Thursday, January 7, 2010

The Burden of Proof

It is almost the end of the week and it is NFL Playoff Wild Card Weekend! You could say I am excited.

If You Have to Ask, It Isn't Shock and Awe
Note: Somewhat political section, read at your own risk.

On the ride home the radio station mentioned that the President was going to hold a press conference and that the National Security Director said the words would be "shocking". This caught my attention so I tuned to a news channel to listen. I was thinking to myself, "Self, what would be shocking about the Christmas Airplane bomb attempt?" and I thought:
-The explosives could be traced to Iran and the Revolutionary Guard (Super Bad)
-We were going to war with Yemen (Bad)
-The explosives were from the CIA (Very Bad)
Some others too, but those were the first ones that came to mind.

And the winner is.....
The various agencies responsible for these kinds of things failed to connect the dots, communicate, and prevent the attempt.

If you have to ask, it isn't shock and awe. Anyone else unshocked?

The Burden of Proof
Last night I wrote some items about government manipulation of data and I have spent plenty of time talking about supported markets and the lack of anything remotely resembling reality in the markets over the past few years. It feels like 2007 again in many ways.

I took a few shots from reader Anon in the comments, and indeed he brings up some valid points about making moves on what IS, not on what I (or anyone) THINK things should be. Of course he is correct. This also misses my point entirely.

This site has never been a "trading" site. I have always been about Macro thinking and trying to inform and foster thought and conversation. What is important about this debate is that to me it is not enough to plead either ignorance about the heavy hands or that you are making money in a funny market. We almost had a total collapse (we are told) and thus fixing the system should be priority number one, not trying to pretend the system is fine. I understand this is hard. People are scared and many have to trade to make their living.

Two examples from today.

Lennar Homebuilders (LEN) posted a profit (WOW!) today and the stock rocketed up 15% or so. So what's not to like? That sounds positive, yes?

Well you have to remember that little tax gift the homebuilders got that allows some hefty tax carry tricks. From today's Yahoo Finance (via AP):
Homebuilder Lennar posts profit for Q4, CEO upbeat
Lennar posts 4th-quarter profit, jump in home orders and sees housing market stabilizing

Lennar Corp.'s stock rose more than 15 percent Thursday after the CEO said he sees a trend in rising prices and anticipates the homebuilder will be profitable this year.

"Prices are no longer free-falling downward and in fact in many instances, are actually starting to stabilize and even recover," Stuart Miller said. "I feel comfortable today saying that this is a trend and not an anomaly."
Sounds almost giddy this guy. Moving on:
The remarks followed Lennar's report that new home orders rose for the first time in more than three years in its fourth quarter. The company also posted its first profit since 2007, thanks largely to a tax adjustment. The builder, however, warned it expects to post a loss in the first quarter.
Hold on now. That is quite a mixed bag. Things are getting better but tax credit helped and another loss is on the way? What kind of story is this?:
Lennar said it earned $35.6 million, or 19 cents per share, in the quarter ended Nov. 30. It had a loss of $811 million, or $5.12 a share, a year earlier.

The tax gain reported in the fourth quarter came from a change in federal accounting rules that allowed the company to reverse previous writedowns of deferred tax assets.

Without the tax benefit, Lennar would have lost $284.9 million, or $1.15 a share. The tax benefit was offset by charges totaling 89 cents a share related to adjustments in the value of land and other write-offs.
Revenue fell 29 percent to $913.7 million, because of a 22 percent drop in the number of completed home sales. The average sales price of a home dropped 9 percent annually to $238,000 .

Analysts polled by Thomson Reuters were expecting a loss of 48 cents a share, on average, on $863 million in revenue.

The number of buyers who canceled their contracts dropped to 20 percent from 32 percent a year ago.

For the full fiscal year, Lennar posted a loss of $417.1 million, or $2.45 a share, compared with a loss of $1.1 billion, or $7 a share, in 2008. Revenue fell 32 percent to $3.1 billion.

Orders for new homes in 2009 dropped 14 percent to 11,510. The cancellation rate improved from 26 percent to 18 percent.
What a mess.

I cannot make heads or tails of the LEN story other than the CEO said things are getting better, but not next quarter, and the tax credit made up the profit. Supported market backed up by the old accounting tricks as well.

Of course the biggest game in town this week is the BLS jobs number tomorrow. Estimates vary wildly from -100k all the way up to +300k. You want a trade? Ok, I'll play, try this one (a little late today):
Buy SPY and hold until right after the number tomorrow because:
-Huge upside "surprise" (how can that be when the market sees everything, but whatever) means stocks moonshot on the recovery strength.
-Downside surprise means liquidity pumps stay on full blast (they will anyway, but whatever) means stocks moonshot.

Can you really lose here? I would not hold on for long as the expected 1-2% upside move will probably not last the day. See, I can trade an insane market!

Another angle to think about in a macro sense is what does it mean if jobs are being created for the first time in a LONG time? Surely this must be good and of course it is. Still, a low rate of job creation is hardly priced into the markets (V shaped recovery and all) unless you are using the market model of free liquidity (also V shaped recovery due to stock gains). See what I mean? The numbers and what they mean do not matter when you have this kind of activity.

For an expansive look at Unemployment with charts and data that is not open to "interpretation", it is just cold hard numbers, please see the dynamic duo of Mish and Chris Puplava cover the bases in this article:
Massive Jump in Emergency Unemployment Compensation (ECU) Benefits - Up 43% in One Month!
One key point of many:
However, these people were not finding employment which is why the House passed a bill in December to extend benefits, thus leading to a massive 43% jump in the aptly named “EMERGENCY” Unemployment Compensation program. The jump was so large that now the EUC numbers surpass continuing claims!
So yes, job creation (at some level) is great, but what about all these people on super-duper-triple dog dare-extended unemployment that are not captured by the U-3 metric? Do they not exist? Do they not matter? Of course they rock in some sense because they are a net negative for inflation as they will not pressure wages, which should help spending. Or so I am told.

The burden of proof is on the economy and the markets to prove they can stand on their own two feet without funny numbers and unlimited support. So far they are falling far short.

"Cut the Chatter Red Two"
Sorry for all the Star Wars references as of late, I guess I just have it on the brain!

I spent a bit of time on the sections above so I will make this section brief.

There was a ruckus going on all over about an advisory sent out to the banks by the FED which reminded them all that they need to have protection for interest rate movements, which of course can only be to the upside in the 0% world of today.

Clusterstock had this:
THE WARNING SHOT: Fed Tells Banks They Need To Worry About Interest Rates

Market Ticker had this to say:
Here It Comes (You Were Just Warned Folks)

The best take I saw was Kid Dynamite:
Bizarro Press Release from the Federal Reserve
There are 11 pages in total, which I find pretty bizarre. If the Regulators need to lecture the big boys on managing interest rate risk, don't we have a huge problem? Isn't the job of the banks to know how to manage this risk? Is the whole press release an effort by the Regulators to "bluff" the market, in the sense that they think they can manage interest rates by threatening to raise them or insinuating that there might be interest rate hikes, rather than by actually raising rates?
There is more so check it out.

My take is that this is baloney (yes, the big hot dog). Posturing and more blustering from the FED who will not raise rates in an election year and will not raise rates which would threaten the awesome housing recovery (Unless they start the government mortgage organization I detailed here).

Must Read. No, Really.
The Iceland story is very important on levels that are both seen and unseen by many. Today's missive over at The Automatic Earth is one of the finest insights I have seen and I would implore you to check it out and then think about things. I will tempt you with one snippet, but then read the whole thing:
And what do we feel about this, who are not directly affected by any of it? Well, try this one on for size. If you allow me to numb and dumb down the numbers a bit, the US at 308 million citizens is about 1000 times bigger than Iceland (320,000). Which means that the US equivalent of what the British and Dutch are demanding from Icelanders would be, loosely, $6 trillion. Now what would you say the odds are that the American people would agree to pay that kind of money, if it were payment for what their banks have (mis-)done in the past, to a group of foreign investors? Let's say Chinese and Japanese?
There is much more.

If you liked Tom of the North's New Years Resolution post from last week, you are going to hurt yourself laughing at his Twitter post featuring all the big players (Bernanke, Geithner, Pelosi, and many more):
@GovTwits Daily Highlights

Have a good night.


Anonymous said...

Tomorrow night, Elvis, "It's Now or Never" in honor of his 75th birthday.

getyourselfconnected said...

When is his birthday?

I love that song by the way! Ask the younger folks today who sang "its now or never" and they will say Bon Jovi, LOL

C-T has one coming from last week, Anon-yours is on deck, but we need some more requests folks! I love Friday nights so get your requests in. Music, film, anything (well mostly) goes.

Anonymous said...

Elvis Presley 1-8-35.

getyourselfconnected said...

Anon, Thanks!

Anyone interested in my Calculated Risk tiff should check tonights post:

From a very firm "MBS bus lower rates 35bps and will end in March" to:
"Although the Fed has made it clear - repeatedly - that they would either continue the program or restart it if they felt it was necessary, I think it is likely that the Fed will stop buying MBS by the end of March - and then react to whatever happens ..."

Hope CR's bike has freewheel because that is some back pedaling! Unreal.

Anonymous said...

CR has been pretty worthless since Tanta died. She made that blog.

watchtower said...

How about Fleetwood Mac's 'Dreams' for a friday night request?

(sorry GYSC, this hotel computer won't let me paste a link)

Anonymous said...

Fleetwood Mac's "Tell Me Lies" would be another good one.

Tom said...

Another Great Post, connected! But more importantly, how is yer Mirth Strain? Did Clay stop by to talk to you?



Tom said...

Another Great Post, connected! But more importantly, how is yer Mirth Strain? Did Clay stop by to talk to you?



getyourselfconnected said...

I hope you are on vacation or on business being in a hotel and all! I think Flletwood Mac can make the cut!

My stomach is better today though it did get a work out after laughing at your twitter post! I would have serious doubts that Clay Aiken could take me, and I still have an open invitation to Bill Gross for a Steel Cage Match!

getyourselfconnected said...

Still time for Friday Night requests! Anything (within reason) goes, but no Beatles.

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