Forced Intervention

Quite a wild day! If you are of the bearish bent, you giggled all day as data point after data point came in "unexpectedly lower". With expectations as low as they can go, that is some feat. I will have an item tonight on this very topic. I really cannot remember a real down day like today, they seem so long ago.

New poll Question
With so much to cover, I will save the last poll results for another discussion. I would appreciate your participation in a new poll that was on my mind after I read this article (via Clusterstock):
Barely Anybody Clicks On Banner Ads Anymore
Obviously the piece covers the reality that nobody even clicks banner ads. I am interested to know how many (if any at all) banner ads the readers have clicked. Be honest, this is anonymous after all!

Not to be Lost in the Confusion
There was so much news and reactions today that I wanted to spotlight two items I read that I thought were first rate material that demand attention. I know there are plenty of items to cover, but these two writings are too good to let slide.

First up is another winner from Jesse's Cafe Americain:
A Priori versus Empirical Reasoning and Practical Decision Making
This article covers the issue of using one's own prejudice (as it pertains to market expectation) to color data selection. This is of course counter to how a real scientist uses information. This selection will allow you to step back and see if you are indeed using data selectively. It should be required reading for all writers of financial news. Blogs included!

The second selection is no stranger to readers of this blog as Ilargi of The Automatic Earth again amazes with another great introduction section:
The Carcass of Mother Goose
While the entire piece needs your review, here is the summation paragraph to get you hooked:

There once was a time, and it's not even that long ago, when the term "Moral Hazard" had a profound meaning that everybody in finance had respect for. Today, Moral Hazard means nothing anymore. The gutting of the term has become a cornerstone of government policy. And that harks back to something I told you a long time ago: this is not a financial crisis we're in, it's a political crisis, and a full-blown one.

Tomorrow's Headline Today
I mentioned the "beating lowest of the low" expectation game in my opening tonight. I am going to go out on a limb this evening and make a prediction with no waffle, no wiggle, and no excuses if I am wrong.

To set this up, we see this headline from today:
Goldman Raises Estimate of September Job Losses
The article tells us that:

The Goldman economics team, led by Jan Hatzius, said in a note to clients that they expected Friday’s employment report to show a net loss of 250,000 jobs, up from their previous estimate of 200,000.

The new figure is well above economists’ consensus estimate of 175,000, as tracked by Bloomberg News.

So one day before the data is to be released (released to the general public that is, government officials surely have this on hand right now, thus so does Goldman) we have a reasonably large bump up of job loss expectations. We saw this game in full force during the last bank earnings season.

The deal here is the template used by the major news wires for the last 6 months of "green shoot" coverage is a fill in the blank template so the news is standardized across the board. Tomorrow was supposed to go:

"Jobs losses of [165,000] easily surpassed Wall Street estimates for a job loss total of [175,000] adding further evidence that the worst of the recession has passed."

Of course after today's numbers the template will have to be changed somewhat, and so the new release tomorrow will read (my prediction):

"Jobs losses of [225,000] surpassed Wall Street estimates for a job loss total of [250,000] adding further evidence that job market pressure is easing after the worst financial crisis since the Great Depression."

You read it here first!

Forced Intervention
The story since last March has been one of government targeted support for the "free market" in order to save it. We are told the edge of destruction has been avoided, and more than that, a recovery is under way. I will side step for now the details involved in all this, they are secondary to this discussion.

In this fable all is going well enough that the FED will have to begin looking at "exit strategies" and in fact are out of ammo when it comes to MBS purchases and Treasury buys. Cash for Clunkers has come and gone. The housing handout is about over as you need to close on a home by the end of 2009 and those things take time. All that is needed is a self sustaining rebound and it would seem all will be well.

This is not going to happen.

Today's numbers (Car sales, Employment, Manufacturing) all are reflecting already a drop off in activity as even the knowledge of the possible end of government intervention is at hand. The stock market's first real down day in months served notice that the exits will indeed be full when the music stops.

In my mind we are coming to the point where the rubber meets the road. It was this writers expectation that as the fall season went along the data would get worse, and then much worse. Today may have been the opening salvo in this process, or just a one time blip that will resume shortly. Either way the real time reactions are the same.

I have never argued that we are not in deflation right now. Even in the face of unprecedented (in the modern era) government assistance, the economy is still in tatters. Soon the FED will come to understand some side effects of all their intervention:
-The market sees temporary lending facilities as capital pools
-The market sees MBS purchases as an open ended trash dump
-The market sees a weakening dollar as a structural trading platform
And there are many more ingrained intervention effects as well.

Should any of this change, there is going to be a violent market reaction.

The government is going to have to make a decision. Massive expansion of support programs and extension of the same is the bare minimum. Of course they could just let things go to their natural level, as I have argued all along. We would be 6 months closer to real resolution of our structural issues if the government had stayed out of things. Instead we have played a rally game built on implicit help that may or may not be renewed.

In the face of a deflationary collapse and overhaul of US financial engineering, I believe the government will go "all in" and do whatever they think they need to make sure deflation "does not happen here". Think big.

Have a good night.

Stock Treasure at the Bottom of the Ocean?

As a very special parting shot from the ice storm of last Friday, two of my heating system water pipes broke and the heat was lost for the second floor of the house yesterday! I was able to get a crew in yesterday and those guys worked all day and most of today to fix the problem. Excellent service and they were real professionals. Hopefully that will be all for the drama department until the new year, but you never know!

Stock Treasure at the Bottom of the Ocean?
A while back I had mentioned a book I read called "Lost Gold of the Republic" by Priit J. Vesilind. The novel chronicles the search for and eventual recovery of the SS Republic, a steamship that was carrying a large shipment of gold and silver coins. This money was destined for the city of New Orleans after the Civil War to act as aid in reconstruction. The ship was lost off the coast of Georgia in a hurricane. The novel is great as it details not only the search for a long lost ship and all that entails, but it also sketches out the experience of many people that were on that fateful voyage.

Economic Disconnect focuses on the macro picture for the most part. I feel that if you have the tide figured correctly, finding stocks to buy is easier. I hardly ever disclose personal trades or ideas on particular stocks. I will this time so you can see how I think in a more short term sense.

The company I took a position in is called Odyssey Marine Expeditions, Inc (OMEX). This firm is the company that found the SS Republic, and has located many other ships that may harbor valued salvage. If you read the book you can appreciate just how good these guys are. The stock itself trades at about $3 today, and shows a market cap of $158 million. The stock trades pretty thin with average volume of 242k shares daily. (All data from Yahoo Finance Ticker report)

As I see it, OMEX is a lottery ticket. The stock is one lawsuit gone wrong on a claim from going to zero. Ships that are located may have nothing recoverable. They could run out of money in short order. This stock is a speculative play at best. If you are still interested, read on.

OMEX does what many of us can only dream about. Bringing up gold and silver from long lost ships can only be termed "wild". The science behind their search methods and the methodical nature of their work is impressive. Those criteria make the stock interesting to me. As a catalyst for me to buy though, I look to this headline from December 11th:

Press Release Source: Discovery Channel
TREASURE QUEST Captures Thrill of High-Stakes Hunt for the Ocean's Greatest Lost Treasures
Thursday December 11, 4:39 pm ET
- World Premiere 11-Part Series Kicks Off Thursday, January 15 at 10PM ET/PT
SILVER SPRING, Md., Dec. 11 /PRNewswire/ -- TREASURE QUEST takes the meaning of "cold case" to a new level - it's not always what you find, but what you find out. Discovery Channel and Odyssey Marine Exploration (OMEX), the world's only publicly-traded company dedicated to deep ocean shipwreck exploration, plunges viewers to the ocean floor as they track the unsolved mysteries of the deep sea in this 11-part world premiere series. The nonstop race against time, secret locations and international intrigue will make the viewer's pulse race and remind them of their childhood fantasies. For the Odyssey crew and the Discovery Channel production team, it is a dream job -- but not one without its major challenges. TREASURE QUEST premieres Thursdays at 10PM ET/PT, beginning January 15, 2009.

So here we will have an eleven episode show on Discovery channel that shows the company in action. While Discovery Channel is not a major network, the channel does have high viewership and it is certainly the kind of inquisitive minds like mine. This kind of coverage will surely engender some interest.

I couple the show exposure with a thinly traded stock, and I see an opportunity to make a short term move. Like I said, at this point OMEX is more a lottery ticket as there are just too many unknowns. But if you are looking for a short term play that has some imagination, this stock jumped out at me. As I said and with full disclosure I now own a position in OMEX.

Automatic Earth Article
I read a great piece today on the blog The Automatic Earth (hat tip Some Assembly Required blog). The writer named Ilargi hits the nail dead on the head many times. I recommend the full read here.
Excerpt:

Yesterday’s rate cut by Bernanke's Fed is the clearest -though by no means the first- signal that the entire gamut of political action has run its course, and it hasn't helped one bit. The answer: double or nothing. When one idea fails, 3 of the same ideas will surely solve the issue. They are gambling with other people's money, and that is always easy. It’s your money though, and the chances of winning are miniscule. They just don’t know what else to do. Every politician is a mini-Bernie Madoff. Addicted to power, fame, money and attention. The combined stakes we see today are at least a 1000 bigger than Madoff's paltry $50 billion.

But this is not the only way to approach the failed system. They could simply let the failed banks fail. You don't, as they like to make you believe, need those banks. You need access to your money. Your government can give you that. Instead, it tries to use your money to save banks you don't need. And those banks are so deep in debt that I can guarantee you all of your money will be lost, and the banks will still in the end go under. How to solve this? For one, expose all the losing assets in the banks. Let the ones who have too many bad assets die.

The whole thing is a great read.

Have a good night.

Bottomless FED Toolkit

Another day another drama. Daytime soaps cannot match the gut wrenching activity of our economic system. A bit short on time tonight, so just a few quick hits.

Must Read Articles; No Really You MUST Read Them!
While I take in tons of stories and information on most days sometimes you come across a piece that captures something fundamental and important. Today's "Five Things You Need to Know" over at Minyanville is one such work of art. This article is required reading for any serious mind, and should be required reading for Mr. Bernanke and pals. Take a look:

http://www.minyanville.com/articles/sox-bks-spx-hgx-indices-fed/index/a/19378

Key excerpt:
"Think about it this way; it is not "normal" to be able to walk into virtually any retail store in the country and within 10 minutes be able to access $2,000 in credit by simply showing a drivers' license. It is not "normal" to buy a home with zero money down. This is not "normal" behavior. Adjusting to the new reality of normalcy will be a painful process.

On the one hand, Federal Reserve officials, Federal Government officials, many Wall Street executives and salespeople, believe it is "necessary for our economic security" to return to that place of easy credit. I disagree with that. I believe the American people disagree with that. And so the disagreement over the Bailout Bill, though pegged in the Mainstream Media as a war between battling economic classes, might really be a much deeper and more significant faceoff; a battle for the economic soul of this country."

As always, very strong stuff.

If you are of the persuasion that Gold is money, and will always be that way then Shedlock has an excellent article about Gold in the current environment. Mish also shows that Gold is decoupling from silver and what that means for silver:

http://globaleconomicanalysis.blogspot.com/2008/10/real-price-of-gold-soars.html

Key point:
"Fundamentally, silver is more of an industrial commodity than it is a currency. It is not holding up as well as gold in recent selloffs. There is a very real possibility that silver falls back to the 2004 high around $8. Those who pay attention to moving averages will note that $8 happens to be the 200 EMA as well.

In contrast, gold has almost no industrial use worth mentioning. The demand for gold is the same as it has been throughout history, as money."

Great charts as well.

Bottomless FED Toolkit
This morning the FED decided to step into the world of commercial paper. I have to admit that my grasp of this section of finance is limited, so I cannot offer too deep a commentary. What I will state is the the FED is no becoming an unsecured lender. The FED is supposed to loan money only to member banks, but now will dive right into the messy world of loaning to more general companies as well. As this is all new, we of course can have no way of knowing how this will work out.

The FED seems bent on trying something new every day until they see some kind of response. I never recommend doing the same things over and over again and expecting different results. What else will the FED pull out of its toolkit? We will probably see something else by weeks end.

The problem is still the same problem as it relates to lending: There are no credit worthy borrowers that want to borrow, and the banks cannot lend like the good old days of subprime mania any more. With the FED supplying endless cash, no bank is going to lend to another in this environment if the FED will do it instead. Why Bernanke and pals cannot see any of this is lost on me.

With daily intervention from all sides of the government is makes sense to me that the markets are struggling. Why take on a position or try an investment idea if the rules are going to change overnight? If you have a solid macro view and would like to put some money to work you cannot because the very fabric of your thinking may be voided by an activist FED and/or Treasury.

Things are a mess and instead of thinking and coming up with a coping mechanism for the debt unwind, the FED and Treasury are heel bent on using old tricks for a new problem. Good luck with that.

Have a good night.

CEO Pay Breaks Records as Their Incompetence Shatters Assumptions

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

Absolute Must Read
I will often excerpt or link to the best articles I come across if I fee; that the readers here would benefit from seeing the piece. Today there is an absolute MUST READ from the excellent site OC register. The post has a great slide show that investigates a bunch of SoCal foreclosure listings, as well as some interviews. Great stuff. Here is is, slide show is a bottom:
http://www.ocregister.com/ocregister/money/article_2067427.php

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

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

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

CEO Pay Breaks Records as Their Incompetence Shatters Assumptions
I cannot even excerpt this sick piece, so just read it already:
http://biz.yahoo.com/ap/080616/executive_compensation.html

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

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

Have a good night.