Thursday, July 30, 2009

Thursday Questions, Follow Ups, and Media Observations

The wife and I will be attending the Depeche Mode concert tomorrow night so there will be no post and no Friday Night Entertainment. I may do a post on Saturday or Sunday instead, so leave some requests for material in the comments.

Question for Economist's View
Up front let me say that I have nothing but the greatest respect for Mark Thoma, the author of the blog Economist's View. With that in mind I was going to write about an article posted today but soon found that I would be writing about it for about 5 hours. I have boiled down my thinking about the post to two questions, and if Mr. Thoma for some reason that I cannot fathom should ever come across this blog, I would be most interested in his reply.

But first, the post in question. You can read the entire piece here and I would suggest you do. Mr Thoma cites Tim Duy in a discussion about keeping steady monetary policy for some time. This means ZIRP for as long as well into 2010, as stated here at Economic Disconnect for over a year. The major reason Economist's View sees inflation as a non issue is low to no wage growth. Excerpt of the summary at the end of the article:
"..Lacking a story that leads to strong wage growth in the near - or even medium - term, the Fed is almost certainly on hold at least through this year and likely well into 2010, allowing the size of the balance sheet to adjust according to the needs of the financial markets while keeping interest rates at rock bottom levels. That doesn't mean all that easy money will not show up somewhere - technical analysts are looking for US equities to explode on the basis of recent market action. But will the Fed lean against such an explosion without clear and convincing evidence that the labor market is poised for strong, sustainable improvement? I doubt it - and for those looking for it, therein lies the ingredients for making the next big bubble."

My two questions are:
1.) In the 2002-2007 time frame wages were flat to lower yet inflation was a real issue. How does your central argument (no wage pressure = no inflation) account for such a recent example that disproves it?
2.) If wage increases are the driver of inflation and bubbles, how can reconcile the 2002-2007 wage issue with the credit driven housing bubble? May there be other drivers of asset values, namely cheap credit and easy access to money? If so, how is accommodating FED policy here a "good" thing?

I am of two minds here. I would love to hear the response, yet I am terrified to get my butt kicked by a real professional! We shall see!

Follow Up on Last Nights Stories
Last night I covered two issues that had some additional information added today so I will expand on those ideas.

China Learns Fast
In the last article I highlighted the China stock market drop this way:
The Chinese learn fast. The best way to influence monetary policy here in the US is for the market to throw a "hissy fit" to the tune of down 5% in response to any take away of the punch bowl. Greenspan was a total sucker for this play, and recently the TARP was passed on it's second attempt after a daring market drop played out by Wall Street.

Today we get a policy "clarification" from the Chinese central bank on the issue of liquidity (via Clusterstock):
China Can't Take Away The Punch Bowl
Monday's 5% drop in the Shanghai market was a stark warning to the credit-happy central government: do a U-turn on cheap money, and this is what you get.
So the government is already sending out signals that it won't be tightening any time soon.

The article excerpts a Wall Street Journal piece which cites an analyst with thus:
"China's top policymakers have repeatedly assured that the current policy stance will be maintained. Note that the People's Bank of China, unlike the Federal Reserve or European Central Bank, is just part of the government and there is no way for the PBOC to run counter to the president or the cabinet"

See, no worries. The money will flow (just like the spice! Obscure reference).

The economic proverb is now:
"Ask and you shall receive...the ladle to the punchbowl" Book of Greed 3:16

Bond Auctions
After the poor 5 year bond auction yesterday, all eyes were looking towards today's 7year offering. This morning I had the following exchange on SA with loyal reader Manya05:
Treasury auction, what do you make of it? time to jump back into TBT and PST? too soon? or should we do it before they are outlawed?

While I never like to do specific ticker discussions, I offered this note:
Economic Disconnect:
I would say the auction went bad, but that it does not matter. The key will be today's 7 year sale; if the US government cannot get some interest after a poor auction (via arm twisting) then we may indeed have an issue developing, not that the markets (equity) will care anyway. I would say TBT/PST are a great short term play (like hours, never hold overnight) if you think there will be an issue with the 7 year today. I think the sale will go very well, so I would not run with those today. But that's me.

The 7 year sale went just fine, though one would have to wonder why 5 year notes were less than chased, but 7 year notes were a hot item. What's two years between friends? This kind of disconnect is hard to figure out.

Media Searches for Reasons for Market Rise
Last article I showed how two durable goods reports were handled in two very different way depending on how they came out. Tim Iacono over at The Mess That Greenspan had a great catch today that showed a similar gaff relating to today's jobless claims. Check it out here.

At first I was worried my story was scooped, but it appears there is enough media funny business to go around.

This morning at 10am I saw the market opening much higher and looking really strong. I had scanned some articles in the morning and failed to see much that would have pushed such a rally from the get go. I stopped at Yahoo Finance at about 10:05 am and saw this leader (click for larger view):

The headline attributed the stock market surge as related to the dollar declining and the China rebound:
"The US market rises Thursday morning as the dollar declines and China rallies,.."

Now with an eye towards the 7 year bond sale, I was greatly interested if the dollar was declining and by how much. This might provide some clues as to interest in the sale later in the day.

I loaded up the dollar chart and here is what I saw at about 10:07am (click for larger view):

Notice the huge dollar drop at the right hand end at 9am-10am. Oh, you missed it? Well, maybe the chart was delayed or something. It should be clear on the one day chart:

Clearly there was no large move in the dollar at all.

The biggest tell that something is wrong is the plethora of reasons being offered for the markets fast rise. A big gap up in the morning had to be for some reason and Yahoo tried it's best to find one. The markets have an active partner in the media, and this example should show how far things have gone.

Have a good night.

Wednesday, July 29, 2009

Durable Goods Report May vs. June Spin Cycle

Three straight days of super muggy air up here. I will not complain at all after this past winter and the very delayed start to summer so far. Heat is heat and i will take it!

5 Year Bond Auction Results
I failed to include the results of yesterdays 2 Year auction because I was both short on time and the final results were far from clear, at least to me. This evening the results of the 5 Year auction are known, and with a little help from a friend I can offer some discussion.

The Housing Time Bomb has a compilation chart up that covers the auction in detail (reproduced with permission):

The authors take:
"As you can see above, the bid to cover was a measly 1.92! This was not officially considered to be a failed auction even though many economists will tell you that anything under a 2 BTC is considered to be a failure.

The primary dealers "(Goldman, Morgan Stanley, etc.)" were forced to eat more then half of the auction as world demand plummeted. They had to put up $24 billion of their own cash in order to close out the auction. Indirect bidders(China and the other FCB'c) gobbled up only $14 billion.

Folks, the fact that the indirect bidders are disappearing this early in the year is frightening. We still need to sell over a trillion dollars worth of debt. I have been screaming "how are they going to sell all of this stuff all year?"

The indirect bidder component here is very important. Very recently the rules for just who was an "indirect bidder" were changed and that metric shot up over the past couple of bond auction rounds. Many ascribed this to the rule change, which made comparison hard with past results. The key point is that indirect participation was much higher under the new rules until today's result.

This is a development worth watching in tomorrows sale of 7 Year notes. The market was unimpressed with today's poor showing, but then again nothing scares this market anyway.

US Durable Good Reports - A Study in Contrast
Today the US durable good report was released and came in a bit short of expectations. Estimates were for a 0.5% decline, but the print was a 5X larger 2.5% screamer to the downside. So this kind of target miss to the downside was a problem right? Not so fast.

Immediately upon release all kinds of disclaimers were put out with it attributing the miss to aircraft orders and other such items, and the better than expected part of the report was instead all the focus. This put me in a mind of last months repost which came in better than expected, again mainly on defense and aircraft items. I thought it might be instructive to see how one news outlet handled both releases and in what manner they were both reported.

Cast your mind back to last month. Green shoots were all the rage and light was seen across the economic landscape of second derivatives. CNN Money on June 24, 2009 had this take on the upside surprise of the durable goods number:
Durable orders in surprise gain
WASHINGTON (Reuters) -- New orders for long-lasting U.S. manufactured goods rose by a much stronger-than-expected 1.8% in May, Commerce Department data showed Wednesday, providing further evidence that the battered U.S. economy was finding its feet.

Analysts polled by Reuters had forecast durable goods orders would decline 0.6% last month. May's increase, the third gain in 4 months, followed a revised 1.8% gain in April, previously reported as a 1.7% rise.

New orders excluding transportation advanced 1.1% last month, compared with a forecast for a 0.4% decline, buoyed in part by a 7.7% rise in new machinery orders. This was the largest percentage increase in that category since March 2008, the Commerce Department said.

And now today's CNN Money durable goods report:
Durable goods orders tumble 2.5%
WASHINGTON (Reuters) -- New orders for long-lasting U.S. manufactured goods fell more sharply than expected in June, notching their biggest decline in five months as demand for communications and transportation equipment slumped, a government report showed on Wednesday.

The Commerce Department said durable goods orders fell 2.5%, the largest drop since January, after rising by a revised 1.3% in May, previously reported as a 1.8% surge. This was worse than market expectations for a 0.6% decline. Orders had advanced for two straight months.

New orders excluding transportation unexpectedly rose 1.1% in June, after climbing by 0.8% in May. Excluding defense, orders slipped 0.7% in June, after two months of straight gains.

Analysts polled by Reuters had expected orders excluding transportation to be flat.

To be fair with CNN Money, they presented all the relevant data, and one with an eye for these things could have seen the hard quantitative facts here. What I would like to point out is that when the May durable goods report came out better than expected, CNN Money had this qualitative note to add to the numbers;
"..providing further evidence that the battered U.S. economy was finding its feet."

So one would expect the same treatment for a 5X miss to the downside after today's number. Maybe a line like;
" new evidence of a contracting economy"
"..eroding recent signs of recovery"
would have made the piece as a qualitative note.

Instead the CNN article just reports the numbers as is with no leading statements or inferences at all, just as any economic reporting should do when not an opinion piece.

Any positive data will be piled on and puffed up, while anything negative will be pushed out without commentary. I could have dug up any two posts on the topic from many sources and the treatment would have been the same. Cheerleading should not be an active part of financial reporting.

The Two Markets
I read an item over at The Mess That Greenspan Made today that got me thinking:
Shanghai Surprise
The big news out of China this morning is that share prices saw their steepest decline in eight months after rumors swirled that the government was about to clamp down on the excessive bank landing that has led to excessive speculation in stocks and housing.

The Shanghai composite index was down almost eight percent earlier in the day before closing with a loss of about five percent following a huge public offering for China State Construction Engineering, the nation's largest homebuilder, where more than 4 billion shares changed hands - about four times the total trading in the Standard & Poor’s 500 Index.

If the China growth story is real and there are underlying structural pillars upon which the monster rise in the stock market was supposedly based on, why the huge flight on the mere rumor the government might, just might, pull back some of the easy money?

The Chinese learn fast. The best way to influence monetary policy here in the US is for the market to throw a "hissy fit" to the tune of down 5% in response to any take away of the punch bowl. Greenspan was a total sucker for this play, and recently the TARP was passed on it's second attempt after a daring market drop played out by Wall Street.

What this shows is that there is no real lift in China, nor America that is not entirely based on government spending. If Bernanke and Geithner announced tomorrow that TALF, the discount window, TGLP, and any 2 other support programs were ending on Monday, the indices would go to "lock down" at the opening drop. And then repeat it a few times.

I try to keep this in mind while all the cheerleaders are waving their pom poms and heralding the new recovery. Recovery bought and paid for by the government. Of course there is no such thing as "the government" really, just taxpayers paying to get robbed.

An article on Minyanville today by Minyan Peter touched upon this game as well and the ending stuck with me all day long:
"..But while banks were busy taking whatever securities-related profits they could from their balance sheets, their core banking businesses were decidedly mixed. On the good-news front (unless, of course, you're a saver), banks lowered deposit rates and raised transaction fees left and right.

At the same time, loan portfolios showed continued credit deterioration across the board. Worse, loan loss reserves appear to have been sized for an immediate recovery, rather than positioned for any kind of continuing economic malaise.

As I have written before, I don't believe that accounting changes the ultimate outcome -- just the timing. In the second quarter, as the tide back came in, banks accentuated the positive and postponed the negative.

Should a sustainable recovery occur, no one will likely ever know the difference. But realize: That's the bet. And from where I stand, the bank “gain cupboard” is now officially bare.

What struck me, and it fits in with the China story, is that clear manipulation and fungible number play is right now being accepted; pair this with the government backing of all things financial and we see there are indeed two markets. The base free market which is much lower, and the current supported market which is much higher.

As Minyan Peter says the bet is that some kind of recovery will come from some place that will more closely align these two markets, which right now are worlds apart in price. I would offer that recovery had better show up real soon.

Have a good night.

Tuesday, July 28, 2009

US Economic Policy On Display

A bit short on time this evening, so just two items for consideration.

Silver Steeped in Mystery
All readers know that Economic Disconnect is a huge fan of the precious metal silver. I hold various positions in it (some SLV, PAAS, and physical mainly) so I have a bias for the shiny stuff to be sure. That said, there is yet another item out this evening that shows some possible issues with how the Silver ETF's are accounting for their physical silver which if this an area of interest to you is well worth the time.

Zero Hedge has a report up described as "a paper on statistical and factual anomalies in silver ETFs". With a title like that, you have to dig in!
Conclusion excerpt:
During our research into the inventory lists of the iShares SLV and London-based ETFS physical silver funds, we discovered multiple anomalies which cannot be easily dismissed. These included the presence of internal duplicates, rough internal duplicates, weight duplicates, statistical clustering, and cross-reference duplicates. Taken together, these anomalies are cause for concern, and we suggest that more capable teams conduct further research into these issues, as they effect price discovery within the precious metals market, as these ETF shares are being used for settlement and possibly price suppression on the COMEX.

If these problems are caused by accounting errors, they are disturbing and perhaps profoundly incompetent, and we suggest both these funds should have their senior management replaced.

In our opinions, the only way for all of these anomalies to occur together as noted in this paper, is via systemic fraud or gross accounting error bordering on jaw-dropping incompetence.

The paper references a post by the writer Mark Anthony (not J-Lo's husband!) which found some glaring problems with the silver ETF's holdings. I found the article here so please read as a follow up. For a taste of the mysterious, Zero Hedge notes that:
Unfortunately, our private considerations are for the former,
especially considering 'revisions' published to the ETFS bar list
after the appearance of Mark Anthony's July 14th 2009 article on
Seeking Alpha regarding possible ETF fraud. The ETF Securities bar lists were changed after the Anthony's discovery of duplicate bars in the Great Wall brand.

I think I have mentioned that silver holds the highest short position of any metal ever. Very interesting.

US Economic Policy On Display
Today brought several items that are very revealing in the arena of just how the US plays the game of economic fantasy land. That this kind of bold lying is both accepted, and then acted upon as truth by the rest of the world is the single most perplexing observation I have seen in my entire life.

First up, Federal Reserve Bank of Philadelphia President Charles Plosser tries to give some help to the massive bond sales this week by saying the FED may raise rates soon:
A FED Inflation Hawk Speaks
“I think we will probably have to begin raising rates sometime in the not-too-distant future,” Federal Reserve Bank of Philadelphia President Charles Plosser told Dow Jones Newswires and the Wall Street Journal in an interview.

A renowned inflation hawk at the Federal Reserve is at it again, trying to pull more dovish Fed officials under his wingspan of influence to get them to do more to battle incipient inflation.

And the timing of Plosser’s comment is interesting, notes Charles Brady, senior editor of the Fox Business Network.

The Fed is selling a record amount of weekly debt, $115 billion now coming up, a sum that tops the previous weekly record of $104 billion set just last month. The bond glut pushes yields higher because so many bonds means a lot of competition, which means the Treasury has to offer enticing, come-hither yields to lure investors in.

“The impending glut of supply has been pushing Treasury yields higher,” says Brady. “What better way to try and keep a lid on rates ahead of this debt sale than to have a Fed official say that policy makers are likely to begin raising rates sooner rather than later.”

Brady adds: “It’s also interesting to note that Plosser is not a voting member of the Federal Open Market Committee, which helps distance Plosser’s comments from the policy makers who actually do vote on rates.”

Just last week we had Ben Bernanke state with no doubt that rates would be accommodating for, well basically forever. Now another FED player tries to say the opposite. This is another example of how the US just has to say things and not do them for them to be real. Nice work if you can get it.

Next in line for the pantomime if our own Treasury head Tim Geithner. Geithner is over on tour in China saying all the right things, like this quip:
Geithner: US to address deficits after recovery
WASHINGTON (AP) -- Treasury Secretary Timothy Geithner says he has reassured China that the United States will take steps to address rising budget deficits once the economic recovery is firmly in place.

China has huge investments in the United States and has worried it could be undermined by U.S. budget deficits. Geithner says the Obama administration plans to reverse the spending of hundreds of billions of dollars devoted to stimulating the economy and propping up a teetering financial system.
Geithner spoke at a news conference Tuesday capping two-days of high-level talks between Chinese envoys and U.S. officials.

Geithner says the Chinese agreed to take steps to increase domestic consumption of its products.

Geithner pretends that US deficits are a temporary phenomena, while in fact surpluses are like a rare Amazonian animal that is rumored to exist, but never captured on film. If I was at one of these events I would roll over laughing at stuff like this.

Rounding out the trifecta today is Fed governor Janet Yellen who went so far out into pretend-ville that Jesse over at the Cafe spilled some high quality ink (pixels) on the charade (varied excerpts, but read the whole thing!):
The mainstream media is reporting that Fed governor Janet Yellen, a noted dove on inflation as Fed governors go, just told a gathering of bankers in Idaho that "deficits do not cause inflation" and summarily dismissed any concerns in that regard.

So, consulting the source material which is included just below, I am struggling to understand what she is saying, and to believe that she said it with a straight face, and was not just jawboning...

...So, we can inflate our way to prosperity, provided that we control the perception of the results of our actions. Jigger the CPI so its no longer valid, suppress long term interest rates by buying the curve selectively and suppressing gold (See Gibson's Paradox by Larry Summers), and coerce the world's central banks through various means to support our monetary inflation step for step. After all, everything is relative. Until it is not.

OMG. Our entire financial system is based on the sufferance and good will of potential adversaries to do what is in our best interests because the fragility of our currency frightens them. And well they might be fearful, when they read this from Ms. Yellen, and see how many true believers in the omnipotence of the Fed take it seriously.

Jesse lays it out much better than I ever could!

Ever since starting my foray into the economic world I have been at first surprised and then just flabbergasted that the US can do whatever it wants and then just toss out a few token lines of sanity and all is well. If China thinks our deficits are a short term event (short term = 10 years plus?) just because we say so, then I guess the US is in better shape than I thought.

Have a good night.

Monday, July 27, 2009

The Economists Made Me Do It!

Up front I am going to tell you that I had a hard time finding stories that caught my attention tonight. This post may be a little "all over the place" as a result.

Notes From Around the Web
If you were checking out the comments section on Friday, you may have seen the shout out Economic Disconnect was given on Friday form "The Automatic Earth". It seems my offer of a Friday night music choice to the author Ilargi prompted him to write what is my favorite TAE intro section ever, inspired by Bruce Springsteen's "My Hometown". No excerpts, as you would be well advised to read the whole thing!

You may want to check out guest writer "Will Profit" who is making some posts over at Capitalist Preservation in place of Lisa for a while.

There is Always a Bull Market Somewhere
A common market saying is that "there is always a bull market somewhere" which I guess is true in some way no matter what. When you consider the less than fundamentally sound underpinnings of the economic system today, it should come as no surprise that there is indeed a bull market, in fraud (hattip Jesse's Cafe Americain):
The Bull Market in Financial Fraud in the US
Does it, should it, surprise us that there is a bull market in financial fraud in the United States, to accompany the bubble economy and the deterioration in government and corporate financial statistics and accounting?

A society where the capital allocation in the bond and equity markets have become the domain of organized manipulation, theft, and insider trading? Where the major media is owned by a handful of corporations dedicated to selectively spinning the truth for their own benefit and point of view? A nation whose very money supply has become a thinly disguised Ponzi scheme?

A wise old hand of many years in government of our acquaintance told us once that he did not think there were more people of questionable virtue in the world today. Rather it is the tolerance of bad behaviour from the top down that emboldens those who are so inclined to lie, cheat, and steal in greater numbers than at other times.

Here is a chart that is in a strong uptrend:

Now all we need is an ETF for this thing, something like (FRAWD), and we can all make some money!

Fascinating Forecast of the Markets
While you all know I am not a chart lover ny nature, I do think technicals have plenty to offer any market observer. Today one of my favorite chartists, Tim Knight of "Slope of Hope", had the following a post up which covered an extrapolation he made on October 18th, 2008. I was unable to secure full image posting permission, but you can read the post here and view the hand drawn chart here.

If Tim's long term outlook should hold, we will be faced with the possibility of the indices giving back all the the current move up and then some. I have argued many times that if such a scenario does come to pass, many regular "investors" (401k contributors, small brokerage accounts) will take out that money from the markets and never return. I think that Wall Street and the FED/Treasury are very aware of thesis dynamic, so keep that in mind going forward.

With word filtering out that naked short selling will be permanently banned, and some rumblings that the 3X short ETF's may be next to be outlawed, we may not be far from the day when the ban of lower stock prices is put into effect. No, I am not kidding!

The Economists Made Me Do It!
I figured after I had posted on the hot button topic of health care, and the discussion was very clean and non political, I thought I would venture out again into the quasi political. Maybe my mistake, but there is a point I wanted to get out there.

As I was listening to the President's health care infomercial last week, I was struck by the the following line which was an answer to a question concerning out of control spending through TARP. I admit I had heard before but only now did it rankle me (I did not dig up a transcript, this is a paraphrase):
"The economists told us we had to pass TARP or there would have been a great depression, instead of a serious recession."

And with that line I think we saw one of the real problems with our government as it relates to all things economic.

Simply put, our elected officials (with a few exceptions) have no clue about finance. Which is fine, a prerequisite for government service need not include an MBA from Harvard (though how much good that would do is debatable!). What I was struck by was the total abdication of responsibility that statement infers.

Our elected officials are supposed to be protecting the best interests of the public (ok, stop laughing) and yet when it comes to an issue of central importance, policy is left in the hands of a select few, and those few have shown no ability to promote effective policy. If US economic policy will be left to "the economists" (just which ones I wonder?) then why even allow any fiscal measure to be on the Congress' plates? I find this very disturbing and welcome input in the comments.

Reappoint Ben Bernanke! Why? I Have No Idea
In the next installment of Nouriel Roubini's foray into ,making no sense, I wanted to highlight his defense for reappointing Ben Bernake as FED head. I have great respect for Mr. Roubini, but this treaty for Bernanke really has some holes:
The Great Preventer
Last week Ben Bernanke appeared before Congress, setting off a discussion over whether the president should reappoint him as chairman of the Federal Reserve when his term ends next January. Mr. Bernanke deserves to be reappointed. Both the conventional and unconventional decisions made by this scholar of the Great Depression prevented the Great Recession of 2008-2009 from turning into the Great Depression 2.0.

Right off the bat, the first rule of persuasive journalism is to appear to be impartial. Using a phrase like "this scholar" already sets this up as a puff piece. Continued:
To be sure, an endorsement of Mr. Bernanke’s reappointment comes with many caveats. Mr. Bernanke, a Fed governor in the early part of this decade, supported flawed policies when Alan Greenspan pushed the federal funds rate (the policy rate set by the Fed as its main tool of monetary policy) too low for too long and failed to monitor mortgage lending properly, thus creating the housing and credit and mortgage bubbles.

Now, after that section is seems impossible to climb out of the hole, but Roubini even ups the ante:
He and the Fed made three major mistakes when the subprime mortgage crisis began. First, he kept arguing that the housing recession would bottom out soon (it has not bottomed out even three years later). Second, he argued that the subprime problem was a contained problem when in reality it was a symptom of the biggest leverage and credit bubble in American history. Third, he argued that the collapse in the housing market would not lead to a recession, even though about one-third of jobs created in the latest economic recovery were directly or indirectly related to housing. Mr. Bernanke’s analysis was mistaken in several other important ways. He argued that monetary policy should not be used to control asset bubbles. He attributed the large United States current account deficits to a savings glut in China and emerging markets, understating the role that excessive fiscal deficits and debt accumulation by American households and the financial system played.

Great points made here. It seems Roubini is making a fair retrospective. So how do we get to an all clear for Bernanke? Next up:
Still, when a liquidity and credit crunch emerged in the summer of 2007, Mr. Bernanke engineered a U-turn in Fed policy that prevented the crisis from turning into a near depression. He did this largely with actions and programs that were not in the traditional toolbox of monetary policy. The federal funds rate was effectively pushed down to zero to reduce borrowing costs and prevent the collapse of consumer demand and capital spending by business. New programs encouraged skittish institutions to resume lending. For the first time since the Great Depression, the Fed’s role as lender of last resort was extended to investment banks.

Mr. Bernanke also introduced a wide range of other programs, like those to maintain the functioning of the commercial paper market (which makes short-term loans to companies so they can cover operating expenses like payrolls). The Fed was involved directly in the rescue of financial institutions like Bear Stearns and American International Group. It lent money to foreign central banks to ease a global shortage of dollars. The Fed even committed to purchasing up to $1.7 trillion of Treasury bonds, mortgage-backed securities and agency debt to reduce market rates. These are all radical actions that had almost never been undertaken before.

Roubini seems to think all this was a good thing. In the words of Dalton from "Road House", 'Opinions Vary'. Final push:
Some of these moves have raised important questions: Did the Fed help bail out institutions that should have been allowed to fail? Did it cause moral hazard as reckless lenders and investors were effectively bailed out? How and when will the Fed mop up the excess liquidity that its actions have created? Will these actions eventually cause inflation and a sharp fall of the value of the dollar? Has the Fed lost its independence as it has accommodated the fiscal needs of the government by bailing out banks and printing money to cover large fiscal deficits?

Still, the basic point remains: The Fed’s creative and aggressive actions have significantly reduced the risks of a near depression. For this reason alone Mr. Bernanke deserves to be reappointed so that he can manage the Fed’s exit from its most radical economic intervention since its creation in 1913.

I am lost.

Roubini correctly identifies poor FED policy as the culprit for what is wrong, yet offers his support for more of the same. This cannot be resolved logically.

In summation:
FED easy money policy after the tech bust and 9/11 was the direct contributor to the massive credit bubble which has no bust. The inability of the FED (amongst others) to regulate or monitor abuse of credit led to gross imbalances in debt allocation. faced with hard data which pointed to a collapse of the charade, the FED brushed it all off as minor and was not aware of the extent of the damage. After market implosion, the FED was quick to rush out THE SAME POLICY TOOLS that led to the bust, and thus Bernanke deserves reappointment.

I usually will not excerpt such a long piece, but I think it is clear Roubini's position is weak at best, and untenable at even a medium analysis.

What this all boils down to is this:
The FED will provide easy money and encourage risk taking backed by government backstop. They will then get out of the major role they are in because, wait for it, IT IS DIFFERENT THIS TIME.

I think you have heard that argument before, and I think you know where it ends.

Have a good night.

Friday, July 24, 2009

Friday Wrap Up

I think I am going to have a short post tonight (not counting the fun stuff!). I am a bit burnt out this week. I have had a full plate at work all week plus I think I may have used up all my good ideas this week on the posts I did. I really think all 3 so far were pretty solid write ups and I hope you the reader were informed and entertained.

Friday Market Action
After the dismal earnings reports out lat night from the big boys like Microsoft and Amazon, I saw quite a few headline jumpers proclaiming a drop in the indices were at hand for Friday. I had warned last night:
There are some thinking the MSFT and AMZN after hours release will hurt the market tomorrow. It will indeed, for about an hour. I fully expect another 1% day to the upside tomorrow, momentum is a strange thing.

So what happened?
S&P Daily Chart for July 24 2009:

From the above chart we can see that I was wrong as can be. The S&P was lower for FOUR hours as opposed to my estimate of one hour. The final walk higher was also a clear top line miss as the S&P only posted a measly 0.30% gain instead of the 1% expected.

Clearly I was wrong here. This goes to show you the dangers of playing a market like this one. Be careful out there all!
Note: This should be dripping sarcasm.

When Two Tribes go to War, Money is All You Can Score
Section title provided by the song "Two Tribes," by Frankie Goes To Hollywood
I just came across this Yahoo Finance headline 1 minute ago that had me laughing out loud:
Geithner, Bernanke at odds on consumer protection
You can read the article if you like, but the first thing I had in mind for the opening paragraph was a little different from the Yahoo article (My version):
"Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke staked out opposing sides on the debate over consumer protection. Geithner feels that protecting the consumer could cause a systemic risk to banking profits and Bernanke feels strongly that ineffectual protection would at least give the consumer a feeling of hope. Geithner rejected this as too risky given that any possibility that banks would feel their ability to rip off the consumer was at risk could curtail lending."

Reason Number 4,098,234 Why the Banks Should Have Been Allowed to Fail
I think that we can debate the merits of using home equity as a source of funding for various things (college tuition, repairs, renovation) because there are valid reasons for using that money if done correctly. I understand what was done with it was way out of control, but I do think home equity is a resource that can be used by the responsible.

There can be no debate about a cash out refinance program based on your car! Taking out more debt on a rapidly depreciating asset is about as insane as you can get. There is no reason for this to be done, and no such loan program should even exist. Of course it does however:
Wells Fargo Offering Customers A Car-Equity Loan (WFC)
Acquiring extra cash is tough these days. Trying to find a job probably won't help. Your credit card line's been cut and the idea of a home equity line is a joke.
How about that jalopy in the driveway?
No, we're not talking about cash for clunkers, we're talking about an auto equity loan.
Just head on over to Wells Fargo, which proudly advertises that it's one of the few banks still doing Cash Out Refinance Loans.
In other words, you can refi your car and get cash, just like they used to do with houses. And don't worry that you have no equity in your car... who does?

Read the whole piece for the full page ad that has soured me on writing any more market commentary tonight. Wells Fargo should be ashamed.

Friday Night Entertainment
I need a change of thought process, so lets dig in!

Another Book Read
I could not help myself after "The Moon is a Harsh Mistress" so I went with the Robert Heinlein novel "The Door into Summer" on Tuesday and Wednesday night. I can say this book rocked! I loved it. Heinlein is a true talent and a special treat was the saving of the day by my beloved metal gold which figures into the story in a big way. Highly recommended.

Strange Picture
After the drubbing the bears have taken, many have been feeling a bit of self pity. perhaps this mildly disturbing, yet fascinating picture can summarize the dejection (titled "pity party"):

Must Have
I have to get a six pack or ten of this beer:

From Geekologie:
Okhotsk Blue Draft stands out for its cool color and interesting (yet not off-putting) ingredients. The brew is made using water melted from icebergs that float each year onto Hokkaido beaches from the chilly Sea of Okhotsk, an arm of the North Pacific ocean bordered by Japan and Russia.
Then Abashiri went one step further and used seaweed to give their brew and icy blue tint. Perhaps not the greatest selling point but it does make Okhotsk Blue look, well, different. As for the taste... reports state that Ryuho isn't at all bad as beers go, and if you didn't know there was seaweed in it, you likely wouldn't guess there was.


Film Clips
The following film clip will take some explanation. The clip is from the film "Judge Dredd" which was terrible beyond belief. What I would lie to show is how you have to protect bad actors from being shown up by good ones. In a heated exchange between Sylvester Stallone (whom I think is a fine actor in many fims, not this one!) and Armand Assante, we see how Assante's great acting really overwhelms Stallone in the scene:

Rock Blogging
With all the music requests, i hope I can fill them all! Oh wait, nobody requested anything! You all should know better than to leave this section all to me.

A little Billy Idol goes a long way, so start off the night with "Catch My Fall":

The song that showed just how great Guns N Roses could be, enjoy "Sweet Child O Mine":

Needed a Stevie Nicks fix, so try out "Stand Back":

Last call!

Closing the week, the show, and the night with Boston's classic "More Than a Feeling":

Have a good night.

Thursday, July 23, 2009

Reflections on the Bull Market

Way short on time and really just way too much ground to cover. I will highlight some items I found interesting today.

Rumors That Will Never be Proven Can be Fun
Throughout history there have been rumors. Some have been true, others false, but what is always a fact is that rumors captivate people's interest. Whether it was the Plunge Protection Team (the PPT, true), Goldman Sachs High Frequency Trading programs (true), Billions in bearer bonds stopped at the Italian border (true they were found, bonds likely fakes) or Treasury threatening BAc CEO Ken Lewis (true at some level) these things can take on a life of their own. Tonight brings another juicy morsel.

Zero Hedge, yes the same blog endlessly targeted by CNBC for hit jobs to boost their own ratings, has a possible major story up this evening. This tale is so big that I can say with full confidence the audio tape in question will never be heard. Ever.

Be that as it may, enjoy a rumor that is captivating:
"This Call Is Being Recorded For Quality Service"
You would think that, having run an investment firm of his own, the likes of Steve Rattner would realize that many hedge funds, particularly trader-centric firms (and which aren't?) record their calls. Apparently, that detail escaped him during the Chrysler bankruptcy fiasco.

Zero Hedge has been told that at least one of the firms that were purportedly threatened with dire action by the likes of the IRS, SEC or White House Press Office (Rattner obviously confused the placid Robert Gibbs with Helen Thomas here) if they did not support the administration-backed spoonfeeding of the UAW, has the threats on tape. Oops.
We didn't buy that Rattner resignation story in the first place, but how sad a state of affairs would it be if an Obama Czar used as the "cover story" for a resignation, allegations of fraud at their private equity fund because the truth was much worse?

Now it is in no way clear this story has any merit, but if I use my own internal compass and think about the whole situation for a minute I would be shocked ONLY if this were not true.

That said, this story is too big to surface, so that audio, if it exists will not see your Ipod any time soon. Still fun to speculate in something other than stocks!

US Treasury: All Your Liquidity Belongs to US!
Next week is going to be interesting on many levels. The dynamic to watch is going to be the Treasury auctions, which alone will try and push $250 Billion bucks onto "investors" with a huge weekly debt sale. How big, again? Market Ticker has this write up (hat tip reader Watchtower):
HOLY !@#!! Treasury Auction Schedule
Let's see if I can count this up....
70 day CMBs, $30 billion (tomorrow)
13 week Bills, $32 billion (July 27th)
26 week Bills, $31 billion (July 27th)
52 week Bills, $27 billion (July 28th)
2 year Notes, $42 billion (July 28th)
5 year Notes, $39 billion (July 29th)
7 year Notes, $28 billion (July 30th)
19 year, 6 month TIPS (reopened), $6 billion (July 27th)

That's two hundred thirty-five billion dollars over the next week!
Almost one quarter of a trillion....... geejus.

I would say you can cross the $6 Billion in TIPS off the list as the author of the blog Illusion of Prosperity hearts TIPS and will buy the entire issue! (Kidding Mark!!!)

This kind of money drain will have to impact some market someplace. The liquidity situation next week may be strained.

I would also like to add that do not bother trying to get an up to the minute release of the bond auctions. They will ALL go off very well, spectacular even. The participation will be at all time highs, and foreign buying will be jacked as well. How do I know? Because IT HAS TO BE THAT WAY. The FED will provide any funding the markets will not, so please do not start writing items like "if the bond sales are bad, or even fail" because they will not. You were warned, but be ready for a market run up when the sales go well. If anyone can find some free cash anywhere in the world. Now what about those reserves parked at the banks that are causing all that deflation.......Hmmm. Very interesting.

Reflections on the Bull Market
This blog has been termed a "doom and gloomer" with a "bearish" type of stance since I started writing over two years ago. I would characterize this site as a sarcastic, witty, biting commentary on all things that do not add up in the modern US economy, but that's just me. I do have a vested interest in a market that goes up. I have a 401k just like many folks do. The company that administers the plan has 3 types of funds to invest in:
-Hyper Aggressive
-Overly Aggressive

Those are the choices. My employer has an excellent (really amazing actually) 401k matching plan that matches with CASH your allotments up to a very nice percentage. So I use this vehicle as my proxy for the "very aggressive" portion of my personal investment portfolio. So in theory I like a rising stock market as much as the next guy.
Side note: Beware employers that match with company stock. I know plenty of people that use their 401k as their main investment vehicle and their company matches with stock, then the employee also does the employee stock purchase plan and that is just too much money riding on the results of one company. My 2 cents.

Where we differ is that I care about the "how and why" and not just the direction of the markets.

I would love a bull market built on earnings growth, rising wages fueling demand, job creation in sustainable industry, and economic confidence based on well researched prospects for balanced expansion.

Now ask yourself, is any one element of those criteria met by the current market run?

Take a day like today. The indices were running wild all day and closed almost right at the highs. So what was the big impetus for the move higher (turn off your understanding of manipulation for 1 minute)?

We are told that existing home sales went up from May to June (as they do every May to June since the invention of the school year) and that home prices went up, at least marginally. That sounds great, and we could parse those number for a while, but there is no need.

Today we heard from Microsoft (MSFT), UPS (uh, UPS), Amazon (AMZN), and McDonalds (MCD) which all said in no uncertain terms that sales are still falling, shipments are falling, unemployment numbers are still historically very high, and not even chicken mcnuggets can garner a bid.

So in the face of this data, am I to believe that people that are not buying a computer, shipping things from Amazon and Ebay, nor eating many quarter pounders, are out buying houses instead?? You have got to be kidding me.

I would ask all involved to think for a quiet minute on just who is buying all these REO sales and foreclosure sale homes that are the bulk of sales. Take a minute, I will be here.


Welcome back! Have your answer?

There may well be a few, but leading candidates are:
-Newly born "real estate investors" looking to make a quick flip. These are the same as the old ones and they will just as quickly default on loans as soon as they are under water enough (which is not much). Call me this November and we will see.
-New first time buyers lured into a market that has never looked cheaper to them, because they first entered into the market in 2006 or later. They think this is the bottom. They need a better starting reference point!

As a "moronic blog", as CNBC has coined many of us (I am sure they have no idea I exists but I speak for us all), I would ask their best analyst to square that basic purchases are going down, unemployment is at decades long highs, but home sales are going up? Try it, I would love to see the logic.

I really do not have more to add other than right now feels like late 2000 and mid 2006 to late 2007 to me. Everything is good, and the bad is not applicable. There are some thinking the MSFT and AMZN after hours release will hurt the market tomorrow. It will indeed, for about an hour. I fully expect another 1% day to the upside tomorrow, momentum is a strange thing.

Along the macro type of thinking, I would suggest very strongly (almost ask you) to take a look at The Automatic Earth's author Ilargi's opening statements in his missive from today. I went back to it multiple times, and I still find it very moving, well worth your time.
Read the Whole thing.

Have a good night.

Wednesday, July 22, 2009

Bailouts are Now Option One

The muggy air has arrived here in Massachusetts. Muggy is the hardest sleeping weather as the heavy air makes you warm , but the air temp gets cool at night. It is a "conundrum" to borrow a FED phrase.

A Word About Health Care
Up front, I work for a pharmaceutical company and my mother is a nurse so whatever bias comes from that you should know up front.

That said I have a few thoughts regarding the all out rush to radically change the health care system. I share them here for discussion, but not in any political sense. This issue has become too politicised and that is why no one can see straight about it.

My take:
-In my admittedly small sphere of "people I know" nobody is without health care and all have always had the best care available at a minimum wait.
-There is NO WAY to expand "free" health care to 50 million people without it 1) costing you more and 2) devaluing service. I cannot be more clear on this.
-Once in place, the costs will be 2-3 times higher than anticipated, as all government programs become. Add to this that when the private insurers are gone and outlawed there will be NO WAY to take down the government system, even if it is a total failure.
-There is no "free" here either, no matter what is said tonight. You will pay, oh you will pay. Higher taxes, higher fees, and plenty of "one time charges".
-Health care is not a right, it is a choice. While some prefer plasma TV's, full cable channel menu, and dining out 4 times a week on a minimum wage salary, others pay their premiums and budget out extra cash for the unknown. Once again the prudent must pay for the imprudent.
-Once started, the discussion on "who gets the care" will be nasty and it will be heavily on the political. We all know smokers must pay higher rates. We know old people will pay higher rates. Who next? A soda tax is already been discussed, but I drink diet soda which has no obesity correlation. Will fat people pay more? How about rock climbers and joggers who fill the orthopedic units across the country with breaks, sprains, and joint damage? Who decides? What are the criteria?

Clearly the system we have is not the best possible, but I would argue it works for me and I want it as is. There are just too many issues to overcome and giving the government more control over our lives, in light of their spectacular failure across the spectrum in the last year, is not a good idea. My 2 cents.

Dollar Discussion
On Monday I posted some dollar weakness related ideas. Tonight The Housing Time Bomb fleshes out some more thoughts on dollar weakness:
It's Dollar Day!
...the dollar has pretty much collapsed since the market started rallying in March. I find this to be an interesting phenomenon.

Traditional thinking would tell you that this makes no sense:

Back when the world made sense, a strong currency was the base of any country with a strong economy. This makes the recent rise in equities even more suspect in terms of fundamentals in my view. If things are so rosy then why isn't the dollar strengthening?

Supposedly Europe is in much worse shape then we are. If this is the case then why the COLLAPSE in the dollar versus the Euro?

The note about the Euro strength was a point I had missed. An interesting observation. More:
The only thing that's saved the dollar thus far is the FCB's have continued to store the majority of their reserves into treasury holdings . They essentially blow themselves up if they bail on the dollar because of their treasury exposure.

What we need to start realizing is this doesn't HAVE to be the case. China appears to be gobbling up hard assets all over the place. Other FCB's continue to demand alternatives to the US dollar. I am not sure we will ever find one, but that doesn't mean the dollar can't collapse as the world diversifies its assets.

You need to ask yourself the following:

Why is oil rallying when there are tankers upon tankers filled with oil with nowhere to go as a result of no demand? Why is gold not collapsing in price like other hard assets like housing?

Lets take it a little further: Why is the DOW rallying like mad as the economy continues to struggle?

Great additions to the discussion.

Read the entire piece for some additional conclusions.

I would only add to the "just because something has never happened, does not mean it cannot happen" meme. Everyone expects the dollar to stay great even in the face of wild spending and collapsing revenue. The world always seeks out the dollar for safety is the argument. Ok, I would agree. But that implies the US will always and forever be worthy of such a safety flight. Well, that may not always be the case. We see China making a real efforts to settle in Yuan as well as acquire hard assets in bulk.

Bailouts are Now Option One
There has been extensive coverage of the impending commercial real estate problems. Well, there has been great coverage if you do not read the mainstream media or listen to CNBC. If you read this blog and others like it (try Zero Intelligence, they are pretty good!) then you are well aware that there is a sea of commercial structures to match the flood of residential empty homes across the nation.

This is of course, bad. Add to this that the concentration of bad CRE loans resides in many smaller regional banks (not "to big to fail" allegedly) because those small fish could not compete with the big boys in residential loans and you have a real mess on the way.

Never fear my dear readers. The FED is well aware of the issue and has already put their number one option on the table. Care to guess what it is going to be?

If you guessed managed loan defaults, bank closures, bondholder haircuts, and a reduction in mini malls across the American Southwest (hello Phoenix metro!) you are asked to limit your thinking to more simple terms.

If you guessed government bailouts and backstops, you win a lolly pop. The really cool kind with gum in the middle! Lucky you!

Sadly, I am not kidding. Ben Bernanke in the course of his testimony today made the coming CRE bust sound easy to fix. So easy in fact I would like to show you the FED's newest tool in the war against mortgage defaults which was on display today:

The FED bought an Easy Button!

In a strange twist, the congressional panel had relevant questions about the CRE issue today and asked Bernanke about them. Of course so soon after the FED head penned an opinion piece about how he will "exit" all the fiscal support programs a soon as possible, Mr. Bernanke was probably thinking this was not a good time for this discussion:
Bernanke Says Commercial Property May Pose Risk for Economy
July 22 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said a potential wave of defaults in commercial real estate may present a “difficult” challenge for the economy, without committing to additional steps to aid the market.

I highlight the "without committing" part because the next passage shows that to be untrue:
The Term Asset-Backed Securities Loan Facility, a Fed emergency program that lends to investors to purchase securities backed by consumer and business loans, began accepting commercial mortgage-backed securities as collateral last month.

Fed policy makers will extend the TALF, currently scheduled to expire Dec. 31, should they judge financial markets are still “some distance from normal operation,” Bernanke said today.

“We will certainly be monitoring the situation, and if markets continue to need support, we will be extending the final date of that program,” Bernanke said.

That does not sound like a non commitment. Just like that 24 Trillion in promises will never, ever be called in. Nice! Finally:
It “may be appropriate” for the government and Congress to consider “fiscal” steps to support the industry, Bernanke said today. Ideas for fresh support for the market could include government guarantees for commercial mortgages, Bernanke also said today, while noting no proposal on the subject has emerged.

If you believe there are no plans in place already, then you write for Bloomberg.

Mish makes the day's top observation with this nugget:
Given the commercial mortgages have "completely shut down", does anyone buy Bernanke's line that he is "somewhat concerned"?
Here is the real deal: Bernanke is terrified and so is the rest of the Fed.

If the FED is even saying they are "concerned" it means they are as scared as possible.

A follow up to the Bernanke discussion was located by Economic Disconnect and I publish it here for the enrichment of the readers. Please note these lines were garbled and only my "Sarcasm ON" device was able to translate the mumbling:
Bernanke: "I cannot believe I just told them that we will have to bailout the commercial real estate market, and nobody asked my how we are going to pay for it! This EASY Button is the real deal! As long as they keep Ron Paul out of here, I should be able to get out of here soon. Bailouts get easier the more you do them. We should get a burrito, lets hit Anna's Taqueria!"

I have read plenty of articles written by some writers I have great respect for that are very complacent that the FED will magically exit all the support programs should things start to get ugly on the inflation/dollar debasement front. They base this on the evidence that the FED says they will be able to do it. I find that line of reasoning to be lacking at best, and outright ridiculous at worst. The FED will not be exiting anything anytime soon. The sooner commentators see that, the sooner they may figure out the rally in the indices.

The markets may be pricing in low cost loans, a sea of liquidity, and a government explicit guarantees for a time frame measured in years, not months. Once this realization comes to the front of the discussion, I would like to see how the dollar is doing then. I look forward to seeing how the FED supporters square reality with their faith in the FED's words.

Have a good night.

Monday, July 20, 2009

Talking Economic Trash

Long weekend of yard work. At least the weather was outstanding. No post tomorrow night as I have a dinner engagement.

Dollar Weakness - More Bang for the Intervention Buck
As the stock market indices have been on a tear for a week now, a peak at the dollar index chart gives us an idea where the impetus is coming from (dollar index 1 Month):

While this chart looks dramatic, keep in mind this is only a drop of about 3 on the index. Still, the clear breakdown tells the tale.

Dollar weakness is bullish for stocks for reasons I can never really figure out. While the FED/Treasury has been largely ineffective in helping the real economy, I think they may have begun to notice that constant headlines of "STOCKS RISE" are worth more in the psychology column than headlines like "TALF Lends Money".

Of course we all should have known the dollar was going lower when the Treasury secretary made a trip to Saudi Arabia to assure them their dollar holdings were "on solid footing". These trips almost always coincide with significant dollar weakness, a sort of heads up to our debt buyers as a courtesy.

The Axis Powers of finance (FED and Treasury) may be tempted here to let the dollar slide without any help in order to have a higher stock market. The value in terms of headlines due to a rising market are too alluring I think. How low can the buck go? I would say all the way down to 74-72 on the index should be worth another 15% or so of upside for the indices. What could go wrong? A few items come to mind:
-China has had 3 failed bond auctions and this may require them to be sellers of dollars to buy yuan. This would be downward pressure in a downward move.
-Said China dollar sales could cause acceleration of downside, perhaps causing a run
-Too many more headlines like "Bailouts Stretch to 24 Trillion" cannot help the dollar

Again, the problem with intervention all day all the time is that it requires even more intervention to maintain order. While the Axis Powers have been able to guide the dollar to their will, this environment is very dangerous.

Talking Economic Trash
While I am not a chart lover in general, I do like technical analysis as a corollary of a trading idea or just as another data point to consider. One of my favorite chartists is The Evil Speculator. Combining sharp trading analysis with hilarious writing makes for a fun site. Today the author had a different kind of post up.

The constant market manipulation and ever higher bias over the last few months make charts and trading a difficult proposition. While accepting the current atmosphere, Evil Speculator makes the following observation:
We are getting closer - I can smell it - just watch bubble vision these days. Resident CNBC court jester Dennis Kneale recently announced on his freak show that the ‘recession ended in June’. Meanwhile Goldman is shoveling out huge (tax payer sponsored) bonuses for the past quarter. It really didn’t take much - did it? After extreme pessimism in early March good ole’ greed and irrational bullish exuberance have returned in four months flat. Which is exactly what I predicted late February, remember?

The 2007 bubble mentality is back with a vengeance! We’re back to business and the status quo has been preserved. Yeeeeeehaaaaaa!!!!

Unfortunately it’s all an illusion - it doesn’t exist. What you see on your SPX chart is not a reflection of the state of the economy or even the stock market - it’s pure investor sentiment - or as Robert Prechter calls it: socionomics. This rally has been fueled by hope, wishful thinking, blatant and unlawful market manipulation, tax payer backed private bailouts, high frequency trading bots, and perhaps even the tooth fairy. I’m not going to waste time and energy rehashing the myriads of reasons of why this rally has been running on vapor.

I think I’ve made myself abundantly clear in the past few months and nothing, absolutely nothing, has changed since then. We are in a depression and the SPX will breach its 666 low within the next 12 months - maybe even before this year comes to a close.

Which is why I have told you guys over and over again to keep your powder dry. That’s also why I have played it very small and never had more than 20% of my assets in the market since late February. Of course it’s easy to get sucked into trades here and there - we can’t help it - that’s what we do. But even if you took a hit in the first half of this year - forget about it. Focus on what’s ahead.

The golden rainbow lays beyond all the hype and the noise you hear from those bullish pundits. Let them celebrate and let them pop the champagne as we breach their silly moving averages and watch them push the tape one last spike to the upside. None of that matters. What matters is that you are ready to short the sh&t out of this market at the end of this summer - and then grab a cigar and watch the freak show unfold - I’ve got front row seats reserved for all of you.

That is a pretty confident call.

On the opposite end of things a Goldman Sachs staffer handed out what can only be termed as a "Wildly Optimistic" forecast that was just mind blowing:
S&P 500 to Rally Most Since 1982, Goldman Sachs Says
July 20 (Bloomberg) -- Goldman Sachs Group Inc. boosted its forecast for the Standard & Poor 500 Index, saying improving earnings will spur the steepest second-half rally since 1982.

The benchmark index for U.S. stocks will advance 15 percent from its June 30 level to 1,060 on Dec. 31, an increase from David Kostin’s prior projection of 940. The chief U.S. investment strategist at New York-based Goldman Sachs also lifted his 2009 and 2010 earnings estimates for S&P 500 companies to $52 and $75 a share, which are 30 percent and 19 percent higher than prior estimates.

Wow! Now that is quite the call.

Tyler over at Zero Hedge had this take on the report:
Abby Joseph Cohen must have threatened with retirement and David Kostin is here to pick up the Olympic torch. Goldman Sachs just raised its 2009 year end S&P target to 1060, "13% above the current level" meaning Goldman prop positions are full and the great offloading to marginal buyers has begun. The justification: "After trading in a 10% band for the past three months, our “Pop, Stall, & Sustained recovery” framework, sequential improvement in ex-Financials EPS, stabilization in profit margins, and higher forward EPS guidance all point to a rising market through 2009." More specifically, 85 Broad is raising its 2009 EPS to $52 from $40, and 2010 EPS to a patently absurd $75 from $63, a 45% increase in bottom line earnings, and almost 100% from the old $40 estimate. And just so it seems more credible, "measured on a pre-provision and pre-write-down basis our estimates are $69 and $81. S&P 500 trades at 12.5x our 2010 operating and 11.6x our pre-provision EPS." In other words, pure rose-colored glasses halcyon.

...But back to Goldman - up until this point the firm has been at least slightly sensitive about catching marginal end buyers. Now the guns are blazing, and as all Wall Street professionals tongue-in-cheekly know all too well, a forceful upgrade is when any firm (Goldman most definitely included) starts to sell into a call (in this case its own). So buyers please beware: you are now implicitly buying the shares that Goldman and other brokers have been accumulating over the past 4 months.

You were warned!

This does present a chance to do an actual science experiment with Goldman Sachs providing all the reagents. Here is what we have:
-GS announces spectacular earnings
-GS has (with others) been the man behind the curtain with late day futures gunning, high frequency trading (HFT) push highers, and extremely large trading positions as evidenced by their huge Value at Risk (VAR) number
-A wildly optimistic, perhaps even insane, research report that almost begs anyone listening to buy stocks hand over fist

So what is the experiment?

We will test to see if first there IS a ramp up in stock prices. If so, we should be able to see that the HFT should take a downward move as they exit the churning and sell to other buyers. If after a 15% move or so to the upside coincides with next quarters earnings coming in WAY UNDER the Goldman estimates, we can watch GS earnings and see if they show no hiccup in earnings growth. If there is none, we can conclude that GS pumped the markets, sold all their volume accumulated over the past 3 months, and then shorted an overbought market right after telling everyone to buy.

I have argued that if the markets take another dive (like Evil Speculator thinks to the 600's on the S&P) that many people will simply leave the market never to return. In speaking with as many folks as I can over the last 3 months they all say the same thing: Glad markets have gone higher, but one more drop like we had and they are out for good.

If Goldman is gaming the system (if??) and my metrics come to pan out, they may find it very hard to sell another ramp up anytime in the next 10 years. In any case, it will be fun to see if the estimates for S&P earnings come in anywhere near what the analyst at GS thinks they will.

Have a good night.

Friday, July 17, 2009

What's the Future of Mankind? How do I Know, I Got Left Behind

88 degrees here today and the humidity was out in force. I love the heat. Hopefully we will move into a nice warm pattern here. Bad news on the fishing front; my beloved Quabbin Reservoir is closed to boat traffic for 45 days as the dreaded Zebra Mussels have been found in a feeder river to the reservoir. No private boats allowed, and I am not sure about the boat rentals. I hope the situation can be resolved, the Quabbin really is a treasure.

Blog Housekeeping
I have cleaned up the blog a bit and moved some items around so you may see some changes. Let me know if there is anything format wise you think would add to the quality of the blog.

I have made some changes to the blogroll to better reflect my daily reading list and to offer all readers some fresh new sites to try out.

I have added:
EconomPic Data which is graph heavy and always a good read.

The Financial Ninja has been added. Great main course macro analysis and a side order of technical charting.

I have been stopping daily at The Housing Time Bomb for some time now. A nightly in-depth parsing of a major market theme that covers all the angles.

Check them out!

Rise of the Silver Surfer
I have not written about the precious metals in a while, I know you are all so waiting for a metals post! Haha. There were some gold and silver related items I have been watching lately that I will share tonight.

First up is the strange move by COMEX to make sure everyone understands that they can in fact deliver paper interest from exchange traded funds (GLD,SLV) in place of physical metal delivery. This should make it clear that COMEX may one day deliver to your door a certificate that says you are holding ounces of a metal in your hand, and not just a piece of paper. What could go wrong?

From Jesse's Cafe:
Paper, Scissors, Gold
As you may have heard recently, the COMEX has asserted their right under their rules to deliver the equivalent paper interest in Exchange Traded Funds such as GLD in lieu of the delivery of physical bullion for those standing for delivery under the rules of the commodity exchange...

We have often said that when the real crisis of liquidity comes, and the final flight to safety from the credit bubble collapse begins in earnest, the exchanges will alter the rules to allow for cash and paper settlement of claims for bullion, which they cannot or will not be able to deliver at the agreed upon prices.
This is what makes the current structure of the short positions held by a few banks on the precious metals exchanges a 'racket,' a type of Ponzi scheme where the same thing is sold repeatedly with no means of satisfying the aggregate of the claims and ownership.
We are sure the Comex is "well capitalized," and will continue to be so, even as it is rocked by de facto delivery failures and the substitution of more paper to back up the general failure of paper.
The wheels of justice grind slowly but they grind exceedingly fine.

Disclosure: I own GLD and SLV but I am well aware of the physical shortcomings of the funds. I only use them as a proxy for the metals.

As for my personal favorite metal, silver, The Mogambo Guru chimes in today with some mind boggling facts (excerpts):
The Silver Supply/Demand Imbalance
..But sometimes something comes along that makes me think about silver, such as David Morgan of the site reporting that “during the past ten years, silver’s use in industry has gone from roughly 35% of the entire annual production in silver, to greater than 50%. Not only that, but it is the fastest growing area of the silver market.”

...So how much silver was mined? Well, the notes that “According to the US Geological Survey, about 672m ounces of silver was mined in 2008. And with an average silver price of $14.94 per ounce, if all mined silver was sold at spot, the entire supply chain would generate revenues of only about $10 billion.”

...And since this is after decades of dis-hoarding of strategic stockpiles, the result is that “Today, most of the U.S. silver stockpile is gone,” and whereas “the world once had about 2.2 billion ounces of silver above ground,” now there are “only about 300 million ounces. In other words, total world silver supply has plummeted by over 86% just in the last few years…while silver demand has gone UP!”

Have I ever mentioned I love silver for the long haul? No? Well I just did.
Disclosure: I own silver via multiple channels

What's the Future of Mankind? How do I Know, I Got Left Behind
"People look to me and say
Is the end near, when is the final day?
What's the future of mankind?
How do I know, I got left behind"

Ozzy Osbourne's "I Don't Know"

A smart person knows what it is they do not know. Ask 100 people if they think they are of "above average intelligence" and fully 85% of the respondents will say they are. Of course in any sample size you have the good old Gaussian distribution so we know that this cannot be the case. As a card carrying member of the mental middle of the pack, I am aware am lacking in many market understandings and thus I try to stay away from things I feel unqualified to opine on. Take Zero Hedge and Tyler's coverage of High Frequency Trading. I know it is important, but i really am not clear how it is done (or why it is allowed, but that is another discussion). Two items from the past few days also had me vexed, so I will share my bemusement with the readers.

MGIC and CIT Make No Sense to Me
The area of mortgage insurance must be a nuclear waste land in the current market meltdown. The two biggest players are PMI and MTG. This week MTG was out with earnings, well loss guidance, and that is where all the action begins:
MGIC 2Q loss widens, plans to shift new business
MILWAUKEE (AP) -- Private mortgage insurance provider MGIC Investment Corp.'s loss for the second quarter widened, the company said Thursday, as delinquencies increased due to increased unemployment, lower home prices and the ongoing recession.
For the three months ended June 30, MGIC lost $339.8 million, or $2.74 per share, compared with a loss of $99.9 million, or 81 cents per share, in the year-ago quarter.

About what you would expect. Very bad indeed. On top of this most headlines were showing "MGIC to end new origination" and this of course would have serious implications for the housing market. Market Ticker had a write up you can see here.

So what has be confused? This information:
It also said it plans to shift newly written insurance to a subsidiary beginning Jan. 1, and the parent company will then stop writing new business.
The company said the state of Wisconsin has allowed MGIC to contribute up to $1 billion to its subsidiary MGIC Indemnity Corp. to enable that entity to begin writing new mortgage guaranty insurance as of Jan. 1. MGIC plans to provide the capital in two $500 million installments, with the first slated for July 31.
However, the state's insurance commissioner must still specifically authorize the subsidiary to begin writing insurance, as must each state.
The subsidiary must also be approved as an eligible insurer by Fannie Mae and/or Freddie Mac, neither of which has yet done so.
"We cannot predict whether these approvals will be obtained and if so on what conditions," the company said.
If they must continue to write new business through the parent company, MGIC "will need either additional capital or relief from the regulatory capital requirements in 16 states," the company continue. In 14 of those state, relief will require new legislation or insurance regulation changes.
MGIC said it has not yet tried to raise capital from private sources, but has had discussions with the U.S. Treasury to seek a capital investment.

See what I mean?

MTG is basically done. They cannot do any new business and need gobs of capital to go on. So they are done? Well no. I guess you can make a new company, capitalize that, and through the magic of financial engineering, nobody is supposed to see that the new company is just a smaller version of the bigger failed one! Amazing!

I have no idea how this works or who would pony up any money for it. Never fear, here is the 5 day chart for a company that will no longer do business and will use a "mini me" firm to write new coverage as if nothing is wrong;

Nice chart!

The other news that has be befuddled is all the wrangling over the fate of CIT. The government seems ready to let CIT go down and they judge CIT is not a good taxpayer money risk. I mean things have to be really bad for that to be true! Today there was serious talk (and a 70% rise in the penny stock) that either or both Goldman Sachs and JP Morgan could extend the firm some financing. This of course makes no sense.

If CIT could not get US government assistance at great terms because they could not even qualify in the eyes of the FDIC and Treasury, there is NO WAY they can meet the onerous terms GS or JPM would surely impose. This is either a false rumor, or a orchestrated move by the FDIC/FED/Treasury to make the market think there are non government avenues of capital out there. Spare me gentlemen, there are none. Please explain to the best of your ability what gives here in the comments.

Friday Night Entertainment
A little lighter fare to get the weekend off right!

Book Reviews
I have read two books in the past two weeks that I thought I would share.

The first was Barry Ritholtz' "Bailout Nation". I must say that this book was really great. Over the past 2 years I have forgotten all the help that has been extended, and more important I had the entire timeline of events all jumbled. Bailout Nation has rich history lessons on the FED, bailouts across time, and banking regulations that are a must read. The book even reads fun which is not something I can say about most economic themed books. I was thinking I might pick up a couple of copies and run a couple of contests with the book as the prize.

The second book I read this week has already become a favorite. Robert Heinlein's "The Moon is a Harsh Mistress" is a masterpiece. I was so engrossed with the tale I could not put it down and read it in two blocks of 3 hours. While on the surface a Sci Fi tale, it really is a lesson in self reliance and self determination. If you are of a libertarian bent, you will love this book. All I can say is "TANSTAAFL"!

Comic Relief
If you have ever had a cat, this is something they would certainly do:
funny pictures of cats with captions
see more Lolcats and funny pictures

Friday Night Rock Blogging
Some tunes to get things started off right!

Loyal reader Watchtower asked me to drop my favorite guitar solo by the best guitar player I know. While always a matter of opinion something like this is, I do have a clear "best all time" pick. His name is Randy Rhoads. With so many to choose from it is hard to pick one. I have selected the solo from the center section of "Suicide Solution" from the live album "Tribute". While the entire song is scorching hot, skip forward to the 4:45 time mark for what I think is the best work I have ever heard, and live no less:

I have always loved this song, but until I just looked it up I had no idea who performed it or the name of the song! Please enjoy Grand Funk Railroad and "I'm Your Captain":

Found a really rocking live version of Bad Company and "Bad Company":

Just so it is not all hard all the time here, how about a little disco? Try out Santa Esmeralda with "Don't Let Me Be Misunderstood". Major props (and a name mention on the blog) to the one who can guess where this song was reborn in a classic scene:

Last call! Grab a drink, a girl or whatever else is nearby!

I close the show with the classic 80's rock out tune by Ratt, "Round and Round":

Have a good night.