Thursday, January 31, 2008

Delusion and Illusion is All That is Left

Very cold here today. I guess it is going to be fairly warm next week, in the 40's, so I will try and hang on. Missed posting on FOMC Wednesday, but I went out with some friends from work instead of hashing over the latest FED slash and burn move. I am sure I was soooo missed.

Google Misses Earnings - What Does This Mean?
Everybody's favorite stock, Google (GOOG) was out tonight and missed their earnings forecast. I will not cover the details of the earnings report, it was as fake as any report that wall street puts out anyway. It amazes me that in this era of financial trickery with regard to earnings reports that nay company (banks and lenders not included) can ever miss a numbers projection. There are just too many ways to play "hide the salami" with respect to how the numbers get figured. Remember that saying "Figures don't lie, but liars can figure"? Sums it up perfectly.

I do not really care about Google as a stock or any other way, but I bring it up because I feel the need to point the readers here towards a piece that I think is pure mastery of the situation at hand. I feel that this piece holds many levels of both truth and insight that is sorely lacking in the world of economics. What is the piece? Ok, I will tell you! It was writtten this week by the great Kevin Depew of Minyanville. Kevin's daily "5 Things You Need to Know" articles are the finest missives on the net and are a MUST read for any economic junkie. The post from Januray 30th (yesterday) was so thought provoking that I spent most of the day yesterday, last night, and most of today thinking about it. You must read the article in full before proceeding to my main thought for this evening. Here it is:

Delusion and Illusion is All That is Left
Did you read the article? Good stuff, huh?
I know it is in poor taste, but my post tonight will borrow heavily from Kevin's original idea.

Monoline Insurance Companies Retain AAA Ratings
Companies like MBI and ABK provide insurance for a wide range of products. These entities are facing real problems right now as it has been shown beyond any reasonable doubt that they cannot in any way pay off their contracts if more than a miniscule amount of debt goes bad. Companies like these two have barely 100 Billion in cash, yet are on the hook for many times that amount. These are the facts.

Without going over all the well documented specifics regarding this business, just focus in on the fact that even though the facade of this insurance has been unmasked (it is indeed a known fictional arrangement) the AAA ratings are still retained. The ratings agencies are setting out baby criteria for the companies to stay afloat and keep the charade alive.

It is here that we see that the monoline insurance companies are now not a part of any real world finance vehicle. The argument for keeping the AAA ratings are rooted not in sound actuary criteria, but in the acceptance that the loss of the appeareance of insurance payouts is a systemic threat. We have arrived at a point in time where objectively fantasy belief replaces reality and itself becomes reality. The AAA rating is kept on the inurers, and therefore they ARE AAA rated agencies just like that. No need to ask questions, no need to ask how. To borrow a phrase from the film "The Matrix": " The Illusion Has Become real!"

You can see it in practice. When a rumor hits that the AAA rating will be downgraded, the stocks sell off like there is no end. Add a rumor of some kind of plan to keep the rating and the stocks fly to the moon. Whether the AAA rating is in fact realistic or not has no bearing, as long as the AAA rating is retained.

This process is in play across many facets of the financial world right now. All know the USA can never pay off it's debts. By pretending otherwise, the fantasy of repayment exists all by itself and becomes real. The USA is able to then sell boatloads of more debt all over the world. Again, the illusion has become real.

Home prices are disconnected from incomes many times over. There is no way possible to service the debt load for many households. Rental incomes cannot service the mortages. If credit can be made cheap enough however, some may be willing to try. The fantasy that home prices are of any real "value" becomes real.

I am sure you can think of many more, and I encourage you to leave your ideas in the comments section. I will post relevent ideas and give full credit to the authors.

I really think this idea that started with Kevin Depew could become a kind of unifying theorem to describe our financial markets. I have a poll question up tonight that asks about his article, so please vote. I am engrossed by this line of thinking and I hope you will like it as well.

Have a good night.

Tuesday, January 29, 2008

Gaming the FED Decision

It is going to be 50 degrees tomorrow! One of the many reasons that I hate the cold is that the low temperatures force me to bring a lunch with me to work. Cold weather cuts down the amount of walking I do. I spend all day in my building so I like to take a stroll and get something to eat for a while to take a break. Looks like a burrito tomorrow!

Irony in All Its Wonderful Glory
Ran across this story today on an obscure Arizona website:
Illegal Aliens Rear End Homeland Security Vehicle
January 29th, 2008 @ 4:22pm
by Jon Zimney/KTAR Newsroom
Normally, a non-injury rear-end collision wouldn't warrant a news story. But in an ironic twist, this crash involved a van full of illegal immigrants which slammed into an SUV owned by the Department of Homeland Security.
The Arizona Department of Public Safety said the van was heading west Tuesday morning when it was involved in a three-vehicle chain-reaction crash near the Elliot Road off-ramp. Harold Sanders with DPS said, "the 11 illegal immigrants inside the van were turned over to Immigration and Customs Enforcement."
There were no reports of any injuries, despite the fact that the van was overloaded.
"The passengers inside were moving targets for other vehicular danger," Sanders said. "The van was not designed to hold 11 people, that's based on the amount of seat positions."

HAHAHAHA! Gotta love that one! Full link here:

Gaming the FED Decision
Tomorrow brings the FOMC rate decision and the always fun to read accompanying statement. The FED futures market is pricing in about a 70% chance for a 50bps reduction. Ben BernanSpan and company sure must be feeling the heat now. After the hurried 75bps cut last week that was seen as a little panic coming through, the move tomorrow is going to be closely watched. I figured as an exercise I would run through a few scenarios along with the estimated chances for each one. Feel free to discuss in the comments section.

No Rate Cut - Not going to spend much time here. The only possible way the FED does not cut tomorrow is, well, actually I have no idea! Chance=ZERO

25 bps Cut - The Durable Goods number was very strong today. The stock markets (you did not think the FED does not watch those did you?) seem to have resumed a cautious upward bias. The dollar is probing recent weakness. With that kind of a mixed bag, the FED could go with 25bps and not feel too bad. The market would feel very bad however, and thus 25bps is a no go. Chance=5%

50 bps Cut - This is the minimum number expected by the street. BernanSpan loves to make sure nobody but dollar holders and savers are disappointed, so the FED will go at least this much. The question is, is 50bps going to be enough to stave off a hissy fit from the markets. The players are all really hoping for more, and 50bps may be seen as "behind the curve" kind of stuff. If the FED cuts 50bps, I expect the markets to sell off into the close, perhaps pretty largely so. Chance=60%

75 bps Cut - Now this is where things could get interesting. I posted snips from an article last night that had the idea that 75bps or more may send a message to the markets that things are worse than they seem (is that possible?). 75bps after the shot last week would be a 150bps move inside of 12 days. That is really juicing! It is my firm belief that rates will be at 1% by August, September the latest. If BernanSpan goes with 75bps this time, he is really limited in the number of cuts he has left. For this reason I think 75bps is unlikely. While the FED wants rates at 1%, they also want to do it stepwise to give the markets something to look forward to. Chance=30%

100bps or More Cut - What would a mega cut do? Crash the dollar? Send euphoria through the markets, or panic? Would James Cramer declare the FED geniuses? I don't know, and neither does BernanSpan. While the FED's ability to forecast anything is weak at best, the fact that almost anything could happen if a mega cut is done will preclude it from happening. It would be a wild afternoon though! Chance=5%

So my guess is 50bps followed by a selloff in the markets. I would hope for either Zero or 100bps or more. It would be refreshing for the FED to just come out and say "No more cuts, start figuring out what you are going to do now" or "Let's just get to 1% and start from there". Why would I hope for that? Simple. I do not like dog and pony shows. I do not enjoy farce. I hate the silly baby game the FED plays with the toddler stock market of "We will cut a little here, surprise with a cut here, cut a little more here". Just declare your position and be done with it. If lower rates will help the economy, then lower them immediately to the rate you think it will do that. If lower rates will not help (winning idea) then quit screwing around with rates.

While I am on a FED rant, just let me say that I find it to be the ULTIMATE show of conceit and overestimation of the FED's brains to think they can find a rate from 3.5%-1% that will both ignite a faltering economy but keep all the bad stuff about easy money from occurring. Will it be 3%? 2.5%? What about 1.5%? Is there really ANY difference between these number in the scheme of things? If you think 1% of spread is going to embolden banks to gamble on housing again, or that a slight .5% difference on a mortgage that gets passed to the consumer by the banks is going to qualify millions of people for loans you are a true F#ing idiot. I think at this point my major frustration listening to market commentators is that they think 50bps here or there is going to change anything structurally in the credit markets. Time will tell.

Homebuilder Stocks
While I do not like to make specific sector comments, the action in the homebuilders this week has been so funny I cannot help it. The news on New Home Sales was absurdly terrible. Sales way down, inventory up again, and prices falling off a cliff. Somehow the traders got to thinking that the price cuts are going to start to refire demand. Almost all homie stocks are up significantly based on this idea. This is an instance where Mr Market is just plain WRONG. I could go into detail on why the new home market is going to continue to get crushed here, but we have done that plenty of times. Instead the take home point is that it is a common saying that the markets "looks 6 months ahead". Traders may think a bottom is forming based on numbers that they do not understand. All the gains of the past week will be given back in short order. Avoid this sector unless you are doing some nifty day trading!

Have a good night.

Monday, January 28, 2008

You Know What Happens When You Assume Things

I am already tired of all the talk about the Superbowl. I just want to have the game played. I understand that the NFL likes to have a 2 week circus to showcase the game and build the hype, but I would really prefer a one week schedule. Oh well, only a few more days.

Rate Cut Rescue Dream Runs Hard and Runs Deep
The markets were moderately calm today after the wicked volatility of last week. No doubt most want to play the FED rate decision on Wednesday. While this blog and others have made the observation that rate cuts are not really going to help things much, the belief on Wall Street and amongst financial analysts/commentators that rate cuts rule is deeply ingrained. Perhaps it was because today is Monday, or perhaps using circular logic is a common practice today there was a piece on Yahoo Finance that caught my attention:
Stocks Rise on Rate Cut Hopes
Monday January 28, 5:46 pm ET By Madlen Read, AP Business Writer
Wall Street Advances After Big Drop in New Home Sales, Disappointing Earnings
NEW YORK (AP) -- A jittery Wall Street advanced Monday, reversing some of Friday's sharp losses as investors took a dismal new home sales report as a sign the Federal Reserve will lower rates this week. The Dow Jones industrial average rose more than 176 points in a session that was relatively calm when compared to the turbulence of last week.
On the surface, the advance appeared surprising after the Commerce Department reported sales of new homes in December fell by 4.7 percent and that 2007 new home sales plunged by a record 26.4 percent compared to 2006. But while the report at first exacerbated the market's concern that the housing and mortgage crises are causing a recession, it also raised hopes that the Fed might cut rates again by a wide margin to stoke the weakening U.S. economy.
"Anticipation of another Fed rate cut is the main magnet in the market today," said Alfred E. Goldman, chief market strategist at A.G. Edwards & Sons Inc.
He was skeptical the gains would stick -- anything the Fed decides after its two-day meeting lets out Wednesday could be met with disappointment. If the rate cut is small or nonexistent, the market will likely be unsatisfied; if the cut is wide, the market may worry the economy is worse than it thought.
"If we do rally into a Fed rate cut, we have a lose-lose situation," Goldman said.
And traders who bet on the Fed's next move were pricing in a more than 80 percent chance of a half-point cut. "Any less than that could be a problem," said Richard Sparks, senior equities analyst at Schaeffer's Investment Research.
So there you have it. A smaller than expected rate cut and the market will throw up and move down because the FED is not doing enough. A larger than expected cut and the market may worry that things are worse than they think! Too funny. Can the FED cut by say 62.5bps? That seems to fit the lunatic criteria the two sources for this article are using.

I seriously doubt that a larger than expected rate cut will be met with fear. Think like one of these guys for a second: If the FED cuts by say 100bps, things may be worse than currently thought, but that will open the door for even more rate cuts! Its pure beauty in its simplicity. I cannot wait for the time when rates are at 1% and things are still a mess. What will be the reasoning at that point? Perhaps a plan to have the FED actually pay interest to the banks to loan money out? Maybe I should not have printed that!

You Know What Happens When You Assume Things
There is a major buzz concerning the 60 Minutes piece last night called "House Of Cards". Particular attention is being paid to the following exchange:
Matt and Stephanie Valdez say they knew exactly what they were doing when they bought this small two bedroom house for $355,000, but now....
They cannot refinance because the value of the house fell below the existing mortgage. They say they can afford the higher payments but see no point in making them.
Matt: The value of the house keeps going down and the payments keep going up. Where's the logic in that?Stephanie: Why make a $3200 a month payment on a 1200 square foot home? It makes no sense.
Steve Kroft: But that's what you agreed to do when you bought the house.
Stephanie: Fine if the value was going up. The value is going down.
Steve Kroft: You are saying essentially you are going to stop making payments.
Stephanie: The only advice we've gotten so far is to walk away.
Very revealing indeed. One of the major points that was sadly missed by the usual suspects (FED, Wall Street, Homebuilders, etc) was the main reason for a home purchase during the mania that was the bubble. It was not for shelter. It was not for a long term investment. It was not for better school systems. The MAJOR reason for buying a home was PROFIT. That's it, that's all. Take away the potential for big buck profits, and you have folks like the Valdez' who correctly now see no reason at all to stay in their home.

One of the easiest mistakes to make is to assume that other people will behave like you would in a given situation. I remember a conversation I had around 2006 with a former boss about the housing bubble popping. I had remarked that people were buying with no money down, and had no income to support a home purchase. I added that they were simply using the rapid price increases to pay the mortgage and were hoping to cash out big time. If the prices ever started down, I offered that they would just walk away form the home. My former boss thought that was a crazy idea. He said he did not know anyone like that. For the record, neither do I, but the point is this: Just because You (or people you know well) would not do something does not mean nobody will. It is impossible to get an accurate number, but I would propose fully 50% of all home sales from 2003-2006 were sales to people just like the 60 Minutes couple. Common denominators for these types of buyers are:

  • Income that cannot support the home purchase price except at ultra low teaser rates

  • No savings

  • Already impaired credit

  • Pure speculative purchase; looking for a "payday"

  • No inhibitions about bailing on a losing proposition

Not a good list! It is the great pile of these buyers that resulted in purely fantasy home sales numbers and price increases. It is the same buyers that will delay any recovery in housing for a very long time.

The funny thing is that only NOW will the buyers show any financial savvy and smarts. There is no reason at all to stay in a home that is taking a 50% haircut in price. It is a waste of time and money to try and wait out a housing bubble for possibly 10 years. At the cost of having troubled credit form a foreclosure, and the soon to be proposed (my opinion only at this time) release form all tax penalties from said foreclosure it only makes sense to dump the asset. Herd mentality is a powerful thing and a flurry of foreclosures may just become all the rage. Imagine block parties where a whole group of foreclosure family's live rent free for up to 8 months and throw wild parties with the extra cash that they are saving. Think it cannot happen? We will see.

I am including the following picture for use by all the "housing bottom" callers that were out in full force today:

Have a good night.

Sunday, January 27, 2008

Long Week Ahead

It is snowing again here and will keep snowing until tomorrow. Very annoying to have to contend with snow for the morning commute. 2 more months to go before a real improvement in weather is set in. Have I ever said that I hate the winter?

Stimulus Plan Push
There is an almost frenetic push to roll out an Economic Stimulus Plan as soon as possible. Hanky Panky Paulson was out in force all weekend banging congress over the head to rush a plan through the process. From Yahoo Finance:
Paulson Pushes Senate for Stimulus Deal
Sunday January 27, 3:47 pm ET By Ben Feller, Associated Press Writer
Treasury Secretary Henry Paulson Pushes Senate to Act on Economic Stimulus Package
WASHINGTON (AP) -- President Bush's chief negotiator on an economic aid deal said Sunday the Senate should quickly get behind a plan or risk drawing the resentment of a frustrated public.
The president and House leaders have agreed on a proposal to provide tax rebate checks to 117 million families and give businesses $50 billion in incentives to invest in new plants and equipment. The goal is to help head off a recession and boost consumer confidence.

"I don't think the Senate is going to want to derail that deal," Treasury Secretary Henry Paulson said. "And I don't think the American people are going to have much patience for anything that would slow down the process."
We've got to take care of the people who are losing their jobs with more unemployment. We may have to look at food stamps for people who are falling out of the middle class," said New York Sen. Hillary Rodham Clinton, a Democratic presidential candidate.
When asked if such ideas would be deal-breakers, Paulson said he did not "want to cast a shadow on this rare bipartisan moment."
"I believe that what we've got here is something that will work and will work quickly and more quickly than some other alternatives," Paulson said. "And again, once you start considering additions -- the food stamps, unemployment insurance and so on -- it's a slippery slope, and there is a real danger that we're going to bog down and screech to a stop."

In another appeal to Congress, Paulson said: "Bipartisan agreement -- implemented -- I think will show the American people that Republicans and Democrats are putting the economic security of the American people ahead of their own political interests."
Reading this piece you can almost feel Paulson sweating. He even passes the up front threat that the US public will be outraged if a plan is not quickly passed. The tone of Paulson on this issue is clearly overbearing and desperate. This is conduct not very becoming of a Secretary of the Treasury. He has reduced himself to a cheerleader and a bully in regards to the stimulus. What is worse he makes no sense at all. He threatens political consequences for anyone standing in the way of a deal then lauds the bipartisan work on a deal as "putting the economic security of the American people ahead of their own political interests"? Which is it?

I love Clinton's observation that "We may have to look at food stamps for people who are falling out of the middle class". Now maybe my definition of middle class is different form hers, but I do not think a span of economic hardship will drive members of the middle class to foodstamps! I grew up dirt poor and my family never used them, even when the electricity was cut off for a month here and there.

Long Week Ahead
It has been an interesting evolution, but since about September the financial news has been coming so fast and from so many angles that the market week seems to be more like 2 weeks long! This week promise to be a real winner with many facets of the economic machine in full motion. Looking ahead to the major items and what they could mean:
  • Countrywide Financial Earnings - Set to report quarterly earnings on Tuesday, this one is going to be a laugher. Remember back to Tan Man Mozillo's call last quarter for a profitable quarter this time, as well as a profitable year overall! Dreams and hopes come cheap. CFC will report a dismal result on Tuesday. How bad it is may have an impact on the BAC deal. I was looking forward to the conference call where someone would hopefully call out Mozillo for his baloney prediction and failure to deliver, but the call has been cancelled. Nothing sinister, I have read that companies in the process of being acquired often will not have a conference call. Too bad, that would have been fun. Still the earnings report will likely be a market moving event nonetheless.
  • FED Meeting - Boom Boom BernanSpan and company meet on Wednesday to decide the rate cut schedule. After the fireworks of the 75bps emergency cut last week, this meeting will hold special attention. Mr. Market fully expects at least another 25bps, but in reality is banking on 50bps to get chopped off. 25bps or no cut will absolutely sink the market in baby temper tantrum. 75bps will ignite euphoria. Either way the 2pm announcement will be the MAJOR driver for the week.
  • Other Earnings Reports - I usually do not give a hoot about earnings reports. With the financial wizard work done using things like "one time charges", "costs due to restructuring", and other trickery it is usually impossible to take anything a company says seriously. What makes this week different is that traders are now on the lookout for ANY sign of the ever feared Recession. Last week Apple Co. caused a fit with their report, so you never know who might be the guilty party this week. Here is a list of some companies out this week: Dow companies such as American Express Co., McDonald's Corp., Verizon and ExxonMobil Corp. report earnings this week, as well as other major names including the recently acquired Countrywide Financial Corp., Starbucks Coffee Co., homebuilders Centex Corp. and Pulte Homes Inc., and Internet companies Google Inc. and Yahoo Inc.
  • Government Intervention Headlines - On deck is the Stimulus bill, raising GSE loan limits sky high, and a Monoline insurance bailout. What will this week bring in the way of rushed expansion of the US taxpayer to fund dumb arse stuff? Who knows, but I will hazard a guess at least 2 more backstop/bailout plans will see headlines this week.

Common Sense is indeed Uncommon

"Look son, being a good shot, being quick with a pistol, that don't do no harm, but it don't mean much next to being cool-headed. A man who will keep his head and not get rattled under fire, like as not, he'll kill ya."- Little Bill Daggett in "Unforgiven"

While the FED and the government are running around like lost hikers in the forest and Wall Street is on their heels looking for foreign cash to keep the party going, we see that it is in times of stress that keeping cool is the most important thing. Quick fixes and rushed plans often at best make little difference, and sometimes make things much worse. I am shocked at the current frenzy concerning major financial obligations being put into motion without vote, debate, or public awareness. A quick look at the thinking process shows that the powers that be are in a panic and are not in control of rational thought.

  • The FED wants to cut rates, probably down to 1% by August. Forget what this may do for inflation pressures or the dollar for a moment. The very economic unwinding that is causing the stress seen right now was the product of ultra low rates that remained that way for too long. There is no longer another viable theorem, even in the mainstream media. How in the world is more of the same going to do anything but delay this unwinding? Even if lowered rates could somehow slow down the collapse of housing, what is better; a quick hard recession and a faster move towards the aftermath or a long, slow drawn out bleeding that never ends? Lower rates will only make the mess last longer than it might have.
  • Raising the conforming limit of the GSE's from 417k to possible 800k is a major risk on many levels. Forget that the roles of the GSE's is to help people with affordable housing for a moment. It is apparent now and through history that the so called "jumbo" loan types are typically the worst performing loan types. The banks and lenders want out of this arena because they cannot sell the loans off. Why in the hell would anyone want the US to assume backstopping these loans? Fannie Mae and Freddie Mac have also had severe issues with their accounting. For years many congress members have tried to get better oversight on these debt bombs, and they were fought off the whole way. Now these entities are poised to take on the largest, more risky type debts there are? There needs to be a real debate and vetting of this idea. Do not count on getting one.
  • The housing bubble collapse is both real and not going away. Delaying the fall, again, just prolongs the agony. Places like Phoenix, Las Vegas, much of the Florida coastal communities, and others are going to be ghost towns. People got crazy. People got greedy. In and of itself, there is nothing new with that. The problem was that armed with the previously mentioned low rates and evaporation of all loan qualifications for the first time a great section of the population had access to enormous amounts of capital. The only avenue for this cash was of course home buying. The inflated prices are a result of fraud, greed, and fantasy land thinking. No rate freeze plan can stop this process of unwinding. I cannot figure out the thinking process where you arrive at the idea that hyper inflated home prices that have no basis in reality need to be preserved. Common sense tells us that prices will come down.

It is exactly at this stressful economic moment that we need cool heads to prevail. Unfortunately we are in an election year. Sadly the FED just wants to cut rates to 1% and take no responsibility for their previous bubble blowing actions. Wall Street wants the focus off of their ability to lose money on scale never before seen in the course of human history. If only we could do something to stop the madness!

A few quick tunes for Sunday night.

This song was in the film "Grease" and I lust like the way the guy from Sha Na Na sings this "Those Magic Changes":

From the film "Walk the Line" a great song "It Aint me Babe":

Ozzy always starts his concerts with the orchestra piece "Ride of the Valkries". It really gets the crowd raucous! Here is the song "I Dont Know" from the greatest album ever recorded. Just listen to the beginning and the crowd going wild!:

Have a good night.

Saturday, January 26, 2008

Saturday Off Topic

Cold again here in Massachusetts. Did anyone think those proposed government bailout plans I posted last night were funny? I was cracking myself up writing them. Maybe my sense of humor is unique, but I thought they were hilarious.

Off Topic Topics
A quiet Saturday for news leaves me without much to write about. I thought I might have a post that shares some information about some things I like to try and entertain the readership.

One favorite thing of mine is any pictures taken by space probes from the surface of another planet or moon. There is something about looking at a foreign surface that can keep my interest for long periods of time. Below are some of my favorite photos along these lines.

The Soviets built a whole armada of Venus probes. The program was simply called Venera. Some of them were constructed to land on the surface and transmit pictures. These probes had to be massively overbuilt with regards to toughness to survive even a few minutes in the super dense Venusian atmosphere. Here is a photo from the surface of Venus taken by Venera 13:

Mars, more than any other planet or moon, has a great wealth of information available. the amazing rover Spirit and Opportunity to this day send back vivid images of the martian terrain. With so many to choose from, it can be hard to pick a few to show here. This picture shows a meteorite on the surface of Mars which amazingly was extremely close to where the Opportunity rover touched down:

This photo is my favorite picture of all as it shows the what the Earth looks like from the martian surface at night:

Saturn's Moon Titan
The only moon in the solar system with it's very own atmosphere is Saturn's largest moon Titan. Thought to be hydrocarbon lakes scattered all around the surface, the moon has captured attention for years. A probe called the Huygens probe was able to land on the surface and transmit for a few minutes. Here is one picture that has been released:
There are many more out there and I tend to get lost looking through these kinds of pictures. Makes you feel pretty small in the scheme of things to see these kinds of things. Makes a possible RECESSION seem that much more insignificant as well!
Wikipedia may have some issues at times, but all of the space entries are top notch and I fully endorse their usage to read about space related topics.
Have a good night.

Friday, January 25, 2008

Government Bailouts - Why the Heck Not?

Today was the second day in a row that Patriots Quarterback Tom Brady was not seen during the teams practice that was open to the media. I still think the ankle issue is bogus and even if it were somewhat serious, Brady has plenty of time to get ready for the Superbowl. Do I sound worried?

A Economic Disconnect Plant at Yahoo Finance?
I read an article today on Yahoo Finance that seems like a genuine piece, but it is dripping with sarcasm, my favorite literary device! Check out an excerpt:
Consumers at Heart of Stimulus Plan
Friday January 25, 5:14 pm ET By Christopher Leonard, AP Business Writer
At the Center of the Stimulus Plan: Consumers Debating How to Spend Their Windfall
ST. LOUIS (AP) -- The success of the federal $150 billion emergency economic stimulus plan will hinge on whether American consumers do what they do best -- spend, spend, spend.
The stimulus has been debated in Washington for more than a week as the economic outlook worsened, and now Americans are armed with specifics: Individuals will get up to $600, working couples $1,200 and those with children $300 more per child.

President Bush and leaders in Congress hope people will spend those rebates -- a flat-screen television, maybe, or a trip to Disneyland -- to help revive an economy sagging from bad mortgage lending and a lack of confidence in the stock market.
One problem: The spending habits of Americans, many of whom used the rising value of their homes during the real-estate boom like a piggy bank, may be changing as housing prices tumble and credit dries up.
So many consumers, like Jennifer Galligos of St. Louis, may put the money into savings or use it to pay down debt instead. The 24-year-old accountant is married and has a 5-year-old son, so she and her husband could get up to $1,500 in rebate money.
"I'd probably put something like that in a CD or another investment," Galligos said during her lunch break Friday. "It's not often that I get a chance to save something."

In Salt Lake City, Munn Powell is used to funding a family of six on a bit of an economic roller coaster. A self-employed videographer, his income varies yearly and usually drops when times get tough.
"After 9-11, it was a measurable drop," said Munn, 37, who's a father to 3-year-old twins, a 6-year-old boy and an 8-year-old girl.
Under the Bush stimulus plan, the family would qualify for about $2,400. Munn says he hasn't discussed a possible rebate with his wife of 12 years, Cristy, but said the family has a fairly set financial plan.
"I imagine we'd be somewhat conservative with any little windfall," said Munn, who just finished a spending splurge remodeling his basement. "Honestly, it's probably going to back into our reserves. That's probably not what Bush is hoping for."

Honestly, this piece is far better than anything I have ever written! The thing is just jamming home many points discussed here and provides real world commentary for comedic support. The "spend, spend, spend" quip was priceless. The author covers the great amount of thought put into the plan by mentioning the ENTIRE WEEK the ,ahem, best and brightest spent debating. Anyone want to lay odds the young woman named Jennifer never,ever puts any money into a CD at any time? I mean someone that hardly ever has the chance to save anything at all is unlikely to start here. I absolutely love the guy at the end of the piece! Get this part again: "Munn says he hasn't discussed a possible rebate with his wife of 12 years, Cristy"! He probably doesn't want her to know anything about it. While Munn thinks he will be conservative with the newfound cash, he just blew a wad of coin remodelling the basement! Too funny.

This article by Christopher Leonard (my new favorite writer) could easily be a stealth takeover of the press by the financially frustrated. I love this article with all my heart. At the end we also get a possible liberal rally cry "Do not spend the rebate, George Bush wants you to!".

Government Bailouts - Why the Heck Not?
I admit that I am opposed to any and all government bailouts. I think I am that way because basically I hate government handling of anything, and I am never in need of a bailout personally. It seems that the feeling in the capital is that Wall Street, the consumer, and home buyers of the last 4 years need a "Hand Up" to get through this mess. What they really are getting is a "Hand Out", but whatever. The Stimulus plan, raising the FNM limits to $750k with full backing of the US, The Hope Now Plan, Monoline insurance takeover, FED lending to banks without end, etc. Quite an impressive list of obligations!

With an eye on my bias, I thought a bit about bailouts and may have changed my mind. The following is a list of proposed bailouts that the government should seriously consider getting in on while they are in a self destroying mood:
  1. Loan Shark Reserve Insurance - You know making money in the underground economy is not easy. By definition ALL of your clients are Subprime Slime. Often, not even a broken leg or a cracked cranium can get a deadbeat to pay his marker. At times like this, street credit contracts, and you get loan shark deflation. This is extremely dangerous because the cost of credit goes way up, and people can face some brutal terms. The government should institute a plan to have cash reserves available to these underworld banks. Only the full backing of the US Treasury can ensure a smooth stream of funds to the strapped true lenders of last resort.
  2. Terrible Movie Reimbursement Plan - You know the feeling. The trailer looked great. The film had actors you like very much. The storyline seemed interesting. You plunk down your hard earned $20 dollars for two tickets at the theater and two hours later you feel like you were mugged. The movie was terrible, beyond redemption. You are left with an empty feeling, and an empty wallet. Someone has to pay, right? Well step right up to the office of Bad Film Refunds and get your money back! No longer will a poor movie choice be forced fed to the public. The US treasury will put funds in a secure "lockbox" and will distribute the money after a bad experience. Where were they when I saw "Waterworld"? Kevin Costner, how could you?
  3. Predatory Bartender Protection Plan - You have been there before. It is Friday night and you and the boys are going to go out for a "little while" and have a few drinks to end the week and get some time away from the Wife/girlfriend. You have every intention of having a few beers, talking sports, and getting caught up on the lives of your friends. All would be ok if not for the lurking "Predatory Bartenders". Their sole purpose is to get you and your friends inebriated, and separate you from your cash. Often times they are cute females that just so happen to be single and think you are so very funny. When you stumble on home after close, you get an earful. What is worse is sometime during all the fun, you blew through over $200 dollars! Again, not your fault here. The bartenders are using a substance called alcohol to lower your inhibitions and make you spend your money. The US government has a simple form to fill out and your basically stolen cash will be returned. The plan exempts money blown by going to strip club after the bar and blowing more cash there as this could be a moral hazard.

There are three plans I think the government should jump in on. It could only help people, and that is the business of the government, right?

Friday night and it is Rock Blogging Time!

Ozzy with "No More Tears". Thunderous Bass line and the lead guitar is strung heavy for a deep tone. In my opionion Ozzy's last great song:

Confederate Railroad with the classic "I Like My Women a Little on the Trashy Side". Great Lyrics include "pardon us son, she aint no kid, thats a cocktail waitress in a dolly parton wig!":

Anthrax with "Black Lodge". A truly great song that I had forgotten about until I heard it today for the first time in 5 years! The "Sound of White Noise" album is excellent as well:

Have a good night.

Thursday, January 24, 2008

Bernanke and the FED: Oblivious or Liars?

Its almost Friday! It has been a wild financial week to be sure. Longtime reader Anon G is expecting some news tomorrow concerning a possible job opportunity. Please keep a hopeful thought in mind for him in his endeavor.

Gold and The Dollar - Economic Stimulus Does Not Go Unpunished
Like many readers here, I am LONG Gold and Silver. The pretty metals took it on the chin earlier in the week, but like Rocky Balboa they refused to stay down. News came out today concerning the "Stimulus Plan". It seems if you make less than $75k as a single and less than $150K as a couple you will get the full rebate with less for the higher earners (That's fair! The wife and I get hosed on this deal). There are also some funky tax breaks for business as well. The entire plan will cost 150 BILLION dollars.

The Dollar really fell hard today, going back down to the 75.5 level on the index. I have been wondering how the dollar can rally with so much activity being done to destroy it. Gold took off and ran like a thief, closing at $913 an ounce. The entire "Deflation vs. Hyperinflation" argument is a difficult one, and one I will need to see tons more information that only time can provide to make a definitive call. Until then, I want to recap some of the items that SHOULD push gold higher and the dollar lower. I said should. The markets right now are wild and seem disconnected at times from reality and rationality, so take this with a grain of salt:

  • FED looking to cut rates to 1% this year

  • Economic Stimulus plan will not be the last injection this year

  • FED continues the auctions of cash for crap capital

  • Slowing economic conditions

  • Bailout plans from the monolines to the flooded basements of the country with FED dollars
That is quite a bit, and I bet readers here know a few more. Let GOLD run!

Bernanke and the FED: Oblivious or Liars?
We all know the story this week. In the face of a serious sell off in world markets on Monday (MLK holiday here) the FED was panicked enough to drop rates Tuesday before the open by a historic 75bps. Hoping to stop a market sell off, I mean "ensure price stability and full employment", the cuts did seem to take the edge off the markets. Barry Ritholtz at the Big Picture has a great post which details how the FED may have been fooled by the market action into thinking there was a stock run, while in fact the selloff was due to A french bank unravelling the positions of a fraudulent trader. The details are amazing, and I encourage readers here to check it out:

Barry does a great job with links and the like, so I will leave the details to that post. This also reminded me of the time when the FED cut rates by 50bps in the face of a poor unemployment number a while back that was revised away not even 3 weeks later.

What this means in total is that the FED is very quick to pull the rate cut trigger (faster than Josey Wales, "mister chain blue lightning!") even though the data they are relying on is marginal at best. In a prior post I suggested everyone adopt the "Slow down and Think" model, and it seems the FED could use that idea at this time. The FED stated today that they had "No Idea" about the MAJOR unwinding of the french bank positions. No idea. That is encouraging.

The FED has made two "emergency" cuts in the last 6 months, both based on data that was easy to misread or overreact to. Fair enough. But just to put it out there, here are the two items of contention and possible explanations for the actions taken;

Unemployment Numbers Very Weak -The September unemployment numbers were so bad, an emergency cut of 5obps was hurried out to combat the poor reading.
  • The poor numbers were revised away as a blip. The FED either has no idea what the actual unemployment numbers are, or they wanted to cut anyways and used this as an excuse.
Global Stock Selloff - The horrible Monday spurred the FED to cut by 50bps a week before their scheduled meeting, to ward off a US market selloff.
  • The selloff probably had quite a bit to do with the french bank unravelling fraudulent positions taken by a rogue trader. The FED said they had no information about that. Three possibilities here 1) they are lying 2) they did not know and acted to support stock prices which is not their mandate 3) they wanted to cut anyways and used this as an excuse.
The recurring theme here is that the FED wants to take rates significantly lower, and will use any data point, and market moves, and any cover to do so (See below point for a possible reason). I believe that is the case. If in fact the FED has NO IDEA what the economic picture is, and NO IDEA about massive stock position unwinds done in conjunction with a foreign central bank we are more screwed than you can even imagine. Food for thought, so please leave a comment!

Can the US Consumer Tolerate Rates Over 5%?
Came across this cool, chart which shows the FED Funds rate over time with recessions highlighted. Pay particular attention to the more recent 2000-2008 time frame:

Now keep that in mind and look over this chart from which shows Household Debt as a % of Assets (Please note the chart stops in 2006 and things are much worse now!):

It would seem that as the US consumer has gone on a spending bender, the sad fact is that no matter what macro conditions could confront the United States, interest rates as set by the FED may need to sat below 5% for the foreseeable future. How is that for a long term tradeable idea? There is simply no way for households to service the enormous debt they have unless interest rates across the entire credit spectrum stay at historical lows forever. The next time BernanSpan is on the Hill someone should bring this up. Again, some ideas on this are appreciated!

Have a good night.

Wednesday, January 23, 2008

Does Any of This Really Matter?

My back is fully restored today. I guess I need an extremely firm mattress! I hate the two week break before the Superbowl. The waiting seems like an eternity. After football season ends, it is hard to find meaning in the weekend. Luckily the Daytona 500 is not too far away.

Monoline Insurers - Government Intervention?
One major reason cited for the killer rally today in stocks was word that some closed door meetings were being held to craft some kind of bailout for dying bond insurers, from The Street.Com:
Bond Insurer Plan Lifts Stocks
By Nat Staff Reporter1/23/2008 6:21 PM EST
The Federal Reserve couldn't help Wall Street, but government bailouts could.
That's the message from investors when the stock market on Tuesday greeted a surprise three-quarter point rate-cut from the Fed with a major selloff, only to rebound Wednesday and crank out the biggest rally of the year on news that a lifeline may be in the works for the troubled bond insurance industry.
Forget the highly touted "stimulus package" for consumers that's in the works in Washington, D.C. Talk of a bailout for MBIA and Ambac that's being orchestrated by Eric Dinallo, the top New York state insurance regulator, appears to be what finally lit a fire under stocks in a volatile session Wednesday.
"No private investor in their right mind would touch this stuff, but someone has to step up and deal with it if we want to prevent a systemic event in the financial system," says T.J. Marta, fixed income strategist with RBC Capital Markets.

The markets can be a funny thing sometimes. Banks losing more money than ever? Find foreign capital to replace the losses. Foreclosures skyrocketing? Freeze them. Bond insurers with hopeless business plans and no capital may collapse the fake financial system? Have the government take all the risk. It is easy to fix any problem don't you see?

This possible bailout starts as a 15 Billion bank cash infusion to help the insurers. What is really being proposed is some kind of government backing to keep the access of capital open for municipalities across the US. The US government is the perfect buyer here, as Mr. Marta is kind enough to tell us "No private investor in their right mind would touch this stuff" but Uncle Sam sure will!

Whether or not this possible plan has any legs (the markets sure think it does!) is almost secondary. At a time when the US government is about to start passing out hefty rebate checks, is running a crazy deficit, is already on the hook for home losses through FNM and FRE, should the next step be to wade into a possible trillion dollar market that has no clear direction? What has happened to capitalism when as soon as things go south, all ownership is passed to a central government? I guess what happened is major losses, and you know how well people do with getting less!

Last thought on this topic; Does Warren Buffet feel like a total fool right now? Compared with totally under capitalized insurers like MBI and ABK, his new outfit was a sure winner in this arena. If the bond insurers get US backing, the Buffet outfit is now second fiddle, an afterthought. I admit I am not as sharp on this topic as many others, but I can promise this topic is a major theme for 2008. Keep an eye out!

Does Any of This Really Matter?
I have been thinking about a theme for a while now. Grand theoretical ideas can be hard to put into concise words, but I will give it a try.
In light of the following situation facing the US:
  • MASSIVE Deficit spending
  • IMPOSSIBLE to fund social security
  • Consumer reliance on ULTRA LOW interest rates
  • Federal GUARANTEES in the housing, banking, and possible insurance sectors
  • Stimulus Plans that are getting bigger in possible size EVERY DAY

In short, the USA cannot seriously be expected to EVER pay any of this money out, or back. The Trillions in treasury bonds held worldwide are monopoly money. It has been repeated a million times all of this information. How come nothing ever happens?

I submit for review that the answer is both simple and silly. Everyone knows this. Not in the same way a terrible earnings report can be "priced in" to a stock, but the fact is accepted by all world players. If this idea is correct the only explanation left is that the scam that is the US economy has been leveraged all over the world in so many ways that a realistic pricing of the situation is no longer wanted, and is in fact opposed, by every financial player in the game. Why stop a good thing? How hard would it be to unravel the mess and start over? We have seen the desperation of banks to hide actual prices for the CDO's they hold. "Mark to Myth" versus "Mark to Market" shows how hard holding onto a pipe dream is ingrained.

I think this cuts to the very core of many of the things we are seeing right now. Realistically, there is no way the FED can cut rates to 1% without effectively finishing the dollar. They will cut that hard though, and I fully expect the dollar to RALLY the whole way. The US owes more money than could reasonably ever be paid back right now, yet foreign countries gobble up our debt offerings like the food rewards on the show "Survivor". In this way it is both simple and actually desirable to have the US take on the home price collapse shock (through FNM, FRE, and FED bank backing), monoline bond insurers losses, and pumping money into the economy through stimulus. NONE of that money will ever need to be paid back anyway, so it is a convenient outlet.

Some may argue that things will change. I find that very funny. At this point if no major event has occurred with respect to US debt downgrades, defaults and the like, they will not occur in my lifetime. The US is a nonperforming asset right now, and it is in every one's best interest to keep pretending otherwise.

Please use the comments section to savage my theorem, or add details. Like I said, this kind of big picture writing has its difficulties! I greatly appreciate ALL feedback.

Have a good night.

Tuesday, January 22, 2008

The FED Cuts the Cheese in a Panic - Also Known as "Gambling and Losing"

I am a creature of habit. I tend to have a pattern that I like to stick to. I did not know my body was the same way! The wife and I slept at her Mom's house Sunday night. The bed was very soft. Very soft. The bed we have at home is very firm. I slept well last night, but when I woke up this morning my back was extremely angry at me. One night in a foreign bed and my back was throwing a fit! One more thing they never tell you (or you do not listen to) when you are in your early 20's: Your body will not always be the pillar of strength it is! Live and learn.

Punish Savers and Force Speculation
I just caught the beginning of Jim Cramer's show "Mad Money" before starting this post. Cramer was all smiles after the big rate cut. He opened the show with a mile wide smile and made the statement that with the FED now cutting rates like madmen, anyone in cash is now forced to do something with their money. He was almost orgasmic with the idea that low rates of return in basic savings accounts will force people to put money, you guessed it, into the floundering stock market. I find it a perfect commentary on the basic problem facing this economy that a system that forces holders of cash to speculate in order to preserve capital is seen as a positive. Want to sit tight and save a few bucks? You can't! Inflation will eat it all up, so go buy some Google stock already! Sick and sad but it is what it is.

The FED Cuts the Cheese in a Panic - Also Known as "Gambling and Losing"
From Wikipedia on Flatulence:
"Nerve endings in the rectum usually enable individuals to distinguish between flatus and feces, although loose stool can confuse the individual, occasionally resulting in accidental defecation also known as "wet farts", "sharting", "varting", "gambling and losing", "Leaky Pete" or "following through"

In last nights post I commented on the truly ugly futures market as well as the global stock meltdown. Tuesday certainly looked like it could be the day that a reality truck ran over the market and then backed up a few times to make sure the point was made. I offered that a meltdown may well be averted if the FED panicked and cut rates aggressively before the market open. Well what do you know, from Yahoo Finance:
Stocks Dive, Then Rebound After Fed Cut
Tuesday January 22, 6:23 pm ET By Madlen Read, AP Business Writer
Stocks Drop, Then Rebound, After Rate Cut -- but Long-Term Recovery Could Be More Difficult
NEW YORK (AP) -- The opening bell hadn't even sounded on Wall Street when the Federal Reserve announced an emergency interest-rate cut. The Dow Jones industrial average fell 465 points -- including 300 in the first minute -- then rebounded to finish down a more bearable 128.
Before trading began, the Federal Reserve moved to slash its benchmark federal funds rate by 0.75 percentage points, to 3.5 percent. It was the widest cut since 1990, the beginning of what the Fed says is a comparable period in the way it handled the rate.
The Fed cut the discount rate, the interest rate the Fed charges banks directly, to 4 percent, also a three-quarter-point cut.
Many traders had anticipated a rate cut, but it was unusual for the Fed to make the call between regularly scheduled meetings of its policy-making Open Markets Committee.
The next meeting is a week away, and even then, most traders were expecting a cut of only a half-point.

The global markets were a mess. The futures here were a mess. The FOMC meeting was a impossible week away. What could the FED do? Panic of course! In an effort to prevent a market route, the FED cut interest rates and in effect cut the cheese in a nervous maneuver. The wiki entry noted above can attest to the fact that sometimes you can get a little surprise when you cut things in a panic!

What does this rate cut mean for the outlook going forward? Both allot and a little. Here are some of my observations:
  • If the FED cut rates at 7am, that means they were up at night watching the global markets and watching the futures here. If the FED is monitoring things on such a massive scale, what does that tell you about their thoughts about the economic fragility of the US?
  • The FED deemed waiting 1 week too long a time span to delay an emergency cut. How come when inflation is running rampant they can patiently sit back and wait for "inflation to moderate in the coming quarters" but when Wall Street is getting smacked 1 week is too long a haul?
  • With rates at 3.5% now, there really is not too much further to go down. It is still JANUARY.
  • The FED has no choice now but to cut again next week. The markets will see to that.
  • 30 year fixed rates have been within 1% of 6-7% for 3 years. Cutting rates would only help the ARM mortgage market, which is exactly what caused all the problems to begin with. Now with lending standards tight, the rate cuts will do nothing to stop foreclosures rising.

The FED is in full panic mode. The US government is in panic mode. The efforts to prop up the stock market are a direct attempt to stop the average person from entering panic mode. Will it work? Dunno. I expect another 75bps cut next week, and that will leave rates at 2.75% heading into February. Again, not leaving much room to make moves going forward. I have a new poll up along this line, please vote!

Why doesn't the FED just drop rates to 1% or even 0% and be done with it? Why the charade of "emergency" cuts followed by regular meeting cuts? I have no idea. If you have an idea, please leave it in the comments section!

My overall take on the action today was that the FED was able to stave off a stock market run, but that trick is getting old. The markets still closed solidly negative, which is pretty rare in an era of "The FED will save us" kind of thinking. It would not surprise me at all to learn the PPT was buying solidly all morning to stop a collapse. When they stopped buying however, nobody else stepped up to keep it going. Not a good sign. The rest of the week will bear (pun intended) watching as speculation about the NEXT cut takes over the market. I hope BernanSpan and company have fresh undies going forward. Wild times.

Have a good night.

Monday, January 21, 2008

Stock Market Crash 2008 Edition

Yesterday was one of those days I tell you! A large tree broke and fell onto the MAJOR electrical wires feeding my apartment complex at 1:45am Saturday night. The wife and I awoke to a freezing and dark apartment at around 7am. The heat here is of course electric. Nevermind that the day was freezing, around 5 degrees, the AFC title game was on at 3pm! 4 large utility trucks were out at the scene. The wife and I decided to make a day of it over at her Mom's house. The power was restored at 10pm last night. My mother in law lives all alone in a huge home, and after spending the day there, the wife and I are considering living there for a while as our lease is up in February and we do not wish to renew. Waiting out the housing bubble can be a real inconvenience!

As for the football, the Patriots show once again why they are the best team ever. The Chargers were mugging the Pats receivers, and the officials were letting it go. Dropping into a nickel coverage, things looked grim. The Pats then proceeded to run all over the Bolts using a underestimated running game. With the ball, up 21-12, with 9 minutes remaining, the Pats lined up and ran out the clock. Amazing. The Giants outlasted the Packers in a wild game. The Superbowl is set, a rematch of the week 16 meeting. I will have plenty more to say about the game later, but I am looking forward to a nice weather game!

FED Emergency Rate Cut - Will ONE Week Make Any Difference?
Amidst the global stock market slide today (US markets closed) there were calls from all over the financial world for the FED to cut rates in an inter meeting move. The FED meets next week in their regularly scheduled time. Common accepted thinking is that any FED cut will not take effect for 5-7 months after the cut. So the question naturally is, what the hell does a 1 week move up of a rate cut really help? Would 7-9 days save the world? Of course not, but the feverish calls for a emergency cut anyways puts on display the real reason a cut is screamed for. That is covered below.

Stock Market Crash 2008 Edition
If you have seen any news or checked any financial sites, you will already know that the world markets are taking a beating today while, luckily, the US markets are closed for MLK day. Here is the headline from Yahoo Finance:
Stock Markets Plunge Worldwide
Monday January 21, 4:33 pm ET By Toby Anderson, AP Business Writer
Stocks Plunge Worldwide Amid Pessimism Over US Stimulus Plan
LONDON (AP) -- Stocks fell sharply worldwide Monday following declines on Wall Street last week amid investor pessimism over the U.S. government's stimulus plan to prevent a recession.
U.S. markets were closed for Martin Luther King Jr. Day, but the downbeat mood from last week's market declines there circled through Europe, Asia and the Americas. Britain's benchmark FTSE-100 slumped 5.5 percent to 5,578.20, France's CAC-40 Index tumbled 6.8 percent to 4,744.15, and Germany's blue-chip DAX 30 plunged 7.2 percent to 6,790.19.

In Asia, India's benchmark stock index tumbled 7.4 percent, while Hong Kong's blue-chip Hang Seng index plummeted 5.5 percent to 23,818.86, its biggest percentage drop since the Sept. 11, 2001, terror attacks.
In Canada, the S&P/TSX composite index on the Toronto Stock Exchange fell 4.8 percent. Brazilian stocks plunged 6.6 percent on the main index of Sao Paulo's Bovespa exchange, and Argentina's benchmark Merval index fell 6.3 percent to close under 1,900 for the first time since August 2006. Japan's benchmark Nikkei 225 index slid 3.9 percent to close at 13,325.94 points, its lowest close in more than two years.

Those percentage moves down are no joke. The main line excuse being put out is that investors think a stimulus plan will be both too little (145 BILLION?) and too late (Next quarter?) to avert a Recession in the US. Sounds reasonable. Even believable. I think there is something else going on to precipitate this collapse.

What you must understand is that for years the US economy has been running in such a way that is simply unsustainable. Rapid debt escalation by the consumer was masked by rising home prices. The stock market climbed higher against all reasonable valuations. Profits and earnings were largely phantoms as it relates to the Financial Sector stocks. While personal incomes were falling, spending was increasing. A negative savings rate cannot be maintained for any time period without severe consequences. I could go on, but regular readers of this blog understand what the deal has been. What is important now, is why all the fuss all of a sudden?

Confidence and belief. If you in effect "fake it until you make it" reality can be delayed for a spell. The problem as I see it is that there are several basic facts that cannot be papered over any longer. There is now an acceptance of key problems that cannot be ignored. Easy money and bullish sentiment can do allot, but they cannot hide the truth forever. The following are the main structural issues facing the economy and the markets right now, in no particular order:
  • The housing boom had ZERO to do with demand, demographics, or supply. The mania for real estate equalled and surpassed the dot bomb stock mania for its size and silliness. The reality that there are going to be foreclosures on a scale never seen before is finally seen for what it is, the bankrupting of the US private bank sector. Thank you fractional reserve banking!
  • The world markets will not nicely and neatly decouple form the US implosion. So much of the so called worldwide boom was just the droppings of over consumption in the US. The US will not be alone in a recession.
  • The insurance taken out on so many credit contracts has been shown emphatically to be totally fake. There will be no payments when defaults occur across the bond market. The banks are in so much trouble the very fabric of the TRILLIONS of dollars of derivative contracts must now be seriously questioned.
  • The FED cannot do anything. Rates are still at all time historic lows. If low rates were a fix that would work, things would not be where they are now. The FED can provide Liquidity, but not Capital. This is the single most important concept to know as things go forward. The banking system is not faced with a lack of liquid funds to throw around, they are in many cases insolvent with no assets to match the massive losses they have incurred.

Things can change on a dime. For those of you that remember the Nasdaq crash you may recall things were going alone swimmingly until the CEO of Cisco Systems (Chambers I think) gave a somewhat cautious conference call. Within a week the total collapse of the tech house of cards was in full swing. 1 week.

So much of the last 4 years was built on the expansion of credit that would never be paid back. In a way it sums up the US economic model perfectly, all show and no go. How long can a economy make nothing, consume tirelessly, and sell off all valuable assets across the world go on? It seems we may find out.

Understand that as I write this things look pretty bleak for the stock market at tomorrow's open. Lots of things can change that. A rushed new stimulus plan on the order of say 350 BILLION may calm the markets. An emergency rate cut of 100bps may soothe some nerves for a while. The point is that once the fragile confidence in fantasy land is broken, it is not easily repaired. Major institutions will use any quick market fix to sell off positions on any rally. I truly believe we have entered into real bear stage here, and the air has been let out of the balloon.

Some people think that this blog and others like it are cheering a possible severe economic recession. That misses the point of this blog and others like it. I hate it that things are going to go south hard. I have a 401k, I do not like to see heavy losses. I fear that a bad downturn could put my job in jeopardy. I am just like anyone else scared about their economic future.

The point is that I am angry and sad that things have come to this. Wasting TRILLIONS of dollars on a nonperforming assets class like real estate will impact everyone for years to come. Dumb financial trickery through derivatives and the like have put the entire financial system at risk and I am pissed. Sometimes you have to destroy things in order to build them back up. The US economy is in need of a complete overhaul, and the sooner the better. If most people really care so much about their children as they say, they will not allow the US government, the FED, and Wall Street attempt to delay any more.

Sorry for the rant, but this stuff is exciting! After the worldwide drop today, anyone else have a funny feeling the US markets open UP around 2-3% and stay there all day? It would fit the pattern of denial we have seen for so long.

Have a good night.

Saturday, January 19, 2008

Saturday Musings

Cold day in Massachusetts! It will be cold for the next 10 days as well. My favorite! Game conditions for tomorrow's AFC title game look ok. The wind will be the largest factor, not the cold. If the wind is not too bad the Pats can play their entire offensive plan, which is unstoppable. Bad wind will require a more limited attack. The Green Bay/New York game looks to be about -15 degrees! Now that is just crazy.

General Musings
The Fox business block this morning had a worried tone. After the drubbing the markets have taken to start 2008, even the perma bulls were suggesting more defensive strategies. Most even said to AVOID the financial stocks! What is this world coming to?

Lots of debate about the stimulus plan. Consensus of the talking heads was pretty funny and confusing: A stimulus plan is not going to do anything to help, but we need a shot of stimulus to avert a recession. Got that? It won't help but we need it. Ok.

More talk and some outright pleading for the US government to take over the monoline insurance business after MBI and ABK now look to be toast. Another wonderful idea. Maybe a new entity can be started like Fannie Mae for the insurance field. It could be called "Saving your Fannie" or something.

The wife and I checked out a large chain furniture store today. It was empty and about 5 sales associates were very pushy about trying to help us. Anecdotal information only. It could have been just that store and just today, but 3 years ago when we went there it was packed and you could not find anyone to help you.

People are very angry lately. Usually around Christmas time people's nerves are a little shot, but since September it seems everyone is pissed off to the max all the time. Anyone else seeing that?

Will Tuesday be a "Black Tuesday"? It certainly feels like it could be. The new poll question asks this, so please vote.

Any Chess Players?
I used to play chess all the time. At the Internet site they have a pretty good setup for playing online against people all over the world. I used to favor the Barcza opening as white, and the Sicillian Scheveningen defense as black. I stopped playing for a while when I fell in love with Texas Hold'em. Cards are fun. The major sites do not accept real money from US players anymore (a detail snuck into the Port Protection Bill to stop online gambling) and so I have not played cards since last May. I may start playing some chess again. Anyone here play chess? It truly is a magnificent game.

Sorry for the light post, but it has been a relaxing day and I am too chilled out to write too much. Thanks for all the comments on the last post.

Have a good night.

Friday, January 18, 2008

Slow Down and Think - A Novel Concept

It is Friday, and with a playoff weekend coming up and Monday off to boot! Looks like 10 solid days of frigid weather up here for Massachusetts. Wonderful. I miss fishing so much during cold snaps. Only 3 more months to go!

Online Advertising - Not Effective Most of the Time
In the comments section of yesterdays post, some phantom blogger profile left a rambling comment that basically said to the effect that a "payday loan" would be a great thing and that the readers here may be interested. This got me to thinking about online ads and spamming in general. Traditional magazines and newspapers have been had ad revenue evaporate for years as advertisers look to do more web based stuff. I do not run ads here because I find them annoying and many ads slow page loading times even with broadband. I hate slow loading pages.

The web based groups will tell the companies that web advertising is excellent, and worth every penny. Perhaps well thought out campaigns and targeted site selection does mean better market reach. But most of the time most of the ads placed on a site are extremely poor matches for the site's content. Check out Housing Panic's page and you will see plenty of ads for mortgage companies promising wonderful refinance opportunities. Like the payday loan spammer here, the ads are being placed on sites that the viewership will never buy the product. Seems like a waste of time and more importantly money for the companies blindly paying for the advertising. Just my 2 cents (now a dime after inflation adjustment).

Slow Down and Think - A Novel Concept
The shear speed of negative events in the financial arena has been staggering. I try to follow things the best I can, but things can move fast! A problem that has been visible to me over the course of the last 6 months has been the almost manic RUSH to do something about various developments. The FED, the Treasury, the US government, and the entire financial sector are always running around like chickens without heads telling anyone that will listen that something will be done quickly. Phrases like "restore confidence", "bring calm", "relieve pressures", and "soothe concerns" are always the motive behind hasty actions. Those phrases betray the true purpose of quick action. Most of the US economy is built on faith and belief, not on any underlying fundamentals. Confidence may well be the US economy's most valuable commodity (sorry AnonG, even more so than gold!). That thin veneer of confidence has started a cascade of crumble that may or may not be able to be stopped.

What usually happens when people panic and try to "do something" is they run with the first reasonable idea they get. This first inspiration is usually proved to be lacking in understanding of the real problem. What is worse is the quick action is almost always useless in addressing the issue at hand. What needs to happen when facing the complex mess that is the current economic meltdown is for everyone to stop and think for a moment. This will be extremely hard for all employees of the government, but it is worth the extra effort. Let's take a look at a few events and proposals that have been rushed into service:
  • The Super SIV Conduit- As the mortgage SIV and CDO meltdown started, Treasury boss Hanky Paulson ran out and tried to set up a massive fund among banks to hide losses on these instruments. Without planning and without any real idea how it would work, the member banks balked and eventually the plan was scrapped. This foolish rush job surely must erode any confidence in the Treasury to do anything helpful.
  • Hope Now Plan- This scam aims to keep subprime loan resets to the initial low teaser rate for up to five years. Sounds good in a panic, but among the MANY unresolved issues include: 1)loan workouts may prove to be too complicated for brokers to ever figure out how to do them 2)many people just want to get out of the home 3)how this reset freeze can be handles down the chain of securitization. Another example of a quick fix that has no real chance to be effective because nobody took a breathe and stopped to think.
  • Stimulus Package- A rush to push some cash into eager consumer hands seems to be almost ready to go. Around $150 Billion Dollars may be mailed out across America to try and forestall a slowdown. Will it help? Who knows? No study has been performed to see if this idea has any application to the current mess. How a country running HUGE deficits and with a falling currency can just mail out big bucks are also concerns. Will $800-$1600 dollars really help an underwater mortgage holder? No way. But it is "doing something"!
  • Buyouts, Bailouts, and the Fall of Insurance-Bank of America was strong armed into buying Countrywide Financial. Is this a good move for BAC? Do they really understand the implications of all the REO property that CFC has? If they had time to stop and think, maybe this deal would not go through. Foreign capital has been begged for by most major banks and brokerages in trouble with capital needs. Is selling off US banks to hostile countries and private wealth funds a good idea? The needy are too desperate to even consider the ramifications. ABK and MBI have been exposed as phantom insurance companies, and the bonds they insure must now be repriced to reflect the loss of insurance. Talk has already started to circulate about a government backing for these companies. How much are we talking? Can they really be propped up in a severe credit event that will occur? How about all the derivatives and swaps? Again, the situation calls for a calm analysis about possible scale of commitment, but that cannot be done in a panic to "do something".

The take home point here is that we are in uncharted territory here. Speedy moves and quick promises can be made, but they may prove to be untenable. What is needed is real leadership to take a breathe, think, and come up with a real plan to face the coming unwinding. Unknown amounts of money will be lost. A myriad of companies across the country will no longer exist. A protracted slowdown will occur. These things cannot be stopped. What is needed is cool heads to manage the debacle and then rebuild a stronger more reality based system that will be better off down the road. Sadly, there is no current example that we can hope will be able to do this.

My projection is that over the next year many plans and programs will be rushed out to try and help various issues. Over the year every single plan will be shown to be both ineffective and astronomically expensive. The problem is that once poor policy is in place, it is twice as hard to remove the programs as it was to put them in during a manic panic. Things are going to get worse, and mostly because nobody will SLOW DOWN AND THINK.

Playoff Predictions and Rock Blogging

Two extremely cold weather games this weekend. The hits are going to hurt more in the cold! In the NFC title game I am with Brett and the Packers 27-20 over the valiant Giants. The New England Patriots end the Chargers run on Sunday with a 34-17 win. Tough weather can always throw a wrench into things though!

Music time!

Metallica's "To Live is to Die". A long song, but I implore you to scan ahead to the 4:45-6:30 minute mark and focus on the truly moving acoustic section of the piece. Simply stunning guitar work!

Just so it is not all hard rock all the time, check out Samuel Barber's "Adagio for Strings". My favorite orchestra piece!

Another nice piece "Libera Me" made popular in the film "Interview with the Vampire":

Have a good night.