Dazed and Confused

Happy Halloween and FOMC day!
This morning I had some personal things to do, so I had today off. I was able to hang around and read headlines and watch the CNBC channel for a while before and after the FED rate decision. I must say, it was a very confusing day. It was a strange feeling watching grown adults that are allegedly employed in the financial arena parade silly ideas around all day. I do not mean they said things that I personally do not agree with, that what makes a horse race, but just absolutely silly and/or contradictory things that make no sense at all. The really funny part is that not one talking head or analyst ever questions any of the dumb stuff that is said on TV. Journalists, and I use the term very loosely, do not even try any analysis in their reports, they just trumpet whatever their press piece says. I tried to jot a few notes of the really good stuff for tonight's post. In no particular order, here is today finest of financial coverage!

The FED Sets the FED Funds rate, Unless the Market Does
I am extremely loosely paraphrasing above, but this exact sentiment was uttered during "The Closing Bell" segment by some guy. The FED acts independently after reviewing all available data. The data has shown that a cut was not needed at this time. The markets had already baked a cut into the ever expanding cake of help they expect, so the FED had no choice but to cut. Circular logic at its finest.

The FED statement was Hawkish, but the Language does not Matter
The FED statement today could only be read as at least weakly signaling no more rate cuts this year. Stocks went down pretty hard. Then a new idea swept the markets! The FED has to say that hawkish stuff so the market does not "price in" more rate cuts, so that when they do cut, we will be surprised! So that means they are going to cut more, so lets reset the cake bake mix and put that in as well. Markets rallied strongly to the close. Confused? I am too.

Speculation is Reckless, Hurtful, and Irresponsible, Unless its in Things we Need Speculation In
The rise in Oil prices was lambasted a pure speculation. One talking head said that easily 30% or more of the price of Oil is pure speculation by traders. Ditto for Gold. The consensus was that greedy nasty speculators were pushing up commodity prices across the board, and something needs to be done to reign that in. However, speculation is desperately needed in housing to push prices back up because all the reckless folks bidding up homes are now underwater. Google busts out over $700 a share and that kind of trading is all good. I am not kidding that this kind of stuff was going on today. To add to a wonderful Minyanville phrase of "Inflation in things we need, and Deflation in things we want" the new phrase should read "Speculation in things we own, and No speculation in things we need to get". I'll tell you what Mr. market, lets go ahead and chop off 30% from Gold and Oil, and you chop off 30% from homes and the DOW and lets stop speculation today. Just say no as the saying goes.

Housing is only 5% of the Economy, But we Need Rate Cuts to Save the Financial System
This was easily the most repeated and most confusing idea going on today. Person after person repeated the "housing is 5% of the economy" mantra. Not one talking head or analyst asked where that number came from. Lets assume its true. In the same breadth these people are calling for rate cuts and other FED help to end the housing bust? If I had 95% of a Big Mac, I would be just as full. If I had 95% of my paycheck I would be fine. If housing is only 5% of the economy, why do we need such drastic intervention to prevent banks from failing? Why do we need to stop foreclosure rates from skyrocketing? If its only 5%, then really all this stuff is way overblown. Obviously this one wins for super silly idea of the day, and again not one analyst or talking head ever brought up the issue.

That's a collection of some of the better chatter going on today. I fully admit that I can offer nothing on these matters. I could dig out data, charts, a Ouija board and still not get through to anyone that can buy the crap listed above. The totally absurd things I saw and read today have convinced me of two things:

• There will be NO downward movement is stocks in the next calendar year
• The housing bust will be bailed out on the banking end, but through blind instruments and FED shenanigans. Do not get me wrong, home prices are going to continue to fall, foreclosures are going to go parabolic, and the home buying industry will be crushed. Just do not expect to see any macro fallout involving banks or major brokerage firms. They will be well cared for. In time the housing problems will not even get a headline, as its only 5% of the economy anyway!

That's my take from today. The dollar continues it push to the 70 mark on the dollar index. Gold almost topped $800 an ounce. I have another poll on the dollar up today, please check it out.

Have a good, if confusing, night.

Its Quiet, Too Quiet!

Today was easily the most boring day for financial news and gossip ever. Everyone is waiting for the FED move tomorrow, and I guess that is when things will start moving again. Tonight I just have a few notes and quips, then I guess I will wait until tomorrow as well. Honestly, almost all my thoughts are on the upcoming football game Sunday, so what can you do.

I love this picture from "Revenge of the Sith":

The picture is of course Lord Darth Vader, The Emperor (Darth Sidious), and Grand Moff Wilhuff Tarkin as they oversee the construction of the first Death Star. I had a funny thought about this picture. Imagine the characters in the picture are instead Alan Greenspan (The Emperor), Wall Street Banks and Brokerages (Grand Moff Tarkin), and the National Realtors Association (Darth Vader). They are watching the construction of the Housing Bubble. The Emperor has provided basically unlimited cheap liquidity with low interest rates and money creation. Grand Moff Tarkin is tasked with building a financial superweapon of prosperity using the liquidity. Darth Vader makes sure nobody complains about anything and uses the force to do mind tricks on people so they want to buy homes they cannot afford. The construction goes extremely well, and eventually the weapon is finished. The Death Star is then used to destroy the planet of Alderaan which is the home planet of nasty lending guidelines. All seems well and the galaxy is convinced of the new paradigm of housing perpetual prosperity. Then along comes Bear Stearns Skywalker and he drops a proton sub prime torpedo down an open CDO shaft and the whole thing goes up:

As you know already, the Emperor built a second Death Star that was even bigger than the first. Keep that in mind when the FED (now Bernanke) cuts rates again tomorrow. The second Death Star ended with a bigger boom, a parallel the FED may want to keep in mind.

Football commentary coming, bail out (not you federal reserve!) now if not interested!

All the talk of the Patriots running up the score is already old. I am not sure where the pure animosity towards the Pats comes from this year, but it is quite annoying. The commentary I have read states the Colts have played tougher teams than the Patriots this year. First off, that dumb. The Chargers and the Cowboys are both many levels above any opponent the Colts have played. Second, if the teams the Patriots have played are so bad, should they not score big? You cannot have it both ways. Intellectual honesty and consistency are two things you must have if you want to be taken seriously.

I have a new poll question up tonight, so have at it!

Have a good night.

Crisis of Confidence

Two things up front before tonight's missive. A while back I recommended filing out the online petition backed my Karl Denninger at Market Ticker blog. The petition is well written and covers the main areas of concern regarding the economic future of the US economy. In his post tonight, Karl shares his disappointment with how many signatures the petition has obtained:
http://market-ticker.denninger.net/2007/10/hyperinflated-monday-and-farewell-for.html
The suspension of MarketTicker's daily run down of the markets and macro banking analysis is a real loss. I ask any readers here to please go and sign the petition. One minute is not too much time. Yes, there is an email verification process, but I can vouch for the fact that absolutely no further contact is made by the host. I leave it up to you.

Second, I wanted to thank all those that voted in my current poll. 32 votes as of now, and I am very happy about that. 50% of the readers come to this blog on a daily basis, and that is very exciting. To the one guy that was looking for porn, sorry about that. Even a Google search for PFU DNA polymerase, an enzyme I use in my work, will return a porn hit! I am working on a new poll, and hope to have it up tomorrow night. Thanks to all that voted. Lets try to get some of the comments sections buzzing. I am always looking for information for new blog posts, and suggestions are very welcome.

Crisis of Confidence
Right now there is a major Economic Disconnect with regards to what is reported in the mainstream media and what the real facts on the ground in the financial world are. Slowly, ever so slowly, like molasses in wintertime, the average person on the street may be beginning to have doubts about many things. When reality is bashing you upside the head daily, it eventually will seep in if only by osmosis. I want to highlight 3 major points which should have by now caused a great wake up call for all Americans.

Iraq War and WMD
NOTE: First off, this is in no way a political blog. I would characterize myself as a fiscal ultra conservative and a social mega liberal. This means I never have anyone to vote for! I know I ask for comments, but do not start political discussions here. The point of this discussion is how the situation will relate to a crisis of confidence, and nothing more.
The US spends tons of money, and rightfully so, on maintaining a military. The government also has the CIA for gathering intelligence, space satellites up the wazoo, planes outfitted with cameras and eavesdropping equipment, and the some unknown number of analysts and staff. When those whose job it is to know believe that Iraq had a fairly developed WMD capability, you expect them to be right. I truly believe that President Bush and the upper level leadership were convinced there was an active program in Iraq. The point here is not that Bush lied or somehow outsmarted the Congress with false evidence (can he be so dumb as to outsmart the congress? What does that say about the congress?) the point is that with all the means available, the US government did not know anything concrete for certain. That is the take home point. The agencies and systems we believe are protecting us had no real idea what the heck the situation was. Add to this that it was standing US military policy to field a force sufficient o fight 2 major global theater wars at once, like in WWII. Instead we cannot even deploy 200,000 troops to Iraq without stretching the military to the breaking point! Our men and women in uniform deserve so much more than that, and the US taxpayer does too. Truly, these revelations are troubling.

Home Ownership
For years the average joe was inundated with the idea that home ownership was the path to financial freedom. It was indeed that for the longest time, but only viewed in the correct way. It has been a major tenet of Economic Disconnect that the main utility of home ownership was that it functioned as a forced savings plan for people that either cannot, or will not put money away. Only over a reasonable time frame would the equity built up be boon to the homeowner. Home ownership as a short term financial vehicle is an absolute loser, that's the fact. I will not run through all the garbage related to the current housing bust in this post, but the take away message is that home ownership was so diluted and spread to so may people looking to make a quick buck over the past few years that the very structural appeal of buying a home will be lost for the next 5-10 years if not more. With foreclosures skyrocketing and prices collapsing, the promise that was home ownership is now just a promise to lose.

The FED, the Dollar, and the Banks
The August -September time span was very illuminating to anyone that stopped to watch. The FED showed its true purpose is to save the banking industry and wall street. In an overt effort to add liquidity to a system badly in need of a major correction, the FED showed where they are focused. As the dollar has taken a beating due to the easy money of the past 4 years, even regular folks are starting to see a problem. When they travel abroad the dollar is toast in an exchange. With oil now almost at $100, the winter will be a long one for oil heat buyers. The rampant inflation at the grocery store is also impossible to miss. As the ginormous losses continue at the mortgage lenders and the big banks, the public is only now getting a look at the unbridled greed and total lack of care the banks showed in lending money to anyone that wanted it. The FED and the banks are supposed to be all powerful and smart. Instead they are increasingly looking foolish and greedy.

So what does this all mean? Today, probably nothing. I think that over this winter though the public may start to do some real thinking on what has gone on. High home heating bills are really going to shock people. A turnaround in housing will not materialize even after aggressive rate cuts. Banks will continue to lose tons of money, and yes that is your money they are losing. One way or another you will pay. Eventually confidence in a system that has produced not only the 3 major points outlined above, but many others will weigh on the trust in the system.

I realize that someone somewhere writes something just like this all the time going back 50 years. It is my belief that with the rise of the Internet and new channels to get information (like blogs) never before has the inner workings of a broken system been so exposed. Take a marketwatch headline form Friday that reads "Countrywide on the path to profitability in next quarter", if that was your only news source it sure sounds good, but go around the financial net and you will know that headline is silly at best.

When will a crisis of confidence occur? I dunno. It is very hard to pinpoint such inflection points. The weight of evidence that the average joe has been suckered is really getting hefty. It will not be long and will not take much to crash the system. I think it will be a long winter indeed.

As it is only Monday, I will try not to write too much about the monster game on Sunday between the Patriots and the Colts. On the airplane ride back to New England after the AFC title game loss last year, Bill Belicheck and Tom Brady were plotting revenge for a blown game. The plan included adding receivers that can actually catch a football, and designing an offense that can outscore the Colt modified west coast underneath pitch and catch system. Enter Randy Moss, Donte Stallworth, and Wes Welker. This is the game that the new offense was put together for. On Sunday we will see if it was the right idea.

Have a good night.

"To a Man with a Hammer, Everything Looks Like a Nail"

"To a man with a hammer, everything looks like a nail."-Mark Twain


The major market event of the week is the FED meeting and Wednesday rate announcement. Larry Kudlow is calling for a repeat of the prior 50bp "shock and awe" rate cut. If the last one was so great, why is another needed Larry? If you have to ask, it isn't shock and awe! Consensus is for a 25bp cut. Both the dollar and Gold say a cut is on the way. Economic Disconnect says a cut of 25bp will be delivered, with the wording of the statement to include a market helping "we will do all that is necessary" thrown in.

In Friday's post, I presented the annoying CEO of Countrywide Financial Angelo Mozillos's statement that if housing continues to deteriorate (it will and he knows that) he fully expects the FED to aggressively cut rates. All the talking heads are calling for rate cuts. I see rate cuts being asked for by local graffiti in my town (just kidding).

The mindless call for rate cuts shows that market participants have no context on the economy. With Oil over $90 a barrel and the dollar at an all time low, more rate cuts could do serious damage. Rate cutting cannot exist in a vacuum. I wonder why not one analyst on the CFC conference call asked Mozillo how far he expected the fed to cut rates, given the oil and dollar picture. If CFC is banking (pun intended) on rate cuts, how many do they need? What are they expecting in their business model? All good questions, but you do not get a job as an analyst and get to ask questions on a conference call if you ask those kinds of questions.

The title quote of this post fits the situation this week very well. Credit problems? Rate Cut. Massive foreclosures? Rate Cut. Ridiculous loan losses? Rate Cut. If the FED would only cut rates, global warming would be reversed! Whatever the problem, a rate cut will make it go away. It reminds me of the elixir salesman in the film "The Outlaw Josey Wales". The salesman keeps listing all the problems that his elixir can heal or fix, and Josey Wales spits on the man's coat and says "How's it work on stains?" I do not think anyone should spit on any of the people calling for rate cuts, but at least a little spittle might wake them up.

The problems facing the US economy and in particular the banking industry are:

• A housing price collapse
• Record foreclosures
• Record home inventory
• Record loan defaults

The housing bubble was enabled by the low rates and cheap money of the 2001-2005 span. Observers would have you believe that a return to those rates would reignite housing demand and keep losses and foreclosures from continuing. If loan rates were the only issue, that might even have worked. The problem is the macro situation for housing will not respond to lower rates. The main issue is not the FED rate anymore. The issue is that the silly risk that was inherent in the vast majority of loans made over the last 3 years is now coming to the surface. The prices that various entities are going to charge to buy the crappy paper, to insure crappy loans, and to extend more money into the mortgage market is now going to be well above historical prices no matter what the FED is going to do.

Fed rate cuts cannot really help the situation, but can give the appearance of helping I guess. The market today is made more on sentiment and psychology than fundamentals anyway. That is a major statement, and I stand by it. If people see rate cuts they will keep on keeping on. Can the FED cut rates if oil is over $100 a barrel? What if the dollar falls below 70 on the dollar index? What if the bond market revolts against the rate cuts and they make no difference on mortgage rates? Are rate cuts still the answer?

Unfortunately our elected officials in the US government are not the pick of the litter if you take my meaning. Whats worse is that the folks in charge of monetary policy and in the banking system are no better. The massive and pointless over investment in housing over the last few years has robbed the US worker and economy of any chance of being competitive in a global marketplace. The trillions of dollars wasted on granite counter tops, travertine tiles, and million dollar Las Vegas condos could have been used in so many ways it makes me sad to think about it. The selfish US "get rich quick" donkeys have wasted time and resources on a housing bubble that returns absolutely nothing to the economy save Home Depot sales and commissions for realtors and the states. In time, I believe this moment will be seen as a turning point for the US as a whole. I know this post seems a little bitter, but I am extremely disappointed with what has gone on the past few years. What a waste of time and money.

As of writing, the New England Patriots are crushing the Washington Redskins. The final is in, 52-7! So much for the 4th ranked defense in the NFL. The matchup with the Indianapolis Colts is set for next week. The winner will have home field advantage for the playoffs, and a probable a trip to the superbowl. Next week's game is so big on so many levels. I have waited for this game since the end of last years AFC title game. I will likely post a bit on the game all week. Sorry in advance to any readers that hate football.

Have a good night.

Escalation of the ARMS Race at Countrywide

On October 20th I likened the situation between the banks and the FED to a game of chicken:
http://economicdisconnect.blogspot.com/2007/10/superfund-strong-arm-and-game-of.html

Along these lines, Mish took the theme one step further and framed the confrontation as Mutually Assured Destruction:
http://globaleconomicanalysis.blogspot.com/2007/10/economic-chicken-vs-mutually-assured.html

I must admit, his analysis was closer to the truth of heart of the matter. I am not going to rehash the disaster that was the Countrywide (countryfried?) earnings report today. It was horrendous, even worse than expected. I think the major event to focus on is that Countrywide has escalated the confrontation with the FED and other banks.

Countrywide came out swinging today, and ratcheted up the pressure through economic brinkmanship. Brinkmanship is defined on Wikipedia as:
"The practice of pushing a dangerous situation to the verge of disaster in order to achieve the most advantageous outcome. This maneuver of pushing a situation to the brink succeeds by forcing the opposition to back down and make concessions."

The escalation comes on three fronts. The first was made known during the conference call with investors. Mark Gongloff of the Wall Street Journal was kind enough to live blog the call. You can view his report here: http://blogs.wsj.com/marketbeat/2007/10/26/live-blogging-the-countrywide-call/?mod=yahoo_hs
The salvo is fired at around the 2:11pm mark and is entered on the blog as:
2:11: In response to a question about when the market may stabilize, Mozilo says you “have to remember” that if negative housing scenarios play out, you would have to expect rate cuts from the Fed, while noting that the company has tried to be conservative with its projections. Executives seem at pains to say that the company’s forecast takes into account continuing deterioration in the housing market.

In essence, Countrywide is stating that they fully expect more rate cuts from the FED. Countrywide knows full well that housing will continue to deteriorate and so they make their demands clear up front.

The second front of the Countrywide blitzkrieg involves extending their tentacles into as many banks and credit lines as possible. You may recall the Bank of America deal a while back which gave CFC a cash infusion with a convertible set at $18. The stock, even up 30% plus today is still under that price. Countrywide assures the street today that they have about 34 Billion in "reliable" liquidity. The message is clear enough, Countrywide has tons of cash from many banks and you do not want to see those sums of cash written down across the financial industry do you? As Mish wrote, Countrywide is playing the MAD card well.

The final line of attack is the silly forecast of profitability next quarter, and a call for a profitable year in 2008 as a whole. Anyone with even a casual understanding of the housing bust knows that is a pipe dream. Why would CFC say it then? Escalation gives us the answer. Countrywide is moving tons of their crap paper into their own bank. Perhaps they intend to join the Superfund as well through that entity. Countrywide is going to try and hide all ther losses through off balance sheet shenanigans just like the big boys. The forecast for a profit has two threats implicit:

• We will be able to make this move without any hindrance
• If CFC is not profitable, the stock will tank and necessitate more FED rate cuts and possibly a monster bailout that will be intricate due to the tangle of credit lines they have secured

Countrywide has now made it clear what they expect from the FED and the banks. They will not, as Dylan Thomas wrote, "go gentle into that good night." It is brinkmanship at its finest. Unfortunately this game is probably going to get worse going forward. Again, from Wikipedia: "In order for brinkmanship to be effective, the threats used are continuously escalated. However, a threat is not worth anything unless it is credible; at some point, the aggressive party may have to back up its claim to prove its commitment to action. The further one goes, the greater the chance of things sliding out of control. The chance that things may go out of control is a key element in providing credibility to this threat."

Its like a game of steroid-rage induced chicken armed with thermonuclear economic bombs. It sure will be interesting.

Enough thinking, its Friday!

Football preview time is at hand. Another 2 great calls from last week for the Patriots and Colts game. Maybe I should move to Vegas? This week the Patriots take on the Washington Redskins. The Skins have a really good defense, and Clinton Portis is the real deal. This game will be a hard fought one, and much closer than people think. The Patriots have a bit too much though, an they win 34-17 in a game that is allot closer than the final score would indicate. Never count out Joe Gibbs.

Friday Rock Blogging to get you all fired up:

"Hanger 18" from Megadeth. Great guitar work is always a good thing: http://www.youtube.com/watch?v=rtsD2tBPZgo

"Cherry Bomb" from Joan Jett. That lady just rocks! Song starts at the 25 second mark. Did you know Joan Jett was in a "Highlander the Series" episode? http://www.youtube.com/watch?v=uW_HCdU-qEY

With the MAD and economic combat theme, "Aces High" from Iron Maiden: http://www.youtube.com/watch?v=4Sam5omG0v0

Have a good night.

For a Consumer Led Recession the Consumer has to Know They Have to Stop Spending

Home a little late, so this may be a bit shorter post than usual.

Thanks to the 76 people that voted in my previous poll. It seems the consensus out there is that in the face of a truly massive housing collapse the reason that we are not seeing the major economic indicators go down is due to the data itself being corrupt (51%). Hard to argue with that, as the New home Sales number was so manipulated, false, and compared month over month incorrectly, that it may not be a stretch to say that all official statistics may be subject to some massaging. I don't have anything to add on the silly New Home Sales number that was allegedly "up" month over month. It absolutely was not, and that will be clear next month. The Big Picture has about the best post on this news I have seen, so go check it out: http://bigpicture.typepad.com/comments/2007/10/no-new-homes-sa.html

The Consumer May Not Know They Have to Stop Spending
I have spent some time, and tons of ink (old school term) has been spent all over trying to figure out how the US consumer just keeps on trucking in the face of horrible macro economic news. The housing bust is one component. Higher Oil prices and gas prices are another hit. Rapidly escalating food prices, health care costs, etc are all historically a bad omen for consumer spending. The unemployment numbers are so fraudulent, that is no longer a good data point as unemployment may be closer to 8% than the 4-5% reported. None of these factors has been able to cause much of a dent in consumer spending as of yet. It may in the future, or perhaps things will just chug along as is.

I heard a thing on the radio today during another protracted drive home from work that got me thinking. The talk radio host said that when he was younger the sign of the "middle class" was that those folks did not live paycheck to paycheck. Contrast that with the "middle class" of today and you see a big difference he said. I am only 32 and I came from what could only be called a "poor" family so I am not so sure about what was the case in the recent past. I can say that now most people I know are indeed in a paycheck to paycheck situation. The old standard of 6 months of living expenses saved up is probably nonexistent for 80% of the population today. My special thanks to the biotech bubble of 2000, that's not the case for me.

I had equated the US consumer to a old tech /Internet stock from the Nasdaq boom of the late 1990's to the 2000 bust in a post here: http://economicdisconnect.blogspot.com/2007/09/knowing-price-of-everything-and-value.html
I stated that the US consumer is "priced to perfection" in the sense that basically all of their income is spent paying into the monthly payment game for a house, car, child care, insurance, etc. Sadly, this mentality is a way of life. The savings rate has been negative for quite some time now, and nothing points to a turnaround. The accumulation of debt is another new staple of the middle class.

And with that point in mind the reason a recession in consumer spending is slow to come about, or may not happen at all, is because the consumer has no idea that they need to save money. I know, it sounds stupid and simple. A person that lives paycheck to paycheck does not have the ability to slow spending. They cannot look ahead and see that a job loss, health issue, or a divorce may cause an income disruption. Even if they are aware they need to save, the monthly payment syndrome stops them from being able to change their spending habits. In this way, consumer spending has been surprisingly "resilient" in the face of the 9/11 terror attacks, a home price bust, record foreclosures, rising unemployment, and skyrocketing prices in things they need. Debt is no longer a dirty word, and in fact is looked at as a way to extend finance long term, not just short term. I believe the consumer is not saving money and thus causing a consumer led recession because they are not aware that they need to save money.

Obviously at some point the consumer is going to be overextended and break. Where might that point be? Bankruptcies are rising at a rapid pace, but that helps consumers get a new start on another paycheck to paycheck life, this time with fresh credit. It is hard for me to see a way that the consumer will pull back on spending unless absolutely forced to do so.

If credit becomes harder to come by, then yes a spending collapse could occur. While mortgage credit is indeed tougher to come by all of a sudden, all other debt instruments are fully at the consumer disposal. News reports of 401k raiding at an all time high is another well for the consumer to tap into.

In summary, the housing bust is real, it is here, and it is not going anywhere. A consumer spending collapse and thus a real recession is not in the works as of yet. Looking forward, massive ongoing losses at the banks have a chance to cause a credit crunch. The crunch needed to stop the consumer would have to be very severe. In a credit crunch scenario in business, money is made available by the FED to be loaned out, but companies do not want to take on loans because conditions are unfavorable for future prospects. The US consumer has no such qualms, and as long as the debt is available, they will take it on.

Please take a moment to vote in the new poll, it will help me understand how much this blog is read and whether it is useful.

Have a good night.

The Banks are Losing Puppies!

A pretty wild Wednesday! The markets were looking at serious trouble for a while, but then the FED discount window rate cut rumor was spread (by Lawrence Yung, head of the NAR no doubt) and stocks picked up what they had lost. Seems my prediction for Monday was not wrong as much as it was early.

Here at Economic Disconnect I love headlines, and there were plenty today. Lets start with homebuilder Centex, from Marketwatch:

Centex swings to fiscal second-quarter loss of $5.26 a share
By Wallace Witkowski
Last Update: 4:54 PM ET Oct 23, 2007

SAN FRANCISCO (MarketWatch) -- Home builder Centex Corp. (CTX:
Centex Corporation said late Tuesday it swung to a fiscal second-quarter loss of $643.8 million, or $5.26 a share, from a profit of $137 million, or $1.11 a share, in the year-ago period. Revenue fell to $2.22 billion from $2.82 billion a year ago. Analysts surveyed by Thomson Financial estimated a quarterly loss of $3.26 a share on revenue of $2.08 billion.

"Swung" is in interesting word, as it usually implies a regular speed movement, but this was more like a whipper snapper! Perhaps they could rename the company "Semtex" after a major blow up like that. (Semtex is a plastic explosive.)

I like to check out the message boards on Yahoo Finance, not for ideas or tips, but for the shear comedic value. One post on the CTX board stands out, from the screen name datbehardwork:

TOL &CTX team up to rebuild Malibu!

TOL to build the main residence of McMansions that were burnt, while CTX gets the contract to rebuild the dog houses out back. CTX reports they will include these #'s in new sales for 1st. quarter.

That's some funny stuff! In the face of the losses, Centex also announced they will cut prices 15-20% on new homes. I bet that feels just super nice if you bought one at full price in the last year!

The Banks are Losing Puppies

The big daddy for news today was the Merrill Lynch MOAB (Mother Of All Bombs) which came in at a 8 BILLION DOLLAR loss. The write downs are from the mortgage paper losses they have sustained. Commentary across the news sources had such uplifting language as "stunning", "startling", and "ballooning losses". Not everyone thought it was a bad thing, as the White House Economist was all happy about it:

Merrill Lynch write-down 'positive:' White House economist
By Greg Robb
Last Update: 12:30 PM ET Oct 24, 2007

full article:http://www.marketwatch.com/News/Story/Story.aspx?guid=%7b53B61B74-AE4C-4B11-BC3C-2454638B2478%7d&siteid=yhoo&dist=yhoo

An 8 Billion Dollar loss is tough to wrap your mind around. Typed out it looks like this:

8,000,000,000

I know, still not making a dent. Try these for one Billion:

• A Billion seconds is 31 years


• A Billion centimeters is about the distance from Chicago, IL to Tokyo, Japan

Still does not really make an impression. In an effort to make the 8 Billion Dollars tangible and real, lets try to equate that sum with something one can wrap their hands around. I am going to try puppies. Lets assume that the average price for a pure breed dog is $1000. I know it varies wildly, but for this case we will use that number. Assume that our society uses puppies as currency. The Merrill Lynch loss reported today would equal 8 million (8,000,000) puppies lynched by Merrill Lynch! That's 8 million golden retrievers, poodles, newfoundlands, or pugs (full disclosure, my wife and I own a pug).

I can see it now on CNBC:

CNBC hard-hitting reporter: "We have the Merrill Lynch CEO here on set to discuss his company's quarterly loss of 8 million puppies. Mr. CEO what would you like to say to start us off?"

Merrill CEO: "Well, first off I want everyone to know that we never saw any of this coming. Nobody did. Second off, in light of the pets lost, we are dropping the name "Lynch" from our title due to the obvious discomfort it can cause some people."

CNBC hard-hitting reporter: "Mr. CEO, do you think the loss of all these living, breathing, loving animals could have been avoided had you used time tested mortgage lending practices, and not the new cutting edge products that led to all the foreclosures and loan losses?"

Merrill CEO: "You see, we had all this liquidity staring us in the face, so we had to put it to use. If those loans were not made, home prices would not have gone parabolic, and CNBC may not have had much to talk about after the Dot.com blowup. Besides, I'm a cat person myself."

CNBC hard-hitting reporter: "You make some excellent points. I like cats better too."

The above is supposed to be funny, but I think it is precisely because the shear size of the numbers of dollars that are being lost by the major lenders and banks that the average person on the street does not make any noise. In a Fiat based currency, the numbers continue to swell until they do not matter anymore. If 8 million dogs were killed by some kind of strange virus over the next 3 months, do you think it would be major news? Do you think people would be upset? If money had any real attachment to people, like 8 million dogs would, perhaps all these bank losses and mortgage defaults would cause some kind of stir. I imagine Michael Vick would not care, but that's just one guy. What if 8 million faces like this one was lost (taken from the Wikipedia "Pug" entry):

The losses are going to continue piling up. The housing market is no where near a bottom, as the Existing home sales number shows another "historic, never before, first time ever"magnitude drop. At what point will the losses make any difference? 80 Billion? 100? 200? or is that just the proverbial "drop in the bucket" for the US economy? I will be working on another poll question along this line.

The purpose of Economic Disconnect is to try and spread some understanding about what is happening right now to our economy. If you are reading this and taking anything away from it, good. If you think this blog stinks, that's fine too. Either way, please drop a comment on what you have read here so I can improve future posts. Topic suggestions are always welcome as well. Feedback is always a good thing.

Have a good night.

The Sands of Time are Running Low

"Im waiting in my cold cell when, the bell begins to chime. Reflecting on my past life, and it doesnt have much time. Cos at 5 oclock, they take me to the gallows pole. The sands of time, for me, are running low." -from "Hallowed be thy Name" by Iron Maiden

On a day when tech earnings were able to give a lift to the overall market, the really interesting headline of course comes from our favorite mortgage company Countrywide (countryfried?) Financial (from Yahoo finance):

Countrywide to Modify $16B in LoansTuesday October 23, 11:24 am ET By Alex Veiga, AP Business Writer
Countrywide Launches Program to Refinance or Modify Mortgages
Key quote : "Unprecedented times call for unprecedented remedies," Countrywide President and Chief Operating Officer David Sambol said in a statement."

The loan redo dance was done before by Countrywide, and will probably be tried several times in the future. What would you do if you had over 13,000 (yes 13,000) homes that you owned and are looking at that number skyrocketing in the future? There is a blog dedicated to this process: http://countrywide-foreclosures.blogspot.com/2007/10/13061-homes-offered-for-sale-on.htmlclosures.blogspot.com/2007/10/13061-homes-offered-for-sale-on.html/2007/10/13061-homes-offered-for-sale-on.html

Loan reworking can involve many different things. Some loans can be FHA or Fannie Mae transferable at a certain rate (no bailout here! Move along). Another option is extending the payment timetable up to 40-50 years. Here's some free financial advice for anyone that wants it, if it is going to take you over 60% of your life on earth to pay something off, you cannot afford it. Your welcome.

Never mind the feasibility of these loan reworks, the main point is that Countrywide is stalling for time. In the same way, the SIV Superfund is also trying to buy time. I have renamed the fund and think it should be called the Price Discovery Delay Doomsday Device. It does not roll off the tongue, but its a far more descriptive name.

The problem with CFC and the banks in the Superfund is that they are working under a theorem which estimates a turnaround in the housing market in a relatively short time frame. How short? Good question. I would guess at somewhere between 6 months and a year and a half is what they need to have happen. That is not really a possibility however. In last nights post I linked to a mortgage reset chart which shows things are going to get worse over the next year. I also think the mortgage and home builder sectors have underestimated how much home sales have been front loaded over the last few years. Basically all home demand for the next 10 years was spent in the last 3 years. Add to that the enormous amount of pure speculators in the market, and demand will be suppressed for some time. Psychology is a hard thing to change, and after a sea change in psychology as it pertains to home buying, things are going to be weak for a while.

To illustrate this point, the website Alexa.com (http://www.alexa.com/) is a free tool on which you can track web traffic. If a big turnaround is coming for housing, it stands to reason that people may be actively searching real estate sites to look at homes. Well, lets take a look:

realtor.com 2002-present



WOWZA! That's one ugly, hit with a bag of nickels ugly, chart.

Most people like Zillow nowadays you say? Lets take a look:

zillow.com 2005-Present


They don't like it that much!

On a Macro front, if you imagine that Internet shopping at Walmart is any proxy for the consumer, take a look at this chart:

walmart.com 2005-Present



The spikes around the Christmas season are cool. If you notice as we have gone through 2007 the traffic is slowing down quite a bit. Maybe nobody uses a computer anymore, maybe not.

In summary, both CFC and the Superfund are trying to buy time. The time they think is needed to be bought is a pure Economic Disconnect from what is going on and will happen to the housing market. Keep this in mind as we go forward into the 4th quarter and the banks come out with another round of "visits to the confessional" as its called on Calculated Risk. Recurring losses on mortgages related assets will continue, and the resultant pressure on banks and lenders will become extreme.

Have a good night.

Muted Monday and Chasing the Elusive Bottom

I had posted last night that I thought today would be a rip roarer for the markets. I was counting on a snap back rally today led by the usual garbage like renewed calls for rate cuts by the FED. As in sports, that's why they play the games, and today was especially muted. Oh well, I guess I should stick to football score predictions!

Muted Monday
Reading through the financial headlines and watching some of the talking heads on the business shows had an entirely new feel today. Compare the following points with what was happening when the market tanked in August:

• I did not find many headlines which linked a market drop to a FED rate cut. I think the recent focus on the high price of Oil, in US Dollars, has finally woken people up to the dollar collapse may not be a wonderful thing for the US economy and consumer going forward. If the mainstream media ever links rate cuts with a falling dollar I can save the shipping costs of a flashlight and detailed GPS map to the "get a clue" box I have buried in the backyard.
• There is broad discussion that Merrill Lynch will disclose huge losses for the 3rd quarter, and get this, there will be more in the 4th quarter! Who would have guessed? The August-September superficial wound may instead be a deep puncture wound that is going to bleed red for a while. (Note to Merrill, be careful if you go to the hospital, the drug resistant staph infections are running wild this year!) A commentator on CNBC asked a talking head why Merrill did not just write down all the losses in the 3rd quarter, and the guy actually told the truth. He explained that Merrill only could write down little pieces at a time, because they do not want to liquidate their holdings at pennies on the dollar. Those losses, he remarked, are almost beyond estimation. I think Merrill is holding out for the SIV Superfund as well. This is a key moment, the loan losses are going to continue and that has begun to filter down to the mainstream discussion.
• The Superfund is getting way more attention than anyone involved would ever have wanted. There simply is no way to repackage, rename, or represent the fund as anything but a time bomb and a market rigging of price discovery for mortgage related assets held by the banks. Bill Gross even said it was "lame". It has been a while since a market rigging bailout wasn't embraced like a pretty blonde after last call.
• Countrywide closed at $15.68 today, well below the $18 dollar convertible price that Bank of America had struck way back in August. The message boards of CFC and BAC are ablaze with speculation on what this could mean.
• Jim Cramer did not have a melt down on TV. Where's the fun in that?

Quite a difference from August. Now one day does not a trend make, but those are some real changes in sentiment. The existing and new home sales numbers come out on Wednesday and Thursday, and those are going to help with reality osmosis as well.

In Search of The Elusive Bottom

A while back I remember Bob Toll of Toll Brothers saying on a conference call that housing was "dancing on a bottom". The bottom has been predicted by the NAR, homebuilders, and mainstream media every month for the last 12 months. In fact the housing bottom is like one of those exotic animals that are rumored to inhabit some jungle somewhere. They are stalked and tracked for years, but have yet to be captured on film. The bottom for housing is also elusive and secretive it seems. What was supposed to be a late 2007 turnaround was pushed back to a 2008 recovery. Now there is acceptance that the housing downturn could go on well into 2009. That also seems hopelessly optimistic, and I will bet Bigfoot is found before housing posts a gain in 2009. I said Bigfoot, not the Loch Ness Monster because the Loch Ness Monster is actually real. (kidding)

Two things to keep in mind when thinking about a bottom is housing. Calculated Risk has a great mortgage reset chart up today, check it out: http://calculatedrisk.blogspot.com/2007/10/imf-mortgage-reset-chart.html

No way are things getting any better in the foreclosure arena anytime soon.

From the NY Times and Calculated Risk covers it today: http://www.nytimes.com/2007/10/22/us/22auction.html?_r=3&ref=business&oref=slogin&oref=slogin&oref=slogin

Key quotes:

"The market’s really low right now, so you can get a good price,” said Lori Crook, a food server at Keys Cafe who said she was looking for a place she could fix up and sell. “Even if you can’t sell it right away, if you just sit on it and sit on it, it will go up.”

“I just looked at the picture and thought if we got it cheap enough, we could rent it for a year, then sell it when the market goes back up,” said Mr. Kihle, a building contractor."

“It won’t always be low,” said Pearl Dobbins, who said she was willing to spend up to $50,000. “This is our chance to buy a home and start our financial future.”

I have gone on in detail how a house is a forced savings plan for people without the means or ability to manage their finances. As longs as there is this kind of get rich fast, and a home equals financial freedom mindset we are absolutely nowhere near any bottom. I think I want to leave my molecular biology job and become a foodserver instead. It seems that's where the real cash is being made.

Have a good night.

Odds and Ends and a Note of Thanks

"That's no Moon, it's a Space Station!", Obi-Wan Kenobi upon seeing the Death Star

A few odds and ends while I think about tonight's blog entry. First off, last week a new Star Wars novel was released. It is called "Death Star" and is written by Michael Reaves and Steve Perry (not the one from the band Journey). I got it this weekend, and I am about 1/2 way through and the book is much better than I would have thought. Lots of great backstory on Grand Moff Tarkin and Darth Vader. The story is told from a mainly Imperial standpoint, and it also has great narration of the logistical nightmare the construction of the station was. A good read. The above picture is a photo of Mimas, one of the many moons of Saturn. It is almost a dead ringer for the Death Star, but it is actually a moon. And no, there were no close up photos of the moon before the Star Wars movie was made!

I would like to pass a note of thanks to Michael "Mish" Shedlock who runs the great blog Mish's Global Economic Trend Analysis. He is also a writer for the Minyanville site. In a post today, Mish references my post from Saturday:

http://globaleconomicanalysis.blogspot.com/2007/10/economic-chicken-vs-mutually-assured.html

To be mentioned by one of the "Blogfathers" (Mish's site, Calculated Risk, Minyanville) is a wonderful honor. I have read Mish's site for a very long time, and it has helped me tremendously in understanding economic issues. I hope this blog can help to add to the debate so as to give something back. Read Mish's post above, and he carries my point a bit further. I think he is spot on as usual. He also ends with a killer "Wargames" film reference.

Until I post tonight's missive, in thanks to the mention from Mish, I will close with a "Wargames" quote:

"Mr. Potato head, Mr. Potato head, back doors are not secrets!"

"Yeah but Jim your giving away all our best tricks!"

And yes, I just pulled that from memory, very sad.

The Thin Ice of Psychology

I just want to start off by reiterating my belief that this years New England Patriots are the scariest football team I have ever seen in 17 years of watching the NFL. On Friday I predicted a score of 34-13 (a 21 point gap) and the final today was 49-28 (a 21 point gap!). Offensively they cannot be reasonably contained, and while their defense has seemed a little less than impressive, you also tend to play a little softer when you are up over 21 points to move the clock. The Patriots have not played their best football as of yet, but November 4th versus the Indianapolis Colts is the game of the year. Home field advantage for the playoffs will likely hinge on that game. Also, a humiliating loss in last years AFC title game where the Patriots handed the game to the Colts will be motivation enough to play a strong game. I will of course have TONS more to say on that game closer to the match up. Sorry for the non financial commentary, but you have to be well rounded you know?

As I had posted last night, I fully expect the market to be in full bull mode on Monday and Tuesday, with the losses on Friday being fully erased on tech earnings and FED rate cut hopes. The problem will occur Wednesday when the Existing Home sales number comes out, and It will not fail to disappoint even low end estimates. New Home sales on Thursday also will be about as bad as possible. Those two numbers are going to have a significant impact on the market I think. For a while now, we have been assured that "the worst is over", and the wonderful "the market has all the bad news priced in". Throw in to that mix the mantra "the numbers can't get much lower" and the numbers on Wednesday and Thursday are going to whack that sentiment like those little moles that stick their heads up in that whack-a-mole game.

The psychology of the market right now in on nanometer thin ice. Oil over $90 dollars a barrel has caused a stir, and a nifty side effect has been a new realization of the dollar's weakness as a net Negative for the economy. I posted last night that PIMCO was supposedly joining the SIV Superfund, but today it seems they are going out of their way to say they are not joining. This directly contradicts what our pal Hanky Panky Paulson told the Italian banks at a G7 conference. That is a major development. When you want a bunch of people to come to your party, you tell anyone who will listen that all the major players are gonna be there. Seems like Hank over promised on PIMCO, and his credibility is now probably a question mark.

Slowly the bullish case has been eroding. Its a long slow process, and I think the current Economic Disconnect has some room to run. As seen on Friday, when market belief is shaken, moves down can be brutally fast. The volume on up days has been weak, and the volume on down days has been severe. That also says alot. Even the talking heads on the FOX business block today seemed tired and scared. They have toned down the raging bull arguments quite a bit.

In summary, I think we are very close to a major inflection point. The housing numbers this week are going to really put some pressure on the home price turnaround story. Who know which bank (banks?) are going to pop up and declare losses. Oil rising into triple digits is going to be a major issue. The attention being payed to the SIV Superfund is not helpful to any bull argument. All that said, I still think this week is an up week. But time is running out. The year end turnaround promised by the NAR, the homebuilders, the banks, the FED, etc is not coming. It is almost November, and even dumb people know nothing is going to get fixed in the one month of December.

As always, it sure is going to be interesting!

Have a good night.

Superfund Strong Arm and a Game of Chicken

As the terribly entertaining drama of the banks exposure to mortgage related losses unfolds, a clearer picture is beginning to emerge on how the big banks intend to get through the crisis. The plan appears to make moves on two fronts.
Strong Arming
Friday afternoons are really the place to be as far as news in the future, as most announcements are timed for the late afternoon before a weekend in an effort to not draw attention. This past Friday we see this:
SIV fund support grows with PIMCO, Fidelity: Draghi
By Francesca Landini
WASHINGTON (Reuters) - Support for a so-called super SIV fund designed to ease the stress of the subprime meltdown appeared to grow on Friday as a top global finance official said two giant investment funds had thrown their weight behind the endeavor.
Fund giants PIMCO and Fidelity have joined the so-called super SIV fund set up by three big U.S. banks, boosting confidence in the plan, Bank of Italy Governor Mario Draghi said at the close of a meeting of finance officials from the Group of Seven rich industrialized nations.
Draghi said U.S. Treasury Secretary Henry Paulson had discussed the fund with officials attending the meeting of central bankers and finance ministers from the United States, Canada, Italy, France, Germany, Britain and Japan.
"Paulson has done a short briefing on the SIV fund," Draghi told journalists. "PIMCO and Fidelity have joined."
Full article: http://www.reuters.com/article/marketsNews/idUKWBT00779520071020?rpc=44

So what we see here is the Superfund for SIV's is making sure to collect as many big name players as possible. One may conclude the fund is trying to make itself seem credible by including solid names across many nations. I think their intent is a bit different. The plan is to make it impossible for any sale of assets related to the SIV's to happen without approval of the cluster of banks in the Superfund. In this way, price discovery of the assets can be forestalled indefinitely, the exact stated purpose of the fund. By making agreements with all the major players, the Superfund intends to strong arm (not those ARMS!) any entity from unloading the crap paper they hold. This is a key point. I was thinking that a way for a competing bank to crush the competition would require that the bank not hold any of the assets in question. That bank could then buy a reasonable amount, and sell it on the open market,probably at a significant discount to what the assigned price is. Then that bank could short the big holders of the paper as the new price is now known by the sale, and they make a huge killing. A complete lock-up of those assets will keep that from happening. It is a form of price control, and it is a great move by the banks.

A Game of Chicken
The well known game of chicken is defined on Wikipedia as:
The game of Chicken, also known as the Hawk-Dove game, is an influential model of conflict for two players in game theory. The principle of the game is that while each player prefers not to yield to the other, the outcome where neither player yields is the worst possible one for both players. The name "Chicken" has its origins in a game in which two drivers drive towards each other on a collision course: one must swerve, or both may die in the crash, but if one driver swerves but the other does not, s/he will be called a "chicken"; this terminology is most prevalent in the political science and economics.

Right now we are looking at a systemic banking crisis. The FED had to cut rates in a hurry, the discount window was open for business, Hank Paulson is running around on TV, in interviews, at any conference anywhere pushing the SIV Superfund. All these things are very rare and disquieting. The banks second front in their "War on Insolvency" is a game of chicken played against the FED, the US government, and the US taxpayer.
First I want to present an analogy that I think captures exactly what is going on. Imagine a criminal has committed terrible crimes in the process of being a drug dealer. The Police and FBI have him nailed to the wall on several murder charges. The criminal's lawyer, in a closed door hearing, presents evidence that the firearm or firearms used in the crimes were guns that were seized by the police and/or FBI in other raids elsewhere. The guns were supposed to be melted down and destroyed. The serial numbers of the firearms used by the criminal match those of guns supposedly destroyed. For the case to move on, the police/FBI have to admit the guns were sold from their possession for profit. This would cause serious repercussions indeed. Instead, the police/FBI accept the defense that the guns technically do not exist, and the criminal goes free.

Now before you try to assign who in the current mess is the FBI or the criminal, that is not the point of the analogy. The point is the disclosure of the gun sales would seriously hurt the perception that the authorities are to be trusted. This could cause problems in the public belief system. That is the take home point.

The banks want, and in effect are demanding a bailout in the form of:

• Interest rate cuts, probably down to the 2-3% area in the next 6 months
• A free hand to make the SIV Superfund as closed to the free market as possible
• Solvency guaranteed for Countrywide, Fannie Mae, etc
• Cash infusions form the central banks worldwide

If they do not have these things, a blow up or meltdown of a major bank may cause a serious change in the public belief system as it relates to the banking system. Most people are unaware of the nuances of a Fiat currency, and most people (luckily!) have no idea about fractional reserve banking. If major banks have major issues, most people will be absolutely shocked to find their money is as good as gone. That is the threat the banks are using right now. Perception is reality, and the banks are banking that a bailout will be coming and kept quiet or else the curtain will be pulled back, and the wizard is exposed.

Mish at his site has an excellent post as it relates to how your money is not actually at the bank at all (Warning: do not read if you are easily unsettled): http://globaleconomicanalysis.blogspot.com/2007/10/money-supply-question-about-credit.html

Going forward, the tricky balance is going to be for the prices of real estate to correctly crash downwards, but the banks somehow able to withstand the beating. It is certainly going to be interesting to see it all play out. Remember, an animal hurt and cornered is very dangerous, and I do not think the banks like looking like total fools right now. They have several cards yet to play, and the game of chicken is on.

On a lighter note, check out this tune from a great film, "Streets of Fire". Diane Lane is a great actress:

http://www.youtube.com/watch?v=yMW1loCBKcs

Have a good night.

Light Shines Through Micro Cracks on Marblehead

Its Friday at last.
In my line of work I manipulate DNA. 90% of the time it behaves as expected and there are no problems with the cutting and pasting that I do to it. 10% of the time though, the cells I use to propagate the DNA or the DNA itself decides it want to branch out and do weird things. That 10% of the time takes up most of my time trying to fix it. I am sure it is the same scenario across all job fields, so do not think you are alone when things go a little crazy!

First off, I would like to thank the people that have left comments here. I appreciate that you take the time to check out my posts. Reader Anonymous G wanted a post that detailed the price of Gold during the Great Depression. I looked it up, and its a pretty boring story:
http://en.wikipedia.org/wiki/Image:Au_annual_average_USD_price_1793-2005.png
You can see Gold was not very exciting until the US left the Gold standard behind. Great summation on Gold's role in the great depression form the WIKI entry:
"One reason why the Federal Reserve did not act to limit the decline of the money supply was regulation. At that time the amount of credit that the Federal Reserve could issue was limited due to laws which required partial gold backing of that credit. By the late 1920's the Federal Reserve had almost hit the limit of allowable credit that could be backed by the gold in its possession. This credit was in the form of Federal Reserve demand notes. Since a "promise of gold" is not as good as "gold in the hand", during the bank panics a portion of those demand notes were redeemed for Federal Reserve gold. Since the Federal Reserve had hit its limit on allowable credit, any reduction in gold in its vaults had to be accompanied by a greater reduction in credit. Several years into the Great Depression the private ownership of gold was declared illegal and reduced the pressure on Federal Reserve gold."
No wonder the Great Depression happened, the bankers could not create money from thin air! Where would we be without our Fiat currency indeed.

My major theme for this blog is the Economic Disconnect between where we are economically and where we are told we are by the usual suspects. Today's ripper of a down draft was the second time in the last 3 months that a little reality was pushed onto the markets, and lo and behold, they didn't like it! Shocking really. Here is the basic headline found everywhere, this one from Yahoo Finance:

Stocks Sink on Black Monday AnniversaryFriday October 19, 6:14 pm ET By Tim Paradis, AP Business Writer
Stocks Plummet Amid Lackluster Profit Reports, Credit Concerns on Black Monday Anniversary

Lackluster profits and credit concerns are nothing new, as you know already. Apparently the market did not know that fact. I wrote a while back how the market was acting as though the 3 weeks in late August through early September were the only loan losses, mortgage defaults, write downs, and profit shortfalls that were going to occur. This is the second wake up call for the market now. Unfortunately, like a person on a Monday morning, the market will hit "snooze" at least one more time before a trend down is really started.

Its prediction time!
Now understand, I am no economist, stock broker, fed head, or any other kind of financial expert. What I am about to write is my own ideas, NOT INVESTMENT ADVICE.

Over this weekend all the talk will be about how terrible the credit market is and how much trouble banks are in. FED rate cut talk will dominate all discussions, totally ignoring that the ones we already had have not made the slightest bit of difference. With a bunch of cheery earnings outlooks for some Tech companies next week I fully expect the market to give up most of the losses from today. Add to that the wonderful work of the Plunge Protection Team buying futures strong before Monday's open. By example, the DOW was down 366 points, on Monday it will be up over 250 points. The markets will finish next week higher than they started this week.

That said, we are at a point where the Economic Disconnect is starting to filter through to the average person. Light (eventually) shines on Marblehead if you will. Oil over $90 a barrel is not funny anymore with the winter heating months coming up. Even the mainstream media sources were covering the Oil price as a function of the DOLLAR COLLAPSE! You know its serious when the MSM even comments on the currency. I think going forward, there will be a third wake up call in the next 3 months. That call is going to be hard to ignore, as I imagine it will be a MAJOR bank having serious issues with solvency. As home prices collapse into the years' end, eventually the reality of the enormity of the issues faced will settle in. Then the correction down will begin in earnest. One thing to keep in mind is that when things change, they will change fast. Market moves can be brutally quick, so its better to be positioned beforehand. I am struggling right now with the decision to unload all my gold and silver mining stocks into the rally next week. If a major bank has a blowup, all banks will have to raise cash and they will sell what they CAN, not what they WANT to make money available. Gold is highly liquid, and I expect any major market fall to take gold down along with it, even though fundamentally gold is strong. Its not fair or fun, but thems the brakes. Of course, I could be totally wrong here on all counts, but I am giving you my 2 cents up front, not after everything happens so I look really smart.

I spent a while checking out the Must Read blogs listed on the left, there was just so much news to take in it was overwhelming. Even reports of a secret meeting by Merrill Lynch (lynched?) was hinted at. Should be interesting this weekend.

OK, enough thinking! It's Friday night and its football preview time. The Patriots play the Dolphins on Sunday and it will not be a great game. Patriots win 34-13 in a practice game really. Game of the weekend is Monday night, Jaguars vs. Colts. If the Jaguars can try and not play a soft zone defense, and they can score over 24 points, they will win the game. If not, Colts win. My final, Colts 31 Jags 21. Just not enough firepower to score points, thought the Jags will run the ball all over the Colts.

Fun stuff:
Final fight scene from "Conan the Barbarian", stunning music and the final sword fight is brutally real:
http://www.youtube.com/watch?v=JE9_oEfkV_E

Rock Blogging:
Mighty Bosstones do "Detroit Rock City" and for once a remake far surpasses the original:
http://www.youtube.com/watch?v=HizBbvDICzI

Van Halen "Atomic Punk" I am always amazed most people never heard this song, easily Halen's most nasty good song:
http://www.youtube.com/watch?v=1XrdzdsRcE0

Keep the comments coming and have a great weekend.

Thursday Disconnect

Thursdays are always late work days for me, so no real post tonight. I know, its hard to go even 1 night without a fresh post, but I will try to make tomorrow's extremely fun. Plenty of rock links, football previews, and some financial commentary.

Have a good night.

Houston, Why Don't We Have a Problem?

Over the last few months anyone reading the published numbers on Housing has been treated to a collapse of mythic proportion. Sales of existing and new homes are down month over month as well as year over year. At the end of this year we will see the first National decline in home prices since the Great Depression. The Mortgage Lender Implode-o-Meter (http://ml-implode.com/) currently stands at 167. Mortgage lenders and banks have announced monster losses. Homebuilders are going down the drain. Realtors across the US are having to make due with 15-50% of their previous years incomes. The MEW (mortgage equity withdrawal) home ATM is now finished. State collections of fees and commissions on home transactions are crashing. Oil at $88 dollars a barrel. The list goes on and on.
Given the conditions listed above, here is where we stand on a Macro level:

• Unemployment at all time lows
• GDP cruising right along in a 2-4% range
• Consumer spending INCREASING
• Stock Markets up substantially on the year (DOW all time record)
• General public psychology is not one of fear or distress

Now I know we can basically tear apart a few of the above points. Take the jobs number. We know that crazy numbers of jobs are added by the secret "Birth/Death" model. We also know it is hard to capture the numbers of illegal immigrants working in the construction field (no immigration debates, please!). We also know that the major driver of jobs the past year was the wonderful "government jobs" as well as dining and leisure fields.

The point is not to nitpick the data, but to try and understand why there seems to be no apparent fallout from the housing implosion. As a scientist, I try to be analytical. My theoretical construct in this case is that The housing bust should show some degradation of economic indicators.

With that as my construct, I must then take the bullet point data listed above and try and explain why the observed results are not what my expected results are. I will list them below, and they will also be on a new poll on this site. (Note: Blogger reset my previous poll, so I will start the new one today)

Possible reasons for theoretical construct to not be proven experimentally:

• It will take time for the damage to filter down to the economic numbers
• The housing components of GDP, employment, consumer spending, and psychology are over estimated by the construct
• The data itself is compromised in some way

That's it. It is one of the three possibilities above. As far as taking more time to filter down into the numbers, I think that may be possible, but we would have seen at least some degradation by now. Perhaps going forward we will see more.

Overestimation of the effects of Housing certainly at this point seems the most likely explanation. While Housing may be overestimated per economic numbers, the frantic moves by the FED, and the banking industry imply they are not underestimated in the financial system. Is is possible that besides a bunch of people who lost their homes, are underwater on a mortgage, and people struggling to pay their mortgages, the only entities that will lose are banks and the taxpayer (in a bailout)?

Manipulated data is a tough one. I do not think that the published numbers are bunk so to speak. I do feel that the numbers are massaged a bit however. Again, if the Housing bust is as bad as per my construct, the data could not hide that fact without outright fabrication.

This has been an interesting exercise for me, and I encourage you to try it yourself. Perhaps we could arouse some interest from the Supreme bloggers like Calculated Risk (http://calculatedrisk.blogspot.com/) and Mish(http://globaleconomicanalysis.blogspot.com/) and they will tackle it more head on with cool graphs and the like.

Even though scientifically the information I have tells me that my construct is either wrong or severely flawed, I cannot help but think that it is right. The problem with economic issues is everything takes SO LONG to settle out, any one point in time may not be a representative sample.

Vote in the poll and leave some comments, maybe we can settle on a new construct.

Have a good night.

Terrifying Tuesday

I must admit, I thought this week was going to be a snoozer, but it has been fireworks since Monday morning! There was quite a bit of cross-currents today, with lots of headlines and news that has direct bearing on the Economic Disconnect. I have two thoughts that I would like to put out, and I am asking for feedback because both lines of thinking are terrifying to me.

Price Fixing- Going to be attempted for Housing prices?
Treasury Secretary Henry Paulson's speech at the Georgetown University's law school was disturbing on many levels. You can read some excerpts here:
http://biz.yahoo.com/ap/071016/paulson_housing.html
I want to highlight some key points Paulson harps on, because I think both the language and the tone of his comments are a preface of sorts for action that is already being prepared:

• "Let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy."
• "We must help as many able homeowners as possible stay in their homes"
• The most telling is "The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth."

And just so you do not think the guys at the FED have a monopoly on totally contradictory statements, Paulson throws out this nugget "When investors are relieved of the cost of bad decisions, they are more likely to repeat their mistakes. I have no interest in bailing out lenders or property speculators."

I am of the opinion that a move will be made in the next 6 months to at least float proposal to fix home prices at some level. I am not sure what level that would be. If you can agree that the government likes their "Wars On" (War on drugs, war on poverty, war on terror, etc) a "War on Foreclosures" is not a stretch. I know this may seem crazy, but already we see that through the Superfund set-up by Citi and pals, the SIV market is being rigged right now to delay and hide losses on assets that are at values the banks simply do not and cannot have realized. That is price fixing. That is going on with not only the approval of the Treasury, but active participation. What better way to both stop the mortgage market bleeding, and endear yourself to MILLIONS of REGISTERED VOTERS than to put a floor under home prices? I hope I am as wrong as can be here. I hope someone leaves a well written comment that explains why this is impossible. To quote every Star Wars film and book ever made however, "I have a bad feeling about this!"

Revenge of the Communists

It is generally accepted that the USA won the Cold War with the Soviet Union, not through live combat, but through an ever escalating arms (Not those ARMS!) race that eventually bankrupted the old Soviet system. I do not want to debate the particulars of that story. I want to focus instead on what could be happening in a macro geopolitical sense.

Suppose you were a communist country, and saw what happened to the old Soviet Union. Perhaps you would learn that isolation from foreign trade really hurt them, and a weak economy meant ultimately they were doomed. Say you instead become a massive creditor to the United States. Your country, with terrible environmental rules, no worker rights, a police state that cracks down on dissent, and dirt cheap labor can manufacture every widget needed by the USA. Your economy is booming, and what's even better, you hold a silly (upwards of 2 Trillion?) dollars of US debt. Even sweeter, the US is totally dependant on your country continuing to buy their debt. So far so good.

Now the dollar is tanking badly. The US consumer has spent himself silly buying homes that moved in price like the old dot com stocks. The party is now ending, and massive financial losses are sure to come. The US is in a bad spot with huge budget deficits, massive entitlement programs, and facing a probable bank bailout on a historic scale.

By now you know the country is China. Faced with this tantalizing junction in history, what would be your next course of action?

• Option1: Nuclear Option

China stops buying US debt causing a run on the dollar, and a major meltdown in US markets. A new smarter communism has crushed the US economy and exacts revenge for the loss in the 1980's.

• Option2: Trading Time

Faced with the above mentioned nuclear option, the US signs a treaty of non aggression with China, and Taiwan is left to its own devices under a Chinese invasion. The US will sell out Taiwan in the face of such a catastrophe.

I do not want to have a debate on the merits of Taiwanese Independence, that's not the point of this thought process. I want to point out that because of the major Economic Disconnect that has gone on too long, neither of the two ideas floated here are beyond consideration. By all means, let me know what you think. Again, I hope I am very, very wrong.

Kind of a downer post. have a good night nonetheless.

Online Petition at Market Ticker

I would like to endorse a petition setup by the operator of the Market Ticker blog. I really do not like petitions generally, but this one is extremely well worded, well put together, and may even possibly do some good. The petition is online, and Market Ticker is paying all expenses related to the process. Please go and check it out. If you feel strongly that you would like to contribute, please do. Be advised that you will need to sign the form, then confirm your signature by email for it to count. Thanks to Ticker for allowing Us to participate. Use the link below:

http://market-ticker.denninger.net/2007/10/munching-monday.html

WARNING: Objects in Mirror are Closer Than They Appear

In an earlier blog, I wrote about how the current thinking in the financial mainstream was that the write offs and losses related to the mortgage end of business was a one month wonder, and "that the worst was over" after August and September. Markets have been in rally mode ever since. Of course, readers of this blog (and most sane people over the age of 7 years old) knew that line of thinking was critically flawed, but why spoil a great party? Along comes news on late Friday and early Saturday that Citigroup and pals are putting together a fund (see previous posts for some details)to help out the struggling SIV market. Minyanville's Kevin Depew has great coverage in his must read 5 Things You Need to Know today:
http://www.minyanville.com/articles/index.php?a=14467

What was interesting today is that this news should have been a rocket launch for the markets, as losses could possibly be hidden for some time by this kind of manipulation. Instead, the general market was down, and Citi was beat up (down?) 3.4% today. Could it be that some recognition of the scale of the problems at the major banks is starting to sink in? In a way, the news called attention to the ongoing issues facing the big banks in regards to the commercial paper market, unwanted attention to be sure. Now one day does not make a trend, and there are few things more annoying to me than bearish type commentators breaking out the champagne when the markets drop 1% after they have gone up over 12% year to date. I do believe however that even perma bulls were caught off guard by the seemingly desperate move by Citi and pals. It's like the frosted message on your side view mirrors on the car:
WARNING: Objects in Mirror are Closer Than They Appear
And likewise, the credit crunch, commercial paper crunch, and massive loan losses that were allegedly left behind in early September may be closer to the heart of the matter than the bulls wanted to believe.

I have a geeky analogy for the proposed "Superfund" whose sole purpose is to buy time to slowly unload crap paper at later dates at better prices. In science fiction, most starships have to use a kind of light speed travel. Leave out the Star Wars and Star Trek type of drives that conveniently side step relativity laws, and what you will notice is the effects of time dilation. What this means simply is that as a ship travels faster and closer to the speed of light, the time experienced on the ship by the passengers relative to observers on a fixed earth is different. What may be only 2 weeks on a starship travelling close to the speed of light may be an elapsed time of 200 years on earth. For a wonderful read on this try Poul Anderson's book "Tau Zero".
In that vein, the banks seem to want to load their crap paper on a ship, accelerate to a high speed, and then come back and unload the paper when the market deems the prices are anywhere near what the paper is modelled at. A good plan if you can pull it off, and with the explicit help of the Treasury Department, maybe it will work.

(I have a poll up on the site, and please vote on the Treasury Departments' involvement.)

Maybe this week will be interesting after all.

In my post from Friday night, I previewed the Patriots vs. Cowboys game and called for a final score of Patriots 38 Cowboys 20 (18 point gap). Final score on Sunday was Pats 48 Boys 27 (21 point gap). Again, the Force allows me to see the future, but exact numbers are hard to see.

Have a good night.

Buying Time with Play Money

If you are like me you are wondering how things on the economic front can seem to be ok when we are seeing the kinds of horrific data regarding the housing industry come out all the time, the answer can be partially found by reading this:
http://www.nytimes.com/2007/10/14/business/14bank.html?_r=1&oref=slogin
The article is pretty vague on details, and there are two reasons for that:
1. The details of this setup are not final
2. The details will never be fully known by design of those involved (hint: correct answer)

For a detailed explanation and great insightful discussion I direct you to Calulated Risk and the comments section of this thread:
http://calculatedrisk.blogspot.com/2007/10/siv-bailout-ny-times-on-proposed-m-lec.html

My take away is that the really big bank Citigroup needs to hide the Enormous losses they hold on mortgage backed paper, and this setup will allow them to continue to mark those holding to some mythical value for a time. How long this can go on is any one's guess. Maybe it works for as long as they need it to. Maybe it does not. The main point is that for all the major banks and the US Treasury department to get involved, this is not a small "subprime only" minor niche market issue, but a systemic problem within the banking industry. I hope to be able to post more this coming week on this topic, but I imagine it will be kept very quiet.

The banks seem to be operating under the idea that by holding on for a while the assets they have may go back to a value that will not be so damaging to the bottom line. They gambled on risky mortgages. They gambled on rapid home price appreciation. They gambled on a never ending demand for the kinds of crap paper they were selling. All those gambles have lost, and lost big. Instead of taking their losses and moving on, the banks are doubling down and gambling on a turnaround in housing in the near term. They will lose that bet as well.


For something cool to watch for Saturday, check out this clip of the guitar duel from the movie "Crossroads" (no not the Britney Spears film). Ry Cooder and Steve Vai, ain't nuthin wrong with that!
http://www.youtube.com/watch?v=idb2dUtTpuU

Have a good rest of the weekend.

Friday PotLuck

Due to an extended workday Thursday I was unable to post. Please don't post angry comments because I missed one day, I know it was hard to go without new material when its as good as this! (You know I'm kidding)

Pretty lame week for the markets, boring I mean. The intra-day reversal was wicked pissa on Thursday, and the best commentary on the week as a whole can be found at Market Ticker:
http://market-ticker.denninger.net/2007/10/week-in-review-and-look-forward.html
The host of Market Ticker would like his readers to do more to alert their elected officials that things are not cool the way they are doing things, and If that blog goes away that will be a real loss and reason to be upset.

Calculated Risk has a collection of abysmal ABX charts up today, and the comments section is always a great place to learn things:
http://calculatedrisk.blogspot.com/2007/10/abx-indices-here-we-go-again.html

My only thought for today is about Tax Increases in the current economic atmosphere. Mish of course covers all the details today:
http://globaleconomicanalysis.blogspot.com/2007/10/only-one-choice-raise-taxes.html

I think the illusions being spun to the masses are starting to lose their hold. The point of Economic Disconnect is of course to rush that process. As I read all the proposed major tax increase plans (and I'm from Taxachusetts, no stranger to spending silly money) and see California issuing bonds like they are candy, I see another coming Disconnect that should rear its ugly head in the next 5-10 years. Almost all tax increases are needed to cover various entitlement plans and government job benefit requirements. The average person that works in private industry, that paid for college themselves, does not use any of the so called services the government provides, and does not have 50 plus years of government job retirement benefits coming to them, is going to be really bored and angry when they are tapped to pay for all this stuff. I know, this has been predicted a bunch of times, but never before has so many been so indebted that even a 5% income reduction by higher taxes could break them.
Something to keep in mind about government job holders: How do you think they will vote if job cutting proposals and cost cutting measures are suggested? Looking at the jobs numbers over the last year shows that places to eat and the government is the only hiring game in most towns. Maybe as high as 25-30% of the voting public has a vested interest in keeping government jobs and benefits coming, no matter the cost to the other folks in the country. This is not a political statement, all parties are desperately guilty in this fashion. Just something to keep in mind when they come to take your wallet.

Enough financial stuff. It's Friday! Super game on Sunday with the undefeated NFL Patriots and Cowboys going head to head. New England is possibly the scariest team I have seen in watching football for 15 years, and I predict the final score: Patriots 38 Dallas 20 in a fast paced game.

Friday is fun day so a little rock blogging to get you in the mood for mayhem.
(Note: I post tunes I like, don't care about a bands political stand, criminal activity, drug use, etc so don't bother getting upset if there is some band you hate for some reason here)

Motorhead "Ace of Spades" killer bass line, wicked drums
http://www.youtube.com/watch?v=vQu91gvb0CY

Def Leppard "Bringin' on the Heartbreak" great vocals, great tune
http://www.youtube.com/watch?v=R1-j9hEPenM

Pantera "Mouth for War" one of the sickest song intros ever
http://www.youtube.com/watch?v=fqzZoAu3XsM

Have a great weekend!