Stress Test Results Delayed Until After Secondary Offerings

In my least favorite sign of spring the bicycle riding commuters have begun their annual return to the roads of Cambridge. While I am all for riding a bike to and fro (good for the environment, good for health yada, yada, yada..) what you have to understand is that the streets of Cambridge are not built for cars AND bikes. There is just no room. So now once again in addition to dodging taxis that are driven by crazy people and avoiding being crashed into by cell phone obsessed fools I must now also avoid collecting any bikers that are taking up road residence where this is no room. Love it!

Deflation Biased Statistics Are Driving the FED Insane
Ben "Deflation Will Not Happen Here" Bernanke must be wringing his hands at the incoming data he sees. While the FED tries every known move to "raise inflation expectations" the data that keeps coming out continues to work against them.

The FED after long years of massaging inflation component information (hedonic adjustments, using owners equivalent rent) to make inflation seem much lower that what it is, now the FED is pressed to find ways to make inflation seem even a remote possibility. It is a hard job.

With unemployment rising, deflationary forces have the upper hand. Add to this the decline in consumer borrowing (which should result in less consumption) and the picture is indeed grim. A while back the powers that be decided to change the housing component of the inflation equation. Instead of home prices as the standard gauge, the move was made to use "owner's equivalent rents". This silly substitute uses what a homeowner would expect to reasonably pay in rent for their residence. casting aside the problems associated with asking somebody what their home would rent for, rental prices are factored in as well.

With this in mind, take a look at some rent headlines:
Apartment rents fall in Southern California - 4% drop for LA County
US apartment market worsens with economy - vacant units depress prices further

With the Case-Shiller home price index showing monster declines in home prices, the FED has no place to turn for favorable inflation data. If fuel prices continue their weakness, all that is left is food and clothing.

I think of these things when the FOMC minutes have a line like this one:

"In the discussion of monetary policy for the intermeeting period, Committee members agreed that substantial additional purchases of longer-term assets eligible for open market operations would be appropriate. Such purchases would provide further monetary stimulus to help address the very weak economic outlook and reduce the risk that inflation could persist for a time below rates that best foster longer-term economic growth and price stability".

The FED's current problem can fit on a T-Shirt:
"With all that Liquidity all we got were lousy CPI numbers"

Stress Test Results Delayed Until After Secondary Offerings
The big news of the day was the report that the Treasury "stress test" results would be delayed. At first read I was not bothered by the headline. Initial estimates were for the results to be made public at the end of April. Whether that was the last week, last day or something else was never qualified, so I figured another week or so into May was not a bug deal for a complicated process. If that was all there was to it, no problem. Reading the news stories quickly put that mindset to bed.

It seems the Treasury has decided that any results may have an effect on the stock market. I know, how would have thought that might happen! As this Treasury department seems as obsessed with the stock markets as the current FED, this could not stand. The next nugget is that the results of the stress test may be presented as a basic summary, with no company specific information disclosed at all. I am not making this up, read it for yourself:

US to delay bank test results for earnings-source
WASHINGTON, April 7 (Reuters) - The U.S. Treasury Department is planning to delay the release of any completed bank stress test results until after the first-quarter earnings season to avoid complicating stock market reaction, a source familiar with Treasury's discussions said on Tuesday.

The Treasury is still talking about how results of the regulatory stress tests on the 19 largest U.S. banks will be released, and may disclose them as summary results that are not institution-specific, the source said.

The government is testing how the largest banks would fare under more adverse economic conditions than are expected in an attempt to assess the firms' capital needs. The tests are due to be completed by the end of April, but Treasury has said they may be finished before then.

The source, speaking anonymously because the Treasury has not made a final decision on what to disclose, said officials do not want any test results released before the earnings season wraps up for most U.S. banks on April 24.

Officials realize it may be hard to keep the results under wraps, and they are looking for ways the banks could disclose some details without unduly disturbing the markets. They are also looking at providing some summary information about how the banks fared.

"There will be definitely be some information that will be provided at the end of it, but exactly what that will be, and when it will be provided, will come forth later," Comptroller of the Currency John Dugan, who supervises some of the nation's largest banks, said last week.

The tests are designed to determine the depth of banks' capital holes if conditions deteriorate further. After the tests are completed, the banks will have six months to either raise private capital to compensate, or accept government funds.

But officials are worried about how the market will react to the stress test results if there is not a clear recovery path for a bank that is deemed to have a large capital need.

The last thing Treasury wants to do is set off a panic, the source said.

And the insanity keeps coming.

The Treasury is putting itself into an impossible position. Consider:

- It is known the banks are gearing up for the greatest window dressing of earnings ever seen on earth; armed with new accounting rules and AIG counterparty cash, earnings are expected to actually be posted (still very small) this time around.
- The stocks of the banks of course will rocket ride up after this.
- This will present the best time in over a year to raise cash by stock offerings while the euphoria is high.

This is the plan. Now the Treasury should have known, by looking at a calender, when the end of April is and the overlap with bank earnings. faced with possibly throwing water on the party of the banks, the Treasury will delay any information, and then give out vague information to make the markets guess who they are talking about.

If you are a big investor and would like to buy into a bank secondary offering (why you would want to do that exactly is your business!) how would you feel if two weeks later the Treasury says your bank is now "stress test" insolvent and must be "dealt with"?

The central problem with government intervention is that it quickly leads to all kinds of entanglements. The Treasury will be under ginormous pressure should bank earnings surprise to the upside to make public only positive stress test results. Otherwise they will be calling the earnings statements pure fantasy.

This situation is an unmitigated disaster. The stress tests were supposed to be, at least hypothetically, an independent assessment of bank health followed by a plan to address serious issues. All we have now is a future press release by the Treasury that cannot be credible to the upside or the downside.

Credibility is at an all time low for the government. This move just called into question whatever iota of credibility they have left.

Have a good night.

Consumers Borrow Less; Credit Crunch or On Purpose?

When I was leaving work today there was a ear shattering roar and the car was vibrating. I looked up to see 4 F-15 Eagles screaming by on their way to do a flyover at Fenway Park for the Boston Red Sox home opening game. A little scary at first, then very exciting to see those birds soar by!

Create Your Own Currency
The USA Today had an interesting piece up that covered the little known (at least by me) practice of several communities printing their own "currency" which it is said helps keep spending locally centered. I was further surprised to find out the largest agreement of this type is centered in Massachusetts:

Communities print their own currency to keep cash flowing
A small but growing number of cash-strapped communities are printing their own money.
Borrowing from a Depression-era idea, they are aiming to help consumers make ends meet and support struggling local businesses.
The systems generally work like this: Businesses and individuals form a network to print currency. Shoppers buy it at a discount — say, 95 cents for $1 value — and spend the full value at stores that accept the currency.
Workers with dwindling wages are paying for groceries, yoga classes and fuel with Detroit Cheers, Ithaca Hours in New York, Plenty in North Carolina or BerkShares in Massachusetts.
Ed Collom, a University of Southern Maine sociologist who has studied local currencies, says they encourage people to buy locally. Merchants, hurting because customers have cut back on spending, benefit as consumers spend the local cash.

To be honest I am not sure what the point of this is. I imagine there must be some benefit, or nobody would do it. Still, very interesting.

So how about EconomicDisconnect Bucks?

Canada Juggling "Mark to Market" Reform
It was no surprise that the US regulators caved in to banking interests and basically scrapped the "mark to market" accounting rules set in place after the Enron debacle. Estimates vary from having no material change to balance sheet reporting to raising bank earnings estimates up to 20% on the upside. I would offer that if this change was not going to be very beneficial to the banks, there would not have been so much whining about it. Certainly the banking sector thinks it will help, and those guys know their stuff.

Canada seems to be leaning more towards the European model of keeping mark to market type rules in place. The tone of this article does imply there could be some movement:

Canada to split with U.S. on mark-to-market rule
Bitter disappointment expected for banks on mark-to-market decision
Canada is set to split with the United States over its response to the financial crisis and reject a move to let banks duck losses by inflating the value of troubled assets, according to people familiar with the matter.
The country's top accounting watchdog reached the decision during a closed-door board meeting on Monday, giving a thumbs-down for now to a U.S. move to loosen accounting standards.
The decision, due to be announced this week, is a big blow to Bay Street and means Canadian companies will have to record hits on distressed assets that are hard to sell.
Shares in Canadian banks rallied last week along with Wall Street after Washington's politically charged decision to ease so-called mark-to-market rules that experts said could goose bank profits by 20%.Bay Street executives had lobbied for Canadian authorities to follow the American lead, and will be bitterly disappointed by the decision to break with Washington and align with Europe.
Banks are expected to try to overturn the decision and seek political intervention to persuade the Canadian Accounting Standards Board to change course.
The pressure will likely begin this week when chief executives of top banks start a series of meetings on the fallout from the financial crisis with Jim Flaherty, the Finance Minister.
The American decision was blasted by the European industry as an example of "political interference [which] will only serve to further destabilize confidence in the system."
The U.S. changes will make it easier for companies to price assets using their own internal models rather than market prices, and allow them to recognize only part of any losses in their income statements.

While the Canadian banking sector still hopes to get this changed, at least for now the answer is "NO"!

Please notice the quote from a European source "political interference [which] will only serve to further destabilize confidence in the system". It is clear that the banks do not hold as much sway in Canada and Europe as they do here in the US halls of government. Elected officials from both parties were running around with energy to get this accounting change pushed through. Kind of makes you feel bad for the northern neighbors that had to take their chances with common sense being applied.

Consumers Borrow Less; Credit Crunch or On Purpose?
The data point of the day was a reported drop in consumer borrowing much bigger than expected. Here are the details:

Consumer borrowing dips more than expected in Feb.
Fed: consumer borrowing plunged by $7.5 billion in February on record drop in credit card use
WASHINGTON (AP) -- Consumer borrowing plunged more than expected in February as Americans cut back their use of credit cards by a record amount.
The Federal Reserve said Tuesday that consumer borrowing dropped at an annual rate of $7.48 billion in February, or 3.5 percent, from January. Wall Street economists expected borrowing to slide by only $1 billion, according to a survey by Thomson Reuters.
The decline was led by a record drop in borrowing on credit cards, which fell at an annual rate of $7.8 billion, or 9.7 percent. That is the sharpest drop in dollar terms since federal records began in 1968, and the steepest percentage fall since 1978.
"Consumers don't want to borrow as much, they want to build up their savings," said Zach Pandl, an economist at Nomura Securities International. "People are adjusting to new spending habits."

So it seems the "monthly payment" consumer finally hit the brake pedal. Not mashed it mind you, just tapped it a bit.

This information will most certainly engender quite a few stories from the usual economists about "The Paradox of Thrift". Boiled down it argues that in a tough economic spot, people will pull back on purchases (no way!) but this very pull back will only hurt those foolish enough to do it through more economic contraction. Of course right after that section many will trot out the old "government must fill in the gap" line.

I would like to focus on the possible causes of the borrowing pullback. It cuts to the very core of the debate whether this pull back was caused by a "credit crunch" or if the spending slowdown was done on purpose by the public. This is a key issue.

Much of the argument for aggressive bailout packages and acronyms of all sorts was the need to get lending started again. The idea was that there is massive credit demand, but limited desire (and/or ability) of the banks to extend this credit. If indeed there is a major shift away from ruinous debt accumulation by the public much of the arguments for banking support fall empty.

While I think a final call on this debate will have to wait for several more months of data points to see any real trend, I can offer an anecdote from my own experience that just happened today. My wife has a vacation resort linked credit card through a major bank. She uses this card for various purchases and she builds up "points" that can be exchanged for resort activities or room upgrades. As you need at least one credit card to do most anything these days, it seems like a good rewards program for us.

The usual rate on the card is 4.3% annually. My wife just got a letter today informing her that the new rate is going up to 11.4%!!!! My wife has not missed a payment ever on any credit card. The balance carried is pretty small. There is no material reason for this change other than the major bank issuing the card needs more cash.

And that does it for us. Consider the massive taxpayer bailouts, the FED funds rate so low that banks can book enormous gains by spreads on loans, a scam of a PPIP program meant to transfer losses to the taxpayer, and the fact that the FDIC allowed their fees to go unpaid by member banks. All of this is still not enough? The banks feel that sticking borrowers with almost triple interest rates is now their right as well? How many ways can you get bilked by one industry?

Our reason for less credit card borrowing will be simple: We refuse to pay higher interest rates on credit in yet another extension of a bailout due to deadbeat borrowers. That is what is going on here. In order to make more money the banks are going to gouge the better personal credit managers to pay for the losses from the worse ones.

You can count us out. We will be closing the account and further will now forgo any credit card purchases as I am sure all issuers will be doing the same thing. This is obscene. The law of unintended consequence guaranteed that if the US government got involved in bank bailouts, the banks would take full advantage and now they are even pressing their luck by raising borrowing costs when the WHOLE POINT of intervention was to avoid that very thing. I get to pay for the banking losses by my taxes and then I get to pay higher borrowing costs while the banks enjoy record spreads via FED intervention?

Vote with you feet. Say no to double bailouts of the banks by paying cash, or whatever your local currency may be, and leaving the credit card balance at ZERO.

Have a good night.

Confidence is King

I trust all had a great weekend. Yesterday was very nice, warm around 60 degrees and Sun but today was a torrential downpour all day. Wild springtime weather swings.

William Black Interview
If you have not already come across this PBS Bill Moyer interview of William Black, then you may want to take a look. Pretty sharp commentary but hard to argue with any of the facts Mr. Black uses. Why on earth people with real insight and vision never happen to have any input on policy is beyond me.

The Government Hates Competition
After years of turning a blind eye to blatant mortgage fraud, the US government would like everyone to know that they simply will not tolerate and scams that take advantage of struggling home mortgage holders. The government would like to corner the market on strapping home mortgage holders to new longer term loans that can may be paid back to the banks:

Multi-Agency Crackdown on Foreclosure Rescue Scams Unveiled
Treasury secretary Timothy Geithner, along with other agency leaders, announced Monday morning in a press conference a multi-agency crackdown on bad actors in foreclosure scams.
The new effort aligns responses from federal law enforcement agencies, state investigators and prosecutors, civil enforcement authorities, and the private sector to protect homeowners seeking assistance under the Administration’s Making Home Affordable program from criminal actors looking to perpetrate predatory schemes.
Through FinCEN, the Treasury will also issue an advisory alerting financial institutions to the risks of emerging schemes related to loan modifications. The advisory will identify certain “red flags” that may indicate a loan modification or foreclosure rescue scam and warrant the filing of a SAR by a financial institution.
“The Department of Justice’s message is simple: if you discriminate against borrowers or prey on vulnerable homeowners with fraudulent mortgage schemes, we will find you, and we will punish you,” said U.S. Attorney General Eric Holder.
And with the collaborative efforts of the U.S. Department of the Treasury, the U.S. Department of Justice, the Department of Housing and Urban Development and the Federal Trade Commission (FTC), Attorney General Lisa Madigan said it’s no longer a matter of if those perpetrators will be caught, but when they will be caught.

Now do not get me wrong; I think having protections in place concerning these types of scams is a good thing. I was just wondering the following:

- How is it possible to put together an aggressive enforcement policy against foreclosure relief scams complete with aggressive language and a press conference and yet no program was ever put in place to stop liar loans and other mortgage fraud?

Just pop in a tape of the various home buying shows on TLC and you would have had all the fraud proof you would ever need. The government does not want prospective debt slaves that could be wed to new mortgages scared off by dishonest scams. The only scam in town that will be tolerated is the official one.

Confidence is King
The markets had a little bit of a pull back today, but the huge run over the past 2 weeks is still intact. With what Minyanville likes to term "Turnaround Tuesday" set up tomorrow I fully expect another nice run up.

Reading through tons of articles and listening to various commentary I was struck by the mechanics of the current stock rally. The impetus behind the move up can be boiled down to this:

- The Government has gone on the offensive to foster one thing: Confidence. While fundamentals and structural issues are still getting worse, there is a deep fear that all that could be ignored for a while if everyone collectively pretends it does not exist.

That is the core of the market rally. Market participants know the details that matter; unemployment is going to get worse, earnings are going to be awful, foreclosures are going higher (Fannie and Freddie moratoriums end this month), and the banks are no better off now than they were 4 months ago. These items ar clear and well known.

What is happening is that market players do not want to miss out on any gains a suspension of disbelief can deliver. It is already being widely discussed that earnings announced for the current quarter will be ignored as "in the past". The mark to market relaxation has many wondering just how creative bank earnings are going to be. Small upticks in good orders and consumer confidence levels are being blown out of any proportion.

It seems strange to watch adults in the financial industry allow themselves to be used in such a way. There seems to be some consensus that as long as everyone behaves the same, the rally can go on.

Optimism and confidence are the primary drivers of market action right now. Everything else in secondary. This can persist for longer than one might expect. All it is going to take is one blink or one ship jumper and the whole thing is likely to come down.

Glad we have such stable markets!

Have a good night.

Things That Make You Go Hmmm..

Steady rain with thunder and lightning this evening. It is always a bit strange to ear thunder so close to the wintertime, I just associate it with the summer. Still, beats loyal reader Kevin's area forecast for a BLIZZARD! Stay warm Kevin.

Mortgage Implode O Meter Legal Wrangling
This news item broke last night:

New Hampshire Judge Orders ML-Implode To Divulge Identities of Anonymous Posters
LAS VEGAS - A New Hampshire Superior Court Judge has ordered Implode-Explode Heavy Industries, Inc., the owner of the popular mortgage industry crash site Mortgage Lender Implode-O-Meter (ml-implode.com) to give up the identities of persons who provided information to the site about The Mortgage Specialists, Inc. of Plaistow New Hampshire.
Rockingham County Judge Kenneth R. McHugh also ordered that the allegedly "secret" and "defamatory" content about The Mortgage Specialists would have to stay down permanently.
The information consists of an anonymous posting on the ML-Implode forum about The Mortgage Specialists and the publishing of the company's 2007 "Loan Chart" sent in by an informant and placed online by the Implode-O-Meter staff.

I am no lawyer, and thus there may be some kind of weird standing that makes this kind of thing enforecable, but it stinks. Blogs are the real news sources. Witness the cascade of newspaper failings. This item bears watching. Economic Disconnect extends every support for the Implode o Meter.

Things That Make You Go Hmmm..
I am not an economist. I do not manage anyone else's money, just my own meager stash. I am not Harvard Business School trained or Yale economy educated. Thus I am easily confused. I find that there are many things respected economist types say that make no sense to me, but that is because I am of limited nuance for such things. I saw plenty of stories that made say Hmmm over the past couple of days.

First up is a Robert Reich blog post at Talking Points Memo. Relevant confusing excerpt:

It's a Depression
Capital markets may or may not unfreeze under the combined heat of the Treasury and the Fed, but what happens to Wall Street is becoming less and less relevant to Main Street. Anxious Americans will not borrow even if credit is available to them. And ever fewer Americans are good credit risks anyway.

All this means that the real economy will need a larger stimulus than the $787 billion already enacted. To be sure, only a small fraction of the $787 billion has been turned into new jobs so far. The money is still moving out the door. But today's bleak jobs report shows that the economy is so far below its productive capacity that much more money will be needed.

This is still not the Great Depression of the 1930s, but it is a Depression. And the only way out is government spending on a very large scale. We should stop worrying about Wall Street. Worry about American workers. Use money to build up Main Street, and the future capacities of our workforce.

Mr. Reich correctly puts together the pieces that the US consumer is tapped out, and they are not taking out credit they do not need, at least for a while. Repair of personal balance sheets after a debt binge never seen before on earth sounds like a sound decision. Mr. Reich even acknowledges that the pool of "good credit risks" is getting more shallow every day. What's confusing? Nothing if he had stopped right there.

Mr. Reich then goes all Keynesian on us and makes the case that to support debt accumulation (it is not lending and borrowing, but debt assumption) close to the absolute peak the Government must jump in and spend whatever is needed to restore the old activity level.

Nowhere does Mr. Reich offer an opinion on whether this is a good idea. At no time does the writer cast any value at all on overconsumption and debt fueled asset bubbles.

As far as the note that the economy is "below its productive capacity", isn't it always? I mean if need be we could force into labor the entire able bodied population to make things like cars. Would anyone buy them? What is the point of activity for activities sake? Again, no mention of this.

So I am confused. The US citizen has outstripped their net worth in spending, and the government must come in and support spending at unsustainable levels otherwise the economy collapses. Let me know how that works out.

The second item comes from my favorite bond guru, Bill Gross of PIMCO. Regular readers are well aware of my long standing issues with Mr. Gross. In a small, almost blip of an CNBC video summary Mr. Gross makes the following observations:

Bill Gross: Job Cuts Will Get Worse Before They Improve
Bond guru Bill Gross sees the unemployment rate jumping to double digits before it improves, and even then the economy will evolve into something we haven't seen before.

We're going to have a positive quarter at some point in the second half," he predicted. "Those that would look for bottoms in the economy or the stock market, though, I think are really focusing on the wrong thing, because that implies that we're going to return to what is a normal stasis. We think that's incorrect. We think that unemployment will go to 10 percent before it returns to 8."
Instead of that "normal stasis," Gross said he sees something quite different.
"We're evolving into a 'post-levered' financial economy which will witness intense regulation, and a redistribution of profits and wealth, most importantly, to previously disadvantaged groups, and so that's the 'new normal' that in no way resembles past experience."

I have no idea what Mr. Gross means by a "redistribution of profits and wealth, most importantly, to previously disadvantaged groups". I am confused because the only redistribution I see going on is the distribution of taxpayer funds towards bailing out the fat cats like PIMCO. The only money I see going to disadvantaged groups is more bailout cash, lending programs, and bad asset scams serving those that should be disadvantaged; the idiots that wrote all that paper!

Again, I am confused.

The last item concerns FED head Ben Bernanke's talk today at a FED conference. Relevant excerpt:

Fed 'extremely uncomfortable' about bailouts
Bernanke: Fed 'extremely uncomfortable' about bailouts; but strategy to ease crisis is working
CHARLOTTE, N.C. (AP) -- While acknowledging that the Federal Reserve was "extremely uncomfortable" about last year's bailouts of big financial companies, Fed Chairman Ben Bernanke said Friday the central bank's strategy to ease the financial crisis is working.
In remarks during a Fed conference in Charlotte, N.C., Bernanke said the central bank was forced to take action because the collapse of those companies would have dealt a serious blow to the financial system and the national economy.
The situation underscores the need for new powers to allow the government to safely wind down such huge firms, he said. Bernanke and Treasury Secretary Timothy Geithner recently asked Congress for such powers.
During his speech, Bernanke also defended the Fed's decisions to revive the economy by plowing trillions of dollars into efforts to stabilize the banking system and to lower interest rates. Its program to buy mortgage-backed securities of Fannie Mae and Freddie Mac has helped drive down the rate on 30-year mortgages to record lows.
"These are extraordinary challenging times for our financial system and our economy," Bernanke said. "I am confident that we can meet these challenges, not least because I have great confidence in the underlying strengths of the American economy."
To brace the economy, the Fed has slashed a key interest rate to an all-time low of near zero. The central bank has turned to unconventional tools -- such as its recent decision to start buying government debt -- to pull down interest rates on a range of consumer loans. The goal: entice Americans to go out and spend again, which would help lift the economy out of recession.

This is not so much confusing as a collection of useless lies.

- Note the story uses the line "last years bailouts". There are no bailouts this year? Ongoing lending facilities, auto maker money, etc. Nice move.
- The FED in "uncomfortable"? When I am uncomfortable with something I do not do it. I went to the doctor and told him it was uncomfortable when I raised my left arm over my head and he said "Don't do that!". Little joke.
- Spare me the whole "wind down" talk. Bernanke had already said in quoted words that there will be no more bank failures so do not even pretend.
- If Bernanke had great faith in the strength of the US economy I would offer that the FED would not have had to exhaust the alphabet in acronyms for all their lending facilities. Next up, Chinese alphabet acronyms (the Chinese ok'd this at the G20 meeting) for more lending programs.

It would seem to me a much better use of time and taxpayer money would be to develope industry and more robust economic machinery in the US rather than to try and prop up asset bubbles and keep the debt splurge pedal matted to the floor. just my 2 cents, but then again I only went to state school!

Friday Night Entertainment
Another long week deserves some fun!

WARNING: SERIOUS TIME WASTER
I am lax to even put this up as I will drop way too much time playing this game, but here is mini putt 3 to drive you crazy:
Mini Putt III
You were warned!

Rock Blogging
A little music to get your weekend off right!

Another YouTube "not embeddable" band is "The Cure". I was able to find a live performance of "Friday I'm in Love" that I could embed, so enjoy on a Friday!:


Another tough embed is "Til Tuesday" and "Voices Carry" long a gulity pleasure of mine!:


I found an old school video of "Wayward Son" by the band "Kansas". Great song, scary video:


Last call!

Something a little faster and with an edge. Take a listen to "Judas Priest" and "Ram it Down":


Have a good night.

Rewind Then Press Play

And...... I am back! Thanks so so so so much to reader Edward and his suggestions for cleaning out the computer! I had full faith in my Norton Antivirus software, and repeated scans turned up only 2 items that were flagged as "issues". After trying out the recommended malware site offered by Edward, there were over 50 items found that were constantly running!!!!! I was shocked.

I am very disappointed with the Norton product, and will not renew. Thanks to Edward for getting me back online! Thanks to all for the computer suggestions as well, I will be looking to upgrade anyways pretty soon.

Suffice to say, a ton has transpired over the past 4 days. There is no way to get all caught up. I will go through some items from earlier in the week that I flagged and cover the days current issues as well.

GM's "Scorched Earth" Possibility?
Note: This story was started on Tuesday and updated on Yahoo all week.
I was confused that GM would roll out a plan offering to pay for a car buyers payments for up to one year in spite of their current probable bankruptcy possibilities. If GM is hemorrhaging cash at such a rate that not even the bailout brigade can help them, it seems beyond all common sense that they would initiate this program. From Yahoo Finance:

GM to make payments for customers who lose jobs
New GM CEO says automaker to take over car payments for some customers who lose their jobs
DETROIT (AP) -- General Motors says it will make car payments for some customers who lose their jobs.
The automaker's new CEO Fritz Henderson says under GM's new "Total Confidence" program, the company will make up to nine car payments of $500 each for customers who have lost their jobs through no fault of their own.
Customers must qualify for state unemployment to be eligible for the program. The program starts April 1 and runs until April 30.
The news comes hours after rival Ford Motor Co. said it would take over customers' payments of up $700 for a year in the event of job loss.
Henderson, formerly chief operating officer of General Motors Corp., replaced Rick Wagoner who stepped down Monday at the government's request as the Detroit automaker seeks more federal aid.

Ford is in on this too but as of now is not in the bailout game too deep.

After considering this program on Tuesday, there was more disclosures that GM had their "best day in over 7 months" on March 31st or thereabouts. Then things finally clicked.

GM is flailing away in an effort to stay alive. They are desperate. The boasting of one day sales numbers and offering non-recourse car loans to buyers is a last ditch effort.

Let me ask this: Faced with a unwind and feeling they were not helped enough, what would happen if GM extended car loans to any and all under the protection of this new program? How much damage could they do? As a final parting shot they could leave some thousands (tens of thousands?) of soon to be sour car loans on the books. I think you can guess who is going to pay for all that defaulted debt can't you?

Bond Avalanche
The US is looking to sell some debt, and the amount is a show stopper. England has plenty to sell, as well as many other countries. It seems the state of California is getting set to unleash their own bond avalanche on the debt markets as funding for the fiscally strained state seems to have to end.

Now California is no dummy. Why go out and try to compete in the markets when you have the US Government to back you up:

California may tap U.S. Treasury, Europe for credit
Lockyer: Trouble getting bank credit may prompt need for federal bond aid
SAN FRANCISCO (MarketWatch) -- California's "liquidity problems" may force the state to seek federal backstops for sales of its short-term notes this summer, even though it received heavy demand from retail buyers in a recent bond sale, its state treasurer said Tuesday.
California Treasurer Bill Lockyer said in an interview that the state is talking with Treasury Department staff, including Secretary Timothy Geithner, about getting federally issued letters of credit to back upcoming issues of short-term securities known as revenue anticipation notes.
Lockyer also said the state will probably issue about $12 billion to $16 billion revenue anticipation notes this summer.
But it may have trouble getting private banks to issue letters of credit to secure the notes, a possibility that's prompted it to seek government backup.
"What we're starting to talk to them about is ... short-term liquidity problems" at the state and its municipalities, he said.
Like many municipal bond issuers, California has seen its access to credit severely hampered in the last year as financial shocks have turned away institutional investors from parts of the bond markets.
Lockyer said that while rates on some commercial paper have come down after spiking to 9.5% in October, after the collapse of Lehman Brothers, it can only borrow a sliver of what it had in the past. It's now able to tap $100 million to $200 million a day in this ultra short-term debt, down from about $1 billion to $2 billion before the credit crunch.
To widen its investor base, the state is also planning to tap European investors in an April bond sale that utilizes a new federal subsidy program for municipal issuers.
Lockyer said the state could issue $3 billion to $4 billion in bonds under what's known as the Build America program, which is part of the February economic-stimulus package signed by President Barack Obama in February.
There are huge banks and insurance pools. We're hoping it will be a door to European investors," Lockyer said in a MarketWatch interview. "Maybe some day we'll need to figure out how to access Middle Eastern and Asian investors."

Long excerpt, but very important.

California is a future glimpse of the US as a nation. Credit dependant, fiscally insane, and totally dependant on outside help to survive. California would like to tap the Europeans for debt sales? They already have when all those mortgage backed securities that went to zero had a huge base on California. I think Europe may take a pass.

Not to worry, California has another option for funding. Can you guess who that is?

Japan's Quantitative Easing: Total Failure or Spectacular Success?
I was just barely awake this morning at around 5am and I switched from the local weather news to CNBC to see what was shaking. (I apologise in advance that I cannot remember the analysts name nor could I find a transcript on CNBC. For the record the interview was on April 2nd, 2009 at 5:10am-5:20am eastern standard time.)

The analyst I saw had an interesting take on Japan's quantitative easing strategy. It was the first time I had heard it and it struck me as a great insight.

It is accepted dogma that Japan used quantitative easing to no real avail to help their economy in the early 2000's. Progress, as measured by GDP, was flat to slightly negative for most of this decade.

What was a new wrinkle to me at least was the idea that the ultra low interest rates of the Bank of Japan, topped by quantitative easing, provided a rich reserve of "free" cash through the process known as a carry trade. Through this mechanism banks, brokerages, and other investment vehicles had access to a vast pool of liquidity. This liquidity was sent around the world, though a large part of it was used to buy up mortgage backed assets during the housing boom.

So why do I bring all this up? As the US embarks on their own path of quantitative easing I think I might have missed a key cautionary tale. While Japan was aiming to help their struggling economy by QE, the results were a ransacking of cash from the Japanese banks that was plowed into other areas over which they had no control. the US may want to keep that little tidbit in mind. Or maybe that is the plan after all.

Rewind Then Press Play
The almost unreal rocket ship that is the stock market keeps going up no matter what the news or data. 2 weeks ago we were in the midst of Great Depression 2.0, and today we are well on the way to total recovery. Quite the whirlwind. Your humble author was not able to escape the wild market gyrations without change.

I was stopped out of my two most recent gold miner positions in Goldcorp (GG) and Kinross Gold Corp (KGC) today. I had set sell stops to preserve about a 13% gain on the two holdings and both a lack of computer access and a gold price pounding today resulted in my positions being sold (Total disclosure: I was stopped out of those two positions but I still hold a position in Gold and Silver (physical, miners,ETF's) that was put in place from 2002-2006. This is my core metals holding and have not changed). There was a great piece over at Seeking Alpha about some very fishy ECB gold sales related to COMEX that you can view here. Also, the IMF is selling gold to raise cash to lend out "countries in need". What a waste of bullion. While my long term view on the precious metals is not changed, I was short term bumped due to the market action.

The long awaited change to "mark to market" came to pass today. What this will mean to the Treasury's PPIP idea will be interesting. Why sell assets that are bad if you can just hold them and remark them?

The G20 meeting, long a total non event for the markets, was greeted with glee and happiness that the foreign representatives will "do something" to help the world's economy. The "We are the World" moment for some reason had markets giddy that the same folks that had no idea and no control over the economies world wide now j=know just what to do.

The big news was this item from Housing Wire which cover PMI insurance company Triad Guaranty Inc (TGIC) and their basic temporary default policies to the tune of 40%. Of course PMI insurance policy holders must still pay 100% of the policy for 60% coverage and Triad will pay later if you default. Promise.

The early unemployment numbers were obscene again, but that is a lagging indicator, so no worries.

As of writing I see nothing standing in the way of DOW 10,000 and S&P 500 1000 over the next 2 months. Interested parties may want to try SSO, a double S&P 500 ETF to capture gains. I may do that next week but I had no time to trade, I wanted to write now that I am online again!

We are at a strange market juncture. There is little resistance to stocks going up, but if they fall again there is nothing underneath them either. Treacherous indeed.

In a macro sense I think the worst result of the last weeks market action is that we are now a good distance form the area where real change might happen. My market targets of 10,000 and 1000 stand and I think we get there by the end of May.

In a movie you may have seen before, this summer will bring revelations that the structural issues are still bad and getting worse. This will start another leg down. Rewind and press play indeed. It may stretch into the fall before another "crisis" unfolds. And all the same questions and all the same issues will be waiting for us.

Glad to be back.

Have a good night.

Time and Technical Difficulties

Hello to all the loyals as well as anyone else that stops by.

Yesterday I had some things to take care of, and this afternoon I had a meeting with the landscapers to flesh out how they are going to fix my yard. The ice storm of last December not only took down a bunch of trees and branches, but the wash out of the lawn looks pretty bad as well. Fun stuff.

Also my computer is having some real performance issues. It is 4 years old, but I fear something has gone wrong with the thing. As I know about zero about computers I imagine I am going to buy a new one and contribute to the economy. Any suggestions for a new computer? I am not into anything exotic, and I do not require crazy drivers, huge memory, or other gadgets. Just a basic computer that is fast and simple. Leave any ideas in the comments section, it is much appreciated.

I am planning on a post tomorrow, so leave any good articles or blog posts in the comments as well. My favorite news item of the day was the new program by GM to pay for a person's car loan for around a year if they lose their jobs. Circular logic to pay for the car loans of all the laid off autoworkers as the government throws more bailout cash at the companies to "reform more quickly". You really cannot make this stuff up.

Have a good night.

Will the Next Asset Bubble Please Stand Up?

This workweek seemed like it had 7 days! At least the weather had taken an upturn to the warmer side. Not warm, but warmer is a start.

Key Weekly Thoughts
I am a bit tapped out tonight, so I am going to do a brief summary of the most important items from the week, a fun type post to get some reader participation, and then the Friday night entertainment.

Key Thoughts
- The Treasury's move to use the FDIC as a hedge fund is going to turn out very badly
- Bypass of Congress and backdoor funding tricks result in a rogue agency with limited controls
- Never underestimate the desire of most investors to buy stocks no matter what
- China holding the purse strings, once really understood by average Americans, will effect a new thinking about out of control spending both on a personal level and by the government
- If the government goes for a newspaper bailout the mainstream media will lose whatever credibility it has left
- Is there a record for Presidential appearances? Has Obama eclipsed that record?
- A bill should be passed in Congress banning any and all Goldman Sachs former employees from ever holding a government finance position
- Today Jamie Dimon said March was tough on banking. Tough enough to make liars of Citi, Bank of America, and Wells Fargo who not 3 weeks ago were touting how awesome things were in January/February?

Will the Next Asset Bubble Please Stand Up?
I read a post over at The Mess That Greenspan Made that had this snippet:

"There has been many a time in California's history when it seemed to outsiders to be barreling toward a cliff and to insiders as a place for unbounded optimism. A favorite Silicon Valley bumper sticker says, "Dear God, one more bubble before I die."

Is it just me or is it fast becoming conventional wisdom that we need a new bubble to take up the slack created by the bursting of the last two?

Despite the rhetorical flair of the new President on the subject of future bubbles, it seems clear to me that, given the deleterious effects of the current bubble's demise, the entire nation would jump headlong into a new bubble of any kind if some asset prices somewhere would start to rise and if job losses would ebb.

Indeed I agree.

The hard part is figuring out just what the next bubble is going to be. I for one never would have thought the housing bubble could have become so big after the Tech stock wreck that had just occurred in 2000-2002. Seems I was a bit naive then.

To find that next great chance at a lottery winner, we must first describe some criteria that have to be met for the next bubble to really take off. Here are some qualities I think would be needed:

- Exciting (E): to foster attention and participation said bubble has to have an element of excitement. Junk bonds are so boring, you know?
- Leverage Access (L): for a bubble to really get going you need access to leverage to expand buying power above and beyond that which is directly available to the buyers.
- Believability (B): the next bubble needs a believable storyline, well at least a good story. We all know beanie babies are not going to cost 1 million dollars, but a condo in North Dakota? Maybe!
- Low Entry Threshold (T): the next bubble will not be in some kind of hedge fund that requires 100 million in assets to qualify for participation.
- Displayable Results (R): like YHOO stock rolling up 30% every month or a home going up in price 20% every 3 months, there has to be some way for the masses to show their awesome investment skills off to the world.

With an eye on this criteria, lets look at some possible candidates and score (1 lowest, 10 highest) them on each category.

Candidate 1: Oil
E score: 3
Oil, while an essential commodity, is just not that exciting. It is messy. Most of it comes from countries the US does not like. While oil can be exciting as it relates to gasoline, I think it scores low here.
L score: 3
While big players can leverage up on oil futures and delivery contracts, those vehicles are complex and oil sellers would be lax to let that kind of buying go on with leveraged dollars.
B score: 8
I think oil is solid in the believable category. I mean peak oil and all that makes a compelling case.
T score: 4
While small contracts or oil producer stocks have easy access, the pure oil plays have a high threshold to entry.
R score: 8
Oil scores well again as the oil price is a common news read. Gasoline is also readily observable.
Total score: 26

Candidate 2: Real Estate
E score: 9
Not too long ago you remember all the crazy excitement housing generated. If prices could turn around, this one is a natural.
L score: 10
Home loans simply cannot be beat as far as leverage available to the average joe. While no money down may be gone (maybe not) 5% down payments still allow for a great 20:1 lever up.
B score: 9
It just happened not too long ago, so it can again!
T score: 7
While not as easy as in years past, the government is doing everything it can to get people into homes. This used to be a 10 score, but now a bit harder to jump in.
R score: 9
Again, you know how this works. My house is worth what?!
Total score: 44

Candidate 3: Gold
E score: 9
Gold is about as exciting as it gets. Shiny and never changing, gold gets the blood pumping
L score: 4
While ETF's can be bought on margin, real bullion sellers will not play too loose with the leveraged buying by all but the big boys.
B score: 9
If you think paper money the world over is backed by mostly nothing, gold sells itself. That gold has been money since the dawn of man is a solid tale.
T score: 3
A little gold is easy and cheap. Any real amount gets expensive, fast.
R score: 9
Gold prices run on most market tickers and eBay can always get you excited about how much you could auction your gold off at.
Total score: 34

These are just three examples. I wanted to do the following:
- the Dollar
- Diamonds
- Bank Stocks
- Robots

I am putting up a poll so please vote and use the comments section to flesh out any other possible bubbles. Maybe we can all strike it rich!

Friday Night Rock Blogging
After a one week hiatus, some music to start the weekend. This section gets harder every week as many music bands have entire armies of people that go out on Youtube and disable video embedding (KISS is the worst offender).

While we want a new big bubble, "Tiny Bubbles" from Don Ho is a start:


Reader Kevin had requested some Santana last week, but the Woodstock performance on Youtube had some skinny dipping folks in the intro! Enjoy instead "Smooth" with the Matchbox 20 singer:


While we play "if MBS assets were valued at 95 cents on the dollar we would not be in this mess" take a listen to Jimi Hendrix not being worried at all about "If Six was Nine":


You all know I love songs from movies! Listen to Robert Tepper's "Angel of the City" from the film Cobra:


Have a good night.