classic micro view case. This companion Yahoo Finance article shows just how amazing looking hard at something long enough can play tricks on what you think you are seeing:
Fed survey finds faint signs of hope
Fed survey finds scattered signs that steep plunge in economic activity starting to moderate
WASHINGTON (AP) -- The Federal Reserve said Wednesday there are some faint signs the steep plunge in economic activity that began last fall is starting to level off.
The Fed's latest survey of business conditions nationwide found five of its 12 regional banks reporting a moderation in the pace of the economic decline.
Several regions "saw signs that activity in some sectors was stabilizing at a low level ... (but) overall economic activity contracted further or remained weak," the Fed said.
The survey, known as the Beige Book, struck a slightly more positive tone than last month's report, which described an economy plunging rapidly after the financial shocks that occurred last fall.

So now 5 of 12 regional banks saw some signs of a decline in the pace of contraction in some areas in some way. Got that? Less than half of the banks polled saw some moderation of CONTRACTION in some sectors. More article:
In one sign of a possible rebound, the report said while home prices and new home construction declined in most parts of the country, the number of people shopping for homes was beginning to rise, leading to a scattered pickup in sales in a number of districts.
The Fed also said several districts observed a slowdown in the pace of manufacturing declines. The Cleveland, New York and Dallas regions reported a leveling off in the pace of declines in new orders.

More great news. More people walked through homes on tours! This is exciting! Still more to come:
The nation's job market, though, is not improving. "Labor market conditions were weak and reports of layoffs, reductions in work hours, temporary factory shutdowns, branch closures and hiring freezes remained widespread across districts," the report said.
The Fed found a silver lining in that as well, noting that the job losses have eased worries about inflation being generated by rising wage pressures.
The report also said the credit squeeze that has occurred as banks suffered mounting loan losses did not show any significant improvement. Demand for business loans remains weak.

Trust me the FED would dearly love to see any INFLATION right now on the heels of a highly deflationary PPI number. At least out of work folks can rest easy that inflation will not eat up their savings that are needed to be spent on the economy. Final section:
Still, private economists said the new Fed survey reinforced a slightly more upbeat view on the economy.
"This is good evidence that activity is becoming less bad across the country," said Jennifer Lee, an economist at BMO Capital Markets. "Granted, things are still bad, but less so."
The new survey was based on information each of the regional banks collected in March and early April. It will be used when Fed policymakers next meet to consider their stance on interest rates and other monetary issues on April 28-29.
The Fed is widely expected to keep a key interest rate at a record low of near zero while continuing to supply massive amounts of money to the banking system in the hopes of combatting the worst financial crisis to hit the country in seven decades.

So things are bad, but less bad. Not to worry, the FED is on the case and in a affirmation with the macro piece highlighted above, we see there is no way for the FED out of this mess for a long time to come.

In a micro view, the rate if decline is going lower. By implication, this is taken to mean that things will stop declining and then, of course, resume an upward trajectory. While I am not much of a mathematician, I do seem to remember a theorem about what is known as approaching zero asymptotically. Reduced to ultra basics, as one approaches 0 or 100 on a given scale, you continue to reduce the rate of change and approach 0 or 100 ever more closely but never quite get there.

In a graph format, assume the top right quadrant is the rate of change of any parameter on its way to zero:

Note that after a steep decline, the rate of change towards zero flattens out and slows to a crawl towards zero.

I am not saying that manufacturing, consumer spending, or home sales are going to zero. That is not my point. What I am trying to show is that while the rate of decline may be (or may not be, ask the other 7 regional banks of the Beige Book) declining, that rate may decline for quite some time but just get "less bad". Something to keep in mind.

I am sure I will get torn apart by the more mathematically inclined out there, but that is what the comments section is for!

Have a good night.

Tuesday, April 14, 2009

So What's the Story Morning Glory?

Tonight's post is going to be all Goldman Sachs, so if the clouded drama that is a fraudulent banking system does not interest you try back another night!

So What's the Story Morning Glory?
You know I had a feeling that when the first full "earnings report" from a bank was released there was going to be fireworks. It was all well an fine for Wells Fargo (WFC) to give a "pre-announcement" because that does not require any real details. The first batter up was Goldman Sachs (GS) and over 24 hours later there is still confusion and conflicting information. Transparent markets indeed!

The Curious Case of the Missing Month
When GS moved to become a "bank holding" company this required them to report their earnings in a slightly different way. Instead of the quarter just ended encompassing December to February, the new reporting structure would include January to March instead. Seeing that this was a first run for GS, one would have expected them to issue some details for the "orphan month" and what exactly transpired in that span of 4 weeks.

That did not happen. The month of December was basically glossed over. Was there anything material from December? If you guessed yes, you are both correct and a conspiracy nut via The Big Picture from Floyd Norris:
Goldman’s 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. The leaves December as an orphan month, one that will be largely ignored. In Goldman’s news release, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ending in February.

The orphan month featured — surprise — lots of writeoffs. The pre-tax loss was $1.3 billion, and the after-tax loss was $780 million.

Would the firm have had a profit if it stuck to its old calendar, and had to include December and exclude March?

Very slick move indeed.

AIG Payments - Non Event or Meaningful Ripoff?
The hottest area of contention is whether AIG payoffs of counter party's added to the GS bonanza. GS CFO David Viniar said today that is was a total non-event (via Clusterstock).

Of course opinions vary, and Yves Smith at Naked Capitalism has a different take.

Karl Denninger at Market Ticker keeps the pressure on the AIG double payment issue as well with this post.

So the CFO says no, and others say not so fast. What a mess. As I wrote lats time, this will be an ongoing process to figure out just what the heck happened.

TARP Funds Needed or Not?
As if all that was not enough, now there are issues with GS repaying the TARP money while other money lent by the government goes missing (via Self Evident):
So let me get this straight. Goldman Sachs has issued tens of billions of dollars of debt insured by the FDIC. They have access to the TSLF, TAF, and the good old-fashioned discount window, where they can borrow at half a percent or less to finance their long-term investments. And of course, they received at least $13 billion in taxpayer money via AIG. (That certainly helps to explain the profits this quarter.)

But if they repay the TARP — just the TARP — they will be freed from any meddling government interference in, say, their executive compensation. And that is precisely what they are about to do.

Ahhh, American capitalism at its finest. We truly have the best government money can buy.

Again, another mess.

Economic Disconnect argued loud and hard against any government intervention for the banks because of moral hazard and clear conflicts that can never be sorted out. The GS earnings report provides the best evidence of these facts.

The GS offering went off without a hitch this morning at $123. The stock closed at $115. Another brilliant play by the Goldman boys to capture the best price possible for their stock. I would love to see the buyers faces right now as they are slowly figuring out they just "got punked" once again.

Have a good night.

Monday, April 13, 2009

Systemic Risk of Banking Collapse Yields Near Record Earnings

Monday again. I have SO MUCH work to do at my real job before vacation! I am feeling the squeeze. I also had quite the adventure of installing a new toilet this weekend. My legs are all messed up from lifting and setting that base so many times. I was wondering how they can make an airframe for a jet fighter that weighs like 200 pounds total, but they have yet to make 10 pound toilets for ease of installation! There is a new company idea, "Featherlite Toilets Inc.".

Welcome Back
A good friend of Economic Disconnect is the site Capitalist Preservation. The author was on leave doing research, and after a while I feared she may have been kidnapped by pirates or something! Welcome back!

Finally, A Solution That Makes Sense
With a big time hat tip to The Mess That Greenspan Made, Tim Iacono pointed out this article from CNN Money that takes the next logical step in the foreclosure mitigation effort:
Unemployment: Big factor in home defaultsReport indicates unemployment is a major driver of missed mortgage payments, and raises concerns that Presidential plan to modify loans may miss the mark.
NEW YORK (Reuters) -- Unemployment is a bigger reason for missed mortgage payments than high interest rates, according to a study from the Boston Federal Reserve that raises questions about President Obama's plan to stem foreclosures by modifying loans.
Borrowers are more likely to default on their payments because they have lost their jobs or because the price of their homes has plummeted than because of tough terms on their mortgages, the study found.
Loan modifications are not necessarily a better deal for investors either, wrote Boston Fed economists Christopher Foote and Paul Willen, Atlanta Fed economist Kristopher Gerardi and Lorenz Goette, a professor at the University of Geneva.
Their research found that policies that directly help homeowners overcome setbacks such as losing their jobs may be more effective in combating foreclosures.

Now wait for it, wait for it...
The economists suggest that the government could instead replace part of an individual homeowner's lost income from a job loss through loans and grants and help those whose predicament is more permanent become renters.

Oh, the humanity!

One of the major goals of the FED lowering rates to subzero levels and buying longer term paper to further drive down rates was to head off a wave of mortgage defaults which may have come from higher rate resets. While the FED certainly has been able to lower mortgage rates to all time lows, foreclosures are still escalating. It sure is another "conundrum" for the FED!

So if base rates are not enough to help, what is the next step? Of course if job losses or reduced income are factors in people losing their homes, jut REPLACE THE LOST INCOME! The plan is beautiful in its simplicity. It is everything I would expect from years of government training.

That an idea like this is even put into print should give everyone reason to pause. Artificially propping up incomes or outright "wage fixing" is deep in the realm of communism and central economic planning. While the US seems to be rushing headlong in that direction, a direct subsidy to maintain income indefinitely is sure to cause an uproar. Or maybe not.

Systemic Risk of Banking Collapse Yields Near Record Earnings
The major news of the day was of course the Goldman Sachs (GS) earnings release that was about double the expectations. I always wonder why it is that the all knowing stock market, you know the one that correctly prices in the future six months out with its all powerful clairvoyance, can never seem to be anywhere near an earnings estimate. That is a topic for another time.

In an environment where we were hours away from "tanks in the street" and an all out systemic banking collapse, it seems GS was able to function very well. Consider just how special this earnings report was framed by fictitious headlines that would be roughly comparable:

Amid Worst Car Sale Numbers in Twenty Years GM Posts Near Record Profits

6 Months After Cure for Cancer is Released, Pfizer has Record Profits from Cancer Drugs No Longer Used

Toll Brothers Reports Record Profits as Sales of New Homes Collapse

You get the idea.

So how was GS able to pull itself up from the banking crisis and have one of their best quarters ever? Currencies and fixed income perfection:
Goldman 1Q earnings surpass Wall Street estimates
Goldman Sachs earns $1.66B in 1st-quarter, surpassing Wall Street's estimates
NEW YORK (AP) -- Goldman Sachs, in another sign that banks may be turning around, beat Wall Street's earnings expectations as it reported a profit of $1.66 billion for the first three months of this year.
The New York-based bank said it earned $3.39 per share, easily surpassing analysts' forecasts for profit of $1.64 per share. This compares with earnings of $1.47 billion, or $3.23 per share, in the quarter ended Feb. 29 of last year.
Goldman's news, released a day earlier than anticipated, came days after another top-performing bank, Wells Fargo & Co., said it expected to report record first-quarter earnings of $3 billion, well above Wall Street's estimates. That news fed a huge stock market rally Thursday, but with companies including Citigroup Inc. and Bank of America Corp. still to report their first-quarter results, it's too soon to say the banking industry is finally recovering from the devastating losses caused by the credit crisis and the recession.
Morningstar Inc. equity analyst Michael Wong said Goldman benefited from the fact that it has more traditional investment banking and trading operations than more retail-focused banks like Citi and Bank of America.
"What allowed Goldman to outperform is solely tied to their brokerage operations," he said.
Still, Goldman's first-quarter performance put it in a strong enough position to plan the public stock offering of $5 billion which it said would be used, with additional resources, to pay back its government debt. Goldman received $10 billion in government funds during the downturn last fall as part of the U.S. Treasury Department's program to invest directly in hundreds of banks and try and help alleviate the nearly frozen credit markets.
Goldman said its first-quarter profit was bolstered by strong revenue growth in its fixed income and currency businesses. The Treasury market and the dollar were beneficiaries of investor uncertainty during the first two months of the year; in March, the stock market began a five-week rally that lifted the major indexes off 12-year lows.

So in the absence of wild derivative bets, mortgage backed securities sales, and lending gone wild GS can make numbers such as this by playing the fixed income markets and the dollar? I mean, why ever take a risk on exotic debt instruments when you can make all this money in vanilla trading? Beats me!

Now it is not clear as of this minute how much the AIG counterparty payouts helped GS, and we may never know that in detail. For now that is a work in progress. Some observations on what GS report means going forward:
- The pressure will be on for the other banks to have great reports
- The stress tests are now less than meaningless unless they want to call "baloney" on said bank earnings reports
- The banks just kissed away any ability to get any more help from a vote in Congress; public opinion, while fickle, will be against helping banks making boat loads of cash
- Backdoor bypass of Congress for additional funding for banks now looks like the best example of any forward looking ability of the FED/Treasury
- Feeling of being scammed is beyond salvage now
- GS may have overplayed their hand with this report, effectively uniting opinion against further bailouts

I will have to more thoroughly digest the news and I am sure more information will be coming out regarding the numbers.

Something just does not seem right here. Sound off in the comments.

Have a good night.

Friday, April 10, 2009

Friday Night Random Items

As one gets closer to a vacation the weeks tend to get longer. I need 80 degree plus temperatures like you have no idea. Very soon.

Blogroll Addition and Weekend Must Read
I find myself checking in with the site Zero Hedge around 3-4 times a day. The writer, alias Tyler Durden of "Fight Club", has key insight and what seems to me to be very insider type information. I recommend stopping by and taking a look.

Going further, Zero Hedge has a post up today titled "The Incredibly Shrinking Market Liquidity; Or the Upcoming Black Swan of Black Swans" which is the weekends must read piece.

I have to admit, the concepts detailed in the post are extremely over my head, and thus I will need to review the article in full over the weekend before I can have a write up. I would appreciate any readers leaving their impressions in the comments section.

Stock Offerings; Ready, Set, Go!
It has been the central theme here at Economic Disconnect (as well as other venues, I am not unique!) that the whole pumping up of the banking sector by government was a crass effort to get the banks stocks in some kind of shape to sell stock in offerings. One could argue that the only coordinated effort this government has been a success at has been the elevation of banks stocks. Cast your mind back to when Ben "Boom Boom" Bernanke said one sign of a recovery would be for private investment to buy into bank stocks. Well, some untold Billions of dollars and a fake stress test later, we have arrived!

One may argue that there is no substansive difference in buying Citi stock at sat $1 or $3, or buying Bank of America at $3 or $8 but that is another debate. I think that the earnings reports (not the pre announcements) in the next couple of weeks will have their work cut out for them: Every major bank needs to make it past the $10 mark. For some they are already there, others need serious pumping, I mean help.

Perhaps the best of the bunch, Goldman Sachs, an investment house based in Washington DC, is not waiting for the others and seems ready to go on a big offering. While dilution of shareholders IS a bad thing, in the current market getting diluted really means you are in demand, so the stock reacts very strongly to the upside. Bizarro world indeed. Some details:
Goldman mulls big equity offering: report
Investment bank may use the money to repay government investment
SAN FRANCISCO (MarketWatch) -- Goldman Sachs Group is considering a multibillion-dollar equity offering as the investment bank tries to repay a $10 billion investment it got from the U.S. government in the midst of the financial crisis last year, according to a Wall Street Journal report Friday.
The share sale, which could be announced as early as next week, comes as the firm prepares to report "solid" first-quarter earnings Tuesday. Goldman executives haven't determined the exact size of the offering, but it is expected to carry a value of at least several billion dollars, the newspaper reported, citing unidentified people it called familiar with the matter.
If a Goldman offering were to succeed, that could suggest private investors are increasingly willing to invest equity capital in the U.S. banking sector. That appetite has been sorely lacking in the past year, as the financial crisis pushed several firms into bankruptcy or the arms of the government.

The main reasoning for repaying the TARP has been to get out of government manipulation imposed for taking the money. As GS runs the Treasury anyway, I fail to see the point in this!

A Reason to Save General Motors
Economic Disconnect is of course opposed to any and all bailouts of any kind anywhere on earth, or in our local group of galaxies. Still, if I had to find a reason to save General Motors, I would have to submit the 2010 Chevy Camaro:

That thing is just sexy!

You can read a nice take on the car, that made me want to run out and buy one, from Autoblog called "One Night Stand: Taking Home the 2010 Chevy Camaro SS". What a machine.

Friday Night Entertainment
I know, a little light on material this evening. Still, we must have some fun to start the weekend off right.

Boxing History
I am a huge boxing fan. I have no idea why, but I was thinking about Thomas "The Hitman" Hearns today. I found clip of when Hearns won his first world title, the WBA Welterweight Championship back in 1980. Hearns stops defending champ Pipino Cuevas in the second round with two of the biggest right hands you will ever see. Right at the 2:30 mark of the video the bombs are let loose:


Rock Blogging
A little music to start the weekend.

Loyal reader Watchtower expressed a desire to hear some classic Journey with Steve Perry, not that imposter they have in the band now. Who am I to say no to such a request? Here is "Only the Young" Please note this song was featured in the awesome film "Vision Quest":

One of my favorite albums was "The Sound of White Noise" by Anthrax. One of the best songs on it was "Only". Speed changes, great vocals, and a thunder baseline all rock:

While not a real song, the song by Adam Sandler in the film "The Wedding Singer" about his breakup with his fiance is totally hilarious! WARNING: some bad language, skip if easily offended!:

One of my favorites is John Denver. Truly a tragic loss. Any song is great, but take a listen to "Back Home Again":

Last call! Close the show with The Ramones and "I Wanna be Sedated":

Have a good night.

Thursday, April 9, 2009

Taxpayer Contributes to Record Bank Profits in More Ways Than One

Spring has yet to "spring" here as temps are going to be 40-50 degrees for the foreseeable future. Only a little over 2 weeks until my Caribbean vacation where I can be assured of 80-95 degree weather all week long! Just have to hold on.

Tonight's Post
I usually try to present 2-3 ideas on a given night and go in depth into them. Today there was simply so much information out there I cannot pick out just a couple of areas I would like to cover. This post will have more sections but with more limited commentary as I need some time to wrap my head around all the data. Long weekend of reading ahead!

Hong Kong Going Yuan?
The G20 meeting featured all kinds of talk about getting another reserve currency in use to offset the dollar's dominance. Most observer's laughed it off, and I myself still think something like that is unlikely in the short term.

Seems the city unto itself, Hong Kong, is getting ready to saddle up a bit closer to China and use the Yuan to settle their accounts:
Hong Kong Ready to Start Trade Settlement in Yuan
April 9 (Bloomberg) -- Hong Kong plans to be the first city outside mainland China to start settling trade in yuan, expanding use of the currency in a city whose exchange rate is pegged to the dollar, Chief Executive Donald Tsang said.
“It will reduce foreign-exchange risks for companies, create more business for Hong Kong banks and diversify use of yuan funds,” Tsang said at a press briefing in the city. “The policy has already been approved. It’s almost here.”

An interesting development that bears watching. Later in the article we see a list of countries that have opened swaps with China:
China is seeking to promote the yuan as an international currency after signing 650 billion yuan ($95 billion) in swap agreements with Hong Kong, Argentina, Indonesia, South Korea, Malaysia and Belarus in the past four months.

What was that children's TV show song that went "One of these things is not like the other"? I mean how did Belarus get into this deal?

FDIC Backstop All Part of the Plan
Kevin Depew's "Five Things You Need to Know" is simply a must read any time he has it up on Minyanville. Today's offered some insight into the reasoning behind getting the FDIC involved in making loans for the PPIP program even though that authority is outside the charter of the FDIC. From today's #1 need to know:
And that brings us back to the FDIC. Earlier this week NY Times writer Andrew Sorkin reported that the FDIC is going to be insuring 85% of the debt - funneled through the Treasury - that "private" investors will use to acquire assets via the Public-Private Investment Program, or PPIP.

Although this is way beyond the scope and charter of the FDIC, certainly well above the provision that limits the FDIC to insuring no more than $30 billion, it's okay, we're told, because the FDIC can pretty much do whatever the hell it wants if the Treasury Secretary thinks it is necessary. Which he does.

It this sounds complex, don't worry... It's not. The nut of the thing is this: The FDIC, which was forced in March to raise fees to bolster its $15.7 billion bank insurance fund, and despite an increasing list of at-risk banks with deposits it will likely be be forced to cover, is being used to "guarantee" loans to investors.

Why? That also isn't very complex. The FDIC has effectively been hijacked by Wall Street to protect banks, shoving the FDIC's original mission -- to protect depositors -- a notch or 2 down the financial food chain.

Naturally, the FDIC "projects no losses" on these loans, as Sorkin reported in his original article. Because if they did, they wouldn't be able to make them in the first place.

So what happens if, for some unexpected reason, the loans do show some losses? Good question. And if you think about it for a moment, you can begin to see precisely why the FDIC is being used in this way: Congress won't authorize $1 trillion dollars in loan guarantees to finance the PPIP, because that would be a direct ripoff, and people would get upset. Seats would be lost.

But, if the FDIC guarantees the loans, and makes a mistake, well... We have to save the FDIC - they guarantee all our deposits.

It's a beautiful scheme. Indeed, in the most perverse way imaginable, it's the kind of scheme Americans can be proud of.

No additional commentary is needed. A dirty, nasty backdoor trick to bypass Congress (like getting them to agree would be hard anyway!?) that further undermines confidence.

Somebody is Right, and Somebody is Wrong
Today we were treated to even more "leaks" which told that the banks are doing much better in the stress tests than thought. What a shocker! Hard to square the glowing reviews thus far with this report by an independent research firm:
JPMorgan Chase, Goldman Sachs, Citibank, Wells Fargo and More Than 1,800 Other Institutions Believed to Be at Risk of Failure Based on Fourth Quarter 2008 Data

The report by a Dr. Martin D. Weiss of Weiss Research INC is a stark read of the situation. Both versions of the truth cannot be right, but I think the better sounding one will get more traction.

Taxpayer Contributes to Record Bank Profits in More Ways Than One
Let me start off with a word about the "stress tests" I covered last time. After the news of today I will not spill any more ink (pixels?) on this absurd farce. The whole thing is a joke. I was naive yet again (I know, grow up already) in thinking that these tests may have some real information of value and lead to some needed reform. After today there can be no doubt the entire sham was another avenue to pump banks stocks in readiness of new stock offerings. I offer this as evidence:
No U.S. banks will close due to stress tests: source
WASHINGTON (Reuters) - U.S. officials will not look to close any banks based on the results of "stress tests" being conducted to determine how the largest U.S. banks would fare under more adverse economic conditions, a source familiar with official talks said on Thursday.
"You can't close a bank based on a hypothetical," the source said, speaking anonymously because the tests, being done by the U.S. Treasury, are still being finalized. "And you wouldn't want to anyhow, based on the size of the banks."
However, the tests are likely to show that some banks may have sizable capital needs under the conditions being tested, which is "common sense," the source said. Officials are still discussing how to release the results of the stress tests, and the decision will likely be made by the Treasury, the source said, adding that officials are aiming to release them in some form at the end of April after the bank earnings season is over.

So there you have it. You cannot close a bank is "hypothetically" unemployment reached 9% and the bank is proven insolvent. You would not want to anyway, as the source says, due to their size. Why even bother if all this is old news? I guess now the government will have a fleshed out price tag on how much will finally be needed to prop up the banks. At least for now. Who just said commercial real estate bust? Who yelled out credit card defaults? You could start a panic doing that kind of thing!

In Tuesday's article (Consumers Borrow Less; Credit Crunch or On Purpose?) I was irate that the banks were hiking credit card interest rates while at the same time they were getting the best borrowing rates ever seen on earth from the benevolence of the FED. This act of greed was enabled by the FED and is the end result of getting involved with thieves.

Karl Denninger over at Market Ticker picked up on this right away and puts the mechanism into words far better than I ever seem able to:
Here's the deal guys:
Spreads have widened over the last year on broker (and direct bank) mortgage pricing .vs. Fannie and Freddie bond pricing.

How much?

About 200 basis points worth.

Why is this important?

Because you, the consumer, are getting cornholed in the "pricing" these guys are "offering" you!

That is, the banks are exploiting the dislocation in pricing and the credit markets to screw you and post what Wells now says are record profits.

Are you being told about this? Of course not.

Are regulators stomping on this? Of course not.

Are you being looted to pay for this? Of course you are.

You are seeing near-zero (or actual zero) interest earned on money you loan to the bank (when you make a deposit or buy a CD you are loaning money to the bank) and yet when you go to borrow money you're being screwed with record-high spreads that the bank is pocketing - in mortgage and credit card interest rates charged.
How much does this add up to?

About $4,000 in extra profits per mortgage on top of the "usual" $1,000 profit.

That's right - the banks are making five times the "usual and customary" profit per loan, and it is coming right out of your hide.

I've been hollering about this for months (as has Mish Shedlock) but it appears that both our intrepid lawmakers and the mainstream media simply refuses to talk about it.
When does this stop?
When you, America, are tired of being ripped off and demand that it stop.
Remember, the mantra of both government and The Banks is "never waste a crisis."

Great deal for the banks. I understand there are many people out there that are taking advantage of the new lower mortgage rates to refinance and save some money. I think that is both prudent and correct. I only ask this:

- Why use the banks as intermediaries here? Why can't the FED just loan to people direct? If you thought 5.5% on a 30 year fixed mortgage was great, try on a 1% loan on for size and see how it fits!

No wonder the government officials keep screaming for "more lending, more lending", the massive profit spread the banks can book on this may actually lessen the bailout load! Don't worry, you still get to pay higher taxes forever and pay relatively high loan rates to keep the show on the road. I mean, there is no free lunch right?

Karl was on a tear today, so I offer one more snippet from this post concerning Wells Fargo's earnings "pre-announcement":
So Wells comes out this morning and says they're going to make a "record" profit, claiming an expected 55 cents (.vs. mid 30s expectation)

It must be nice to be able to keep loans on the books at whatever price you feel like, receive billions of taxpayer money including "assistance" in rolling up Wachovia, and then turn out to not need it, right?

That is, if these numbers are accurate.

Wells premarket is ramping from $14.89 at the close yesterday and now trading premarket at $18.10, up over $3 or some 30%.

This leads one inescapably to the following:

Either Wells is lying (obfuscating losses through unrealistic marks, etc) OR
These "bailouts" were no such thing - they were a simple and transparent looting operation by the banks that is now showing up directly in "earnings" (and will shortly show up in the bonuses of executives too!)
So which is it folks?

A good question. Please note that the WFC news today WAS NOT AN EARNINGS STATEMENT no matter what you read in the news. WFC reports real earnings on April 22, 2009.

One last tidbit on the whole bank spread travesty. From this story on Wells Fargo:
Here's a closer look at the drivers behind Wells Fargo's record profit:

-- CHEAP MONEY. Think a 4.8 percent interest rate for a 30-year mortgage is good? Try 0.2 percent -- that's what banks are paying to borrow from each other through the Federal Reserve.

Where it might have cost a bank $4 in interest for every $100 it borrowed a year ago, it now costs less than $1 to borrow the same amount of that money. Banks' borrowing costs have fallen more than consumer borrowing costs have (especially when you consider credit card rates, which are largely rising).
Still, much of the reduced cost of borrowing is being passed on to consumers to help generate new business.

The bucks are being passed alright, from the taxpayers and borrowers (one in the same) right into the banks balance sheets. Thanks for all the help guys, can I at least get a free toaster?

Have a good night, but sleep on your wallet!