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.


Lisa said...

Great post! Noticeable in the Microsoft earnings was a drop in "gaming/entertainment". I've seen other gaming/entertainment companies suffering, too. Last year, MSM/analysts said this sector would never suffer, regardless of the economy. Hmm....

getyourselfconnected said...

Thanks so much! Glad you stopped by!

My company has a new filter up and so I cannot see any "blogspot" items so I cannot answer anything until I am home. Be advised.

PS, you all really need to read that Automatic Earth intro, I still get shivers!

GawainsGhost said...

Well, I did my part to boost the economy and Amazon's bottom line today, ordered a DVD of the movie Hair. I saw it when it first came out, when we were in Corpus Christi for a high school drama tournament actually. Loved it. Great music, great acting, great directing. It's one of the best musicals ever put to film, and its themes are timeless. Highly recommended.

Anyway, I'll tell you whose buying REOs these days, mostly young couples and first-time homebuyers. That's who's buying houses from us, and it really is a great time to buy a house. Prices are low, there's a lot of inventory on the market, and financing is cheap. Plus, it's summer, which is the peak buying season, because people like to move when their kids are not in school.

I've always said, and I'll say it again, real estate is a solid investment, provided that you buy a house to live in it. An older, well maintained home in a nice neighborhood with good schools is about the best investment there is. And there are some great deals to be made now.

The problem is it's a terrible time for an owner-occupier or an investor to sell a home. These people always think their house is worth more than it really is, and they refuse to negotiate on the price. So it sits on the market for months and months and months.

I don't deal with these people, because really it's a waste of time and money. My clients are corporations who want to sell the house, price it reasonably and are perfectly willing to negotiate. This is why we move so much inventory.

I talk to Realtors all the time who whine and complain about how bad the market is. Not for me it isn't. Their listings are not selling, they only have one or two deals pending, and they're thinking about getting out of the business.

We have fifteen deals pending this month alone, and that's just my mother and me. We sell houses like nobody's business. So these people then ask how to get into the repo market.

"Well, you need about $50,000 in capital up front." That shuts them up. But it's true. Lawns have to be mowed, utilities have to be turned on, often repairs (fresh paint, new carpet) have to be made, appliances have to be installed. That costs money. Naturally, you will be reimbursed for those expenses, but if you don't have the captital to begin with, the work doesn't get done and the house doesn't get sold.

That's what these idiot flippers do not understand. It's a money game. If you do not have the money, do not play the game. Period.

You want to flip a house? If you finance the purchase, you'll be paying principal and interest and taxes. If you pay cash, you'll still be paying taxes. Then you have maintenance, utilities and repairs costs. And exactly what do you think you'll be able to sell it for, and how long will it take? By the time you actually sell the house, add up all of the expenses involved and look at the bottom line, you'll be lucky if you've made $500, especially in this market. Sounds like an awful lot of time, money and work to realize so little of a return.

Far better to let a corporation buy the house and pay the taxes. Put up the money for the maintenance, utilities and repairs, get paid back in full, then earn a 3% or 6% percent commission when the house sells. Do that over 100 times a year, and suddenly you're talking about serious money.

Hmmmm. Safety of principal and adequacy of return. Wow, what a concept. Sounds like a business plan to me.

That said, it's a lot of work. And I don't even have a 401k. If you just buy CDs and roll them over every year, in twenty or thirty years you'll actually receive a better return on your money than you will from stocks, bonds, real estate, or gold. It's true.

Finally, you're right GYC, we'll never hear those tapes. Or, actually, we probably will, after the media starts making fun of Obama's big ears.

getyourselfconnected said...

Great post!
My only "fly in the ointment or the monkey on the wrench" is that really homes are still way overpriced, and I think new buyers are suckered in by recent history ( as I stated in blog). Still, if home sales are going up, if reasonable, I think that is a good thing. Besides all the help it took which will cost us......
I digress

Patriots vs Cowboys Superbowl????
Tell me you are not drooling?

Anonymous said...


I have been reading TAE for quite awhile now, In this little town of 600 people I see and talk to these people Ilarge article was referring to and to be quit frank I'm comfortable being around them and helping the ones I can, I have been where they are and before this is over I may be there myself. Even here we have what is referred to a snob hill and yes it is on a hill above the main part of town. That's where the so called rich folk live. Some are probably very well off and some are probably just treading water you can't tell by looks. I know several people that wear bib overhauls and would give you the shirt off of their backs that are worth millions. One thing about this small town is if you crap in your nest you may as well head out of town, petty theft any kind of that stuff and the whole world knows about it. There are a lot of single moms out here, along with the aging widows in their late eighties that live in these huge home by themselves with most of the house blocked off because they never go in those rooms and it cost them too much to heat them in the winter or they can't climb the stairs. A lot of Alzheimer's elders also I have went over to one womans house and fixed the garage door that she has backed threw 4 times in the last 6 months. The kids are in denial and don't want to take care of her themselves and can't bring themselves to put her in a care facility. The doctor also won't take her drivers license away......did I mention this is a small town? When it comes right down to there is a whole lot more to wealth then money if you know what I mean.


Lisa said...

I agree completely, Kevin. I am very familiar with the type of small town you write about, it's where I grew up.

GawainsGhost said...

Well, GYC, houses are still overpriced in many areas, but those are mainly owner-occupied or investor-owned or new construction homes. That's why I don't deal with those people. Their homes don't sell!

What, I'm supposed to waste my time and money marketing, advertising and showing a house that I can't sell? That doesn't make any sense. But it does explain why 80% of people who get a real estate license leave the business in less than two years. Because they go broke.

This is what most people do not understand about real estate and the repo market in particular. These corporations manage literally tens of thousands of houses. So they can afford to take a loss on some and break even on more, because they're going to make a profit on others. It's a balancing act, but at the end of the day they make money.

An owner-occupier or a small time investor simply cannot compete with these guys. They have too much capital and patience and can afford to negotiate. (Incidentally, it's the same with the stock market. The average investor cannot compete with the major brokerage firms, because they make their money off of trading volume, not stock appreciation.)

It is true that REO sales are driving the market and forcing prices downward. This is because these corporations want to sell their inventory and are perfectly willing to take a small loss now, rather than a large loss on the taxes later.

People fret too much about home values. If you bought a house to live in it, then live in it and don't worry about it. Just maintain it, improve it, and when you're finally ready to sell, give it a fresh coat of paint. You'll get your money out of it.

But if you bought or built a house thinking you could sell it quick and make a lot of money, you're going to be sadly disappointed if not bankrupt. New home sales and construction have slowed to a crawl, and flipping is so, well, 2005.

I really don't see a bottom in home prices for at least another two years. Once the tsunami of Alt-A and Option-ARM mortgages go into default later this year and next, there is going to be a flood of inventory on the market. And that will only force prices down further.

Personally, I think that's a good thing, and not just because it means more work for me. Prices have to come down to where they are more in line with income levels. Only then will more people be able to buy homes. And all the toxic mortgages and speculators have to be flushed out of the system before stabilization can occur.

watchtower said...


You have descibed my town to a tee.

GawainsGhost said...

Rich Harvard, Poor Harvard?

Today's absolute must read. Overbuilding, mismanaged investments, 22% loss on the endowment, sheesh. They've stopped serving the students coffee and warm breakfasts! What a mess. If I were shelling out $25,000 per semester in tuition, I'd be pretty upset about that.

Best and brighest my butt.

Anonymous said...


I love this place, When I moved here it reminded me of where I grew up in CA as a kid which started out as a small town but over 50 years along with a growth mentality came 3 state prisons, the population exploded, crime went up, no one knew who their neighbors were, the schools went to crap, gangs, stabings, shootings..........
I don't miss that place at all and hate it when I have to go back and vist my in-laws.


watchtower said...


I was thinking about you and small towns in general this morning while picking up my "heart attack on a bun, i.e. sausage, egg and cheese sandwich" from our local BBQ dive, this place has been in business since the 50's and I know everyone who works there and 90% of the people who eat there.

My family and I visited Niagra Falls (I thought it was an amazing place) a couple of weeks ago on vacation and I would be lying if I said I wasn't a little homesick while there.

Most of the waitresses here call you "hon" or "sugar" even if they are 20 years your junior : ) It's a great place to live.

Lisa said...

I used to be one of those waitresses :)

watchtower said...

The waitresses around here are solid gold and you are too Lisa, I always enjoy reading what you have to say : )

Anonymous said...


My wife was one of those waitresses too and her mom was the cook.
My wife is a great cook and the only time we usually eat out someplace is when were on the road.

I have never been in the one and only restaurant here as the management keep changing, the guy that owns the building put a $1 a month lease on it just to try to keep it open and support his hotel.
My wife goes down there for coffee with the girls every Wednesday to catch up on the town gossip.
The drive in restaurant is only open during the summer and then closes the rest of the year. I just can't stand that kind of food though as I ate to much of it when I was working. One of the bars has a hamburger feed one night a week, the American legion cooks steaks once a week and the Catholic Church has a fish fry one Fridays. then there is a pizza outfit, the convince store which is part of the only gas gouging gas station in town. Gas is always 10 cents a gallon cheaper 30 miles down the road either way.

Now that I have time I find that people dynamics fascinate me.


getyourselfconnected said...

The towns you grew up,in sound very nice. I grew up in a big city north of boston where the next door neighbors eldest son was arrested about every week and nobody knew anyone, and it was better that way!