Tuesday, March 31, 2009

Time and Technical Difficulties

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

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

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

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

Have a good night.

Friday, March 27, 2009

Will the Next Asset Bubble Please Stand Up?

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

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

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

Will the Next Asset Bubble Please Stand Up?
I read a post over at The Mess That Greenspan Made that had this snippet:
"There has been many a time in California's history when it seemed to outsiders to be barreling toward a cliff and to insiders as a place for unbounded optimism. A favorite Silicon Valley bumper sticker says, "Dear God, one more bubble before I die."

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

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

Indeed I agree.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Have a good night.

Thursday, March 26, 2009

PIMCO Calls for Bubble Values to be Re-Instated at Earliest Convenience

The early part of spring is a driving commuters nightmare on the roads I use. Total blinding sunlight in the eyes on the drive in (East) and more of the same on the way home (West). A good pair of polarized UV protective sunglasses work wonders!

Overhead Resistance
I have offered that a move of 35% off of the lows was both possible and probable. With the major indices coming closer everyday, one may be wondering "what's next?" With an eye to the fact that April earnings reports will be brushed aside as "lagging" indicators (unless they are good of course) it seems macro fundamental ideas may not serve an investment strategy for a bit.

While I am not a huge fan of technical analysis, I do use various charting techniques and indicators to fully flesh out market ideas. One of my favorite sites on the web is Tim Knight's Slope of Hope. We could not be more opposite in philosophy, but I respect Tim's great charting abilities and total honesty in his trades.

Looking forward Slope of Hope had a great chart today that uses almost no technical tricks, little trend extrapolation, and few variable interpretations. This chart of the S&P 500 shows the heavy overhead resistance the market will be facing after a big rally over the last couple of weeks:

From the author:
Although the bulls have a government on their side which is willing to sacrifice the future of the country for some very short-term gains, there is something the bears have on their side as well: an astonishing amount of overhead supply.
The market put on its rocket boosters from 666 to 825 because there was very little standing in its way. The fall from 825 to 666 was swift and virtually uninterrupted. The market, being a two-edged sword, had little trouble moving the other way (a few trillion dollars in freshly-minted currency helped, too).
The point is that, even if sometime this year we do keep pushing our way higher, it's going to be quite a slog. The chart doesn't require interpretation - - - the cold fact of the matter is that from 825 to 1025 there is a giant slime pit of overhead supply that is going to make every point higher a struggle.

I agree with those observations. I think the quick ride up is over. Things will tend to mimic "trench warfare" going forward. As for market direction, overall I am favoring a slow move up into the early summer.

Longer term I think that the rosy picture of the PPIP program, quantitative easing, and noisy economic indicators will be replaced by shock. Shock that the banks have been carrying loans at ridiculous levels and will face huge losses. Shock at the quick drop of commercial real estate. Shock that the FED will lose control of borrowing rates. Shock at the ongoing job losses. things are shaping up for another long summer.

PIMCO Calls for Bubble Values to be Re-Instated at Earliest Convenience
I always look forward to reading any news article that has "PIMCO" in the title. I know ahead of time that I will be amused at the blatant promotion of PIMCO's own investment vehicles, usually at taxpayer expense. Today was no exception.
Hat tip to LOLFed that beat me to the punch on this one!

There seems to be a prevailing group think that mortgage backed assets are not permanently impaired, but only now subject to a lack of "liquidity". holdings selling on the market right now for 30 cents on the dollar are only that low due to a lck of available credit to buy them at 90 cents on the dollar. I know it is silly but that is the very core of the FED/Treasury/FDIC's position. PIMCO heartily agrees of course:
Fed needs to double balance sheet: PIMCO
By Faith Hung
TAIPEI (Reuters) - Bond giant Pacific Investment Management Co said the Federal Reserve needs to double its balance sheet up to $6 trillion to replace the amount of wealth destroyed in the United States, an executive said on Thursday.
Liabilities on the Fed's balance sheet should rise to between $5 trillion and $6 trillion later this year amid the financial crisis that roiled global markets, said Brian Baker, chief executive Pimco Asia Ltd.
"Right now, the Fed has spent about $3 trillion. We believe there has to be further stimulus policies put in place," Baker told Reuters.
Pimco is a unit of Allianz Global Investors, which managed about $970 billion in client assets at the end of 2008 and says it is the world's biggest fund house.
Pimco's chief investment officer Bill Gross is one of the industry's most widely watched figures.
Pimco is buying high-yield bonds in some U.S. banks that have received government support.
"We are investing in Citibank. We are investing in Bank of America. Those are, we believe, national champion banks or financial institutions that will survive," he said.

Of course with Alan Greenspan serving as a PIMCO advisor, they would not already know ahead of time that Citi and BAC will survive no matter what, would they? No way.

So PIMCO's trading strategy is that the US government will replace the 6 or so trillion dollars that were vaporized when the housing bubble burst and took the insolvent banking system with it. A fair question to ask is:
- Does PIMCO think that housing prices in 2005-2006 were "correct"?
- Does PIMCO think that all the mortgage backed securities that are falling in price because they are backed by empty foreclosed homes in Phoenix, Las Vegas and Miami are really backed by par value assets?

I think the answer is they really could care less. PIMCO just wants to be made whole again. They seem bent on not only taking very little loss, but no losses at all. The craven call for government backing of bets they made expecting exactly that must surely be the most scandalous event of the past 8 months. Yes, even bigger than the AIG bonus situation.

This puts me in mind of a post I had written in February about propping up assets that have undergone structural and permanent impairment. The example I used was the change faced by the metal Aluminum in the late 19th century:

"Aluminum is the most common earth metal, but due to its reactivity it is almost never found in the pure metal state. Aluminum exists as an ore, usually bauxite. Pure aluminum metal was once one of the most sought after and valuable metals on earth. Then disaster struck. two independent discovers, Charles Martin Hall and Paul Heroult found a way to purify aluminum from all the ores where it could be found! This made pure aluminum as common as wood. From the Legacy section on Wikipedia:
Although aluminium is one of the most commonly occurring elements on Earth, before the invention of the Hall-Héroult process, it was initially found to be exceedingly difficult to extract from its various ores. This made the little available pure aluminium which had been discovered (or refined at great expense) more valuable than gold. Bars of aluminium were exhibited alongside the French crown jewels at the Exposition Universelle of 1855, and Napoleon III was said to have reserved a set of aluminium dinner plates for his most honored guests. Additionally, the pyramidal top to the Washington Monument is made of pure aluminium. At the time of the monument's construction, aluminium was as expensive as silver. Over time, however, the price of the metal has dropped; the invention of the Hall-Héroult process caused the high price of aluminium to permanently collapse.

Now what do you think happened to all the aluminum jewelry makers? What about the shipping industry and mining for pure aluminum? Gone. Busted. This no doubt had a huge effect on asset prices across the board. Did the world end?"

If PIMCO were around at the time they would have favored either government subsidies to preserve Aluminum's lofty price to "maintain wealth" or they would have asked for the government to outlaw the new Hall-Héroult process to protect their holding of Aluminum backed bonds. Imagine the market cap of Alcoa (AA) if aluminum was the same price as gold per ounce!

My main reason for thinking the ultimate bottom is not in is based on observations like this on PIMCO. Many still think the assets they bought and the money the banks lent are coming back, and coming back sooner than later. There is a thought process out there that still sees this whole credit bust as temporary. We are well into the 1 year mark for serious evidence to the contrary, but for now many can wait it out a bit longer. How much longer is the answer to how much more room this rally has to go.

Have a good night.

Wednesday, March 25, 2009

Hair Triggers and Nervous Hands

Home a bit late, so just a quick thought.

Hair Triggers and Nervous Hands
There were wild gyrations today across many asset classes with stocks, bonds, the dollar and gold all reacting aggressively to headlines. The day's primary driver, both up and down, were words by Treasury Secretary Timothy Geithner. Bet you never would have guessed that!

Shortly before noon there were several reports on major news outlets that Geithner had made a statement that he was "open to the idea" floated this week by a Chinese official about using IMF "Special Drawing Rights." The SDR's are a basket type reserve asset made up of currencies including the euro, yen, pound and dollar.

Yahoo Finance has the chronology here:
Geithner: Dollar is 'dominant reserve currency'
Dollar recovers as Geithner affirms it will be 'dominant reserve currency' for long time
NEW YORK (AP) -- The dollar was mixed against major currencies Wednesday, partially recovering from a plunge after Treasury Secretary Timothy Geithner said the greenback will remain the world's "dominant reserve currency."

The dollar initially tumbled after Geithner, responding to a question about a recent essay by the head of China's central bank, said the U.S. was "quite open" to an increase in the use of the IMF's "Special Drawing Rights." SDRs are a basket of currencies made up of the euro, yen, pound and dollar that have served, in limited use, as a reserve asset since 1969.

In his article, China's Central Bank Gov. Zhou Xiaochuan recommended creating an expanded reserve currency made up of a basket of major currencies and controlled by the International Monetary Fund.

Geithner's "off-the-cuff, impromptu remark touched a nerve in the market," said Brian Dolan, a currency strategist at Forex.com. "The dollar is under suspicion due to a potential devaluation effect" from the flood of money the U.S. government is injecting into the system to help unfreeze credit markets.

Seems like a lot of reaction to such a non event.

I am pretty bearish on the US dollar long term. Given that, my first reaction when I saw the "open to the idea" line was to dismiss is as being taken out of context or never said at all. I never attributed any weight to the quote, and not even 15 minutes later all was clarified.

So what was the big deal?

The disturbing thing about all this was the instantaneous reaction of the market in general to the misquote. No Treasury head would ever, could ever utter such a thing and yet the dollar tanked, stocks slipped, and gold rose regardless.

Would this have happened 20 years ago? How about 10? Even 5 years ago? Probably not.

The kind of moves made on a moments notice on this quote must have been already put at the ready should a dollar run occur. There are some very jittery hair triggers out there controlled by nervous hands. The events of today I think show a real worry about the US dollar. While one can hardly fault foreign debt holders for their nervous energy when confronted with huge US budgets, massive stimulus bills, on the fly bank regulations, and quantitative easing it was still a bit unsettling to see the dash for the door on the most flimsy of information.

All was set right before long, but the split second stampede is something to keep in mind going forward.

Have a good night.

Tuesday, March 24, 2009

More Authority for the FED and Treasury to Do What Exactly?

Last nights article was selected as an Editor's Pick over at Seeking Alpha today! I am easily excited so I was very glad to see that first thing this morning.

New World Reserve Currency
Last night I discussed the growing rumblings from China concerning a replacement for the US Dollar as the world's reserve currency. Ultra top secret discussions have now been completed between China, Russia, the IMF, and Antarctica. The new World's Reserve Currency will be unveiled soon, but you always have the inside track here at Economic Disconnect. Enjoy the first draft of the new dollar, courtesy of Geekologie:


Interesting Charts
Reader Watchtower alluded to a chart I check out on a weekly basis that is supplied by Calculated Risk via the site dsshort. The chart compares 4 bear markets of the last century. Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500:

Looking at this chart you can get a feel for just how drawn out various serious downturns have been.

With an eye to the vicious rally in stocks over the past week, I dug up another graph which shows all kinds of volatile price movements after the Crash of 1929:

As I stated in the comments, the most aggressive rallies occur in the midst of bear markets. My target of 15% more to the upside would only be a move (in total) of about 35% from the lows. This chart shows several moves of that size over a two year time period.

More Authority for the FED and Treasury to Do What Exactly?Today both Ben Bernanke and Timothy Geithner went before a congressional panel and talked about AIG. While most of the reporting was centered on the red herring of AIG bonuses (More of a Macguffin, really) there were several substantial revelations to be found.

The first notable item is a piece of revisionist history by FED head Bernanke. In the process of laying out why both the FED and the Treasury should be given even MORE powers concerning all things financial Bernanke let slip this item:
The government has given AIG over $180 billion in bailout funds since it first intervened last Sept. 16. The U.S. now owns nearly 80 percent of the giant insurer.
"If a federal agency had had such tools on Sept. 16, they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders and impose haircuts on creditors and counterparties as appropriate," Bernanke said.

It is not clear that the FED/Treasury/FDIC do not already have this kind of authority, but did not want to use it in the case of AIG. I would love to see PIMCO lead man Bill Gross read that passage about haircutting bondholders.

This statement by Bernanke must be viewed as very shrewd. Ben would like you to think punishment for failure, or even no reward for total collapse, is a goal. The new bad asset plan screams the opposite. The FED head is simply all over the place on core issues.

The second newsworthy item was a slip by Geithner that makes the post from last night even more prescient. Lats night I wrote that the Treasury was using TARP and some other tricks to bypass government approval of actions. The line I used was "This clearly constitutes a bypass of the elected government."

Wait 24 hours and this data point was offered:
Still, there were a few pointed exchanges Tuesday.
Rep. Paul Kanjorski, D-Pa., warned Geithner about any requests by the Obama administration for more taxpayer money to support financial bailouts.
"I assume that you recognize there's not an awful lot of sympathy up here to necessarily provide additional funds -- not going on the merits of whether the funds are necessary," he said.

"We recognize it will be extraordinarily difficult," Geithner acknowledged.

I do not think Geithner plans on asking Congress for much else. Geithner admits that getting a gunshy Congress to play along any more is next to impossible. The fact is the Treasury is nowhere near done with funding needs. These funds are going to bypass Congress. I would caution all very strongly about granting any more autonomy to the FED or treasury concerning additional "tools" to be used on financial businesses across the spectrum.

The third piece of tantalizing information comes from probably the hottest blog on the net right now, Zero Hedge. In a post today titled "The Ridiculous Marks of Toxic Assets" the author relates the following:
The Treasury's arbitrary transaction price of 84 for the "pool of residential mortgages" seems to not have been all that arbitrary after all. In fact, as it may turn out, it was gloriously optimistic. A report by Goldman today on the PPIP caught my eye, with one chart in particular, indicating that bank are still marking the bulk of their "assets" at 90-95! Of particular note is Citi's delirious optimism on marks in its assorted asset classes, especially commercial mortgages.

A PPIP transaction at 70 is one thing, one at 95 is very much different, especially when the FMV is in the 30-40s, as the potential equity upside is very limited, while the downside is... well... much less so. Have not had much time to dig into this but present it for consideration and commentary. If banks have expectations for bid levels north of 90 on the bulk of TALF-mediated transactions, this could really end up being a lot of hot air, despite PIMROCK's enthusiastic endorsement of the proposal.
Please see the post and check out the Goldman slide. The marked prices of many mortgage backed assets are currently running around, on average, 95-98% of full value!

Looking over the listings in the post, I was struck by one thought: If the major banks are still carrying these assets at such high prices, just what were all the markdowns taken over the past 8 months covering? Forget suspension of "mark to market" this makes it clear that was never even in place regarding this stuff.

The FED and the Treasury want more authority, but they are not clear on what they would do if they had it. They are not clear on what they are doing with the powers they have already. Both agencies are all over the place.

I realize many think quick action is better than no action or even deliberate action. I disagree. The credit crisis has been with us for over 8 months now and we are still here and there are no "tanks in the street" as the former Treasury head Paulson threatened. Now is the time to slow down and come up with a REAL plan. No more half measures. No more "experiments" No more promises to come up with details of a skeleton plan. If the FED and Treasury cannot clearly state:
- What they wish to accomplish in real terms, ie no "stabilizing the financial system" baloney. If they want lending to resume, at what level? Under what credit tests? To whom and for what is all this lending needed?
- How they are going to go about it in 5 steps or less

If the smartest guys in America cannot answer those two questions clearly I would doubt ceding any more powers to them will help them figure it out.

Have a good night.

Monday, March 23, 2009

FED and Treasury Sticking US Taxpayer with Non Recourse Clause

Cold and windy today. Allegedly the weather will improve as the week goes on. I have had about enough of this winter and with only about 5 weeks until Caribbean vacation time I will just have to hang on.

China is Not Worried About Their US Treasury Holdings; Really They are Not
I am not sure who is on TV more often these days, President Obama with his almost daily reassurances that all is well or random Chinese financial officials making it well known that the Chinese pastime of buying as many US treasuries that can be printed is alive and well. After all, the economy is "fundamentally sound" and US treasuries are the "safest" investments in the world. Yup.

Housing Doom has a comprehensive compilation of China headlines, and I would suggest checking in and taking a look at the high volume of headlines from all over the world.

One dollar worry headline:
China proposes replacing the US dollar

Leads to several dollar happy headlines:
China keeps faith with U.S. Treasuries: central banker
China reaffirms commitment to U.S. debt purchases
China to Keep Buying Treasuries, Top Official Says

Based on headline count the pro dollar China story is the hands down winner. I am sure there is nothing to the notion that China may become a bit wary of US debt now that the monetary gymnastics have begun. Nothing to see here.

FED and Treasury Sticking US Taxpayer with Non Recourse Clause
I had a feeling I would be writing this post today. Over Saturday and Sunday as I was trying to "read through the lines" I was struck by the "conspiracy theory" bug. I wanted some time and more news to come and change my mind. Alas, I still have the same thoughts as on first take.

On Sunday I wondered why the FDIC was going to be so highly involved in the new Treasury plan. Couple that with my observation that Congress was now going to be extremely wary about passing any additional bailout proposals after the AIG mess and the base is set to account for some serious games being played by our financial leadership.

If you have followed the Treasury "toxic asset" plan (no cool acronym as of yet) you may have been wondering at what point the plan may be debated and voted on by Congress.

There will not be any debate or vote.

After TARP 1.0 actually failed in the house on first pass and the AIG mess now has prompted some in Congress to rethink blank checks for the Treasury, no more leaving things to fickle senators and representatives that get an earful from constituents. The new operating method for the FED/Treasury/FDIC is now to use backdoor fund allocation, misappropriation of funds, and hedge fund like leverage to get whatever they want without any more congressional petition.

- The bad asset plan will utilize TARP money not yet spent. This way no new proposals will have to be floated and approved by Congress. Remember as well the very language of the TARP make it clear that once approved, the money will be used as the Treasury sees fit with no ability to interfere
- The TARP leftovers are small, so the use of leverage will be employed instead to act as a multiplier. Leverage always works out well as you all know
- The FDIC just asked for an open line to 500 Billion dollars, on face to support deposit insurance, but now that 500 Billion is clearly intended for use in the bad bank asset plan

This clearly constitutes a bypass of the elected government.

I understand that the US Congress is a bit weary and gunshy about handling the financial bills, more so after all the "Teas Party" demonstrations and the AIG screwup. Congress really cannot afford to punt on this one. The Treasury is co opting the FDIC (long a singular office with a singular goal) and opening up the FED balance sheet to start what amounts to a new hedge fund making blanket guarantees on the backs of the taxpayer. The Treasury is sticking the US taxpayer with a "non recourse" clause because they intend to operate beyond congressional checks through quarks of pre-approved spending.

I really do not have much more to say about this. Something very wrong and dirty is going here. While most are scared and confused there are things in motion that warrant scrutiny and analysis. Sadly the market rallying so heavily will incline most to look the other way.

Current Market Rally
The markets are going parabolic. While structural issues have not changed, sentiment is now very positive. The entire US financial system is built on sentiment, not fundamentals. April earnings are going to be terrible, but now bullish types can point to a credit thaw "in the pipeline" due to the Treasury plan. Poor reports will be ignored on the basis that they do not reflect the new atmosphere. This line of thinking can, and I believe will, extend to the quarter after next should those reports be poor also (they will be).

How far this run can go is impossible to know for sure. I would offer my 2 cents that the indices have another 15% to the upside from today's close. Again, it is sentiment, not reality that will drive this train. The worst side effect of the markets big run up will be that real bank reforms and a real cleansing of bad debt will be put off once again. The idea that the really terrible mortgage backed paper is unjustly valued and not actually worthless can exist if and only if a market uptrend is in place. Seems all so coordinated. I really have to get off this conspiracy mindset!

Have a good night.

Saturday, March 21, 2009

Sunday Catch Up

NOTE:I wrote this Saturday, but had a computer issue and could not post until today.

Another week for the history books. As expected the news just keeps on coming well into the weekend. Yesterday was the first day of Spring, but that information was not passed along around here as it is a nippy 35 degrees and windy.

Possibly Some Good Things to Come from the AIG Debacle
The saga of the AIG bailout will one day make for a fascinating book and a terrible made-for-TV movie. Until then we have to watch the train wreck unfold in real time. Two possible positive developments have started to take root, so perhaps something good might come out of this.

- Congress Now Might Read Bills They Pass
The bonus payout outrage has put a huge red bulls eye on the political chests of many members of Congress. Trying to enact legislation that would bailout AIG after only looking over the plan for about 3 hours has resulted in some nasty consequences for almost every member of the government. It is clear that the bonus payouts WERE included in the plan passed by a huge margin, but now the entire Congress has to act like they are shocked, shocked! that this little tidbit went unnoticed by them.

Nothing scares an elected official like the idea of a little notation on TV or in the press whenever their name is mentioned that says "...scandal". The AIG bonus scandal is now a real political point. Going forward I would expect members of Congress to get a little better at teasing out the finer details of various bailout plans. They will also be much more reluctant to attach their name to bills of this kind at all. Now the FED and the Treasury have already started a process by which they can just circumvent Congress all together, but that is another topic.

- Corporations Across the Business Spectrum Will Want to Avoid Government Intervention
The banks and the insurers were all for government intervention as long as it remained a hand over of cash with no strings attached. The Treasury has been masterful as crafting plans that allow access to unlimited capital with zero control over how it is used. Now the Congress is rushing (notice a pattern??) a new bill out to tax at 90% any bonus over $10k given to an employee of various firms, the management of said firms are scared out of their minds. As they should be. The new core principle for all going forward will be to try and build a "bullet proof" bank/insurer/other that can survive without government assistance. This is very good, and sadly as it should have been all along.

Plenty of things are Funny, Until it Involves You
I have stated that I think the taxation of the bonus money is probably correct and could serve as a lesson for all to keep the heck away from the government. That said, I am worried about the extension of federal powers to target revenue for taxation in any way they see fit.

Look at it this way;
The US government was able to push through the House a bill to tax bonus money at 90%. Ok, that is going to hurt the banks/insurers. It may even make you feel good or make you laugh at the idea of an AIG executive in the creative finance department having to redo his taxes. HAHA.

How about next week when the government decides that making money on "shorts" is fair game? How about paying 90% taxes on any short position you may have made some money on? Still,laughing?

This is dangerous ground we are running across without a clue or any long term thinking process.

Room for a Different Opinion
By now it should be clear that I am of the opinion that the FED/Treasury/Congress have no idea what they are doing. As a blogger I will of course highlight and reference material that I agree with to state my case. I fully accept that I may be the one that may have no clue what I am talking about. In fact that possibility is most likely!

In an effort to expand my mind, I have been reading and rereading an article that I saw over at Econbrowser titled Quantitative Easing. I would suggest to all to read the story in full as there is plenty of information to digest.

I would say that I have no agreement with any section of the article. The author has great faith that the FED can perfectly manage money creation to arrive at an inflation rate of 3%, which he deems as just right. They also seem fully confident the FED will take away the stimulus both before the dollar tanks and before inflation really gets going. It all sounds too good to be true.

I would offer that the writer of Econbrowser has substantially more knowledge of these matters than I do. Certainly they exhibit great depth of knowledge on fiscal policy that is impressive. Again, it is good to check out all opinions, not just the ones you think are right. You cannot get much more different than Economic Disconnect and that article.

Toxic Asset Transfer to Taxpayer version 10.4
Every plan totted out thus far to take the "bad assets" off the books of the banks has crashed and burned because there was no way to protect taxpayers form massive losses. Not content to let sleeping dogs lie, Treasury has an "all new" three pronged attack to....transfer massive losses to the taxpayer.

Yves Smith over at Naked Capitalism has her usual top notch analysis, and I would point you over there for the full write up.

The NY Times has all the details:
The three-pronged approach is perhaps the most central component of President Obama’s plan to rescue the nation’s banking system from the money-losing assets weighing down bank balance sheets, crippling their ability to make new loans and deepening the recession....
The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.

RED FLAG ALERT: I am not sure I understand why the FDIC is going to be so involved in all this. The FDIC is in the business of making sure our money is available if a bank goes bust. I am not aware that they have a charter to become a management firm that specializes in brokering deals. This is a serious red flag. The FDIC just made news last week with the fact that they need more cash just to do their job of deposit insurance, and now they are going to be involved in this? Strange indeed and warrants more reporting. Hello mainstream media!

In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.
In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Secure Lending Facility, a joint venture with the Federal Reserve.

I thought the FDIC was going to be the management firm?

Although the details of the F.D.I.C. part were still being completed on Friday, it is expected that the government will provide the overwhelming bulk of the money — possibly more than 95 percent — through loans or direct investments of taxpayer money.
The hope is that such a generous taxpayer subsidy will attract private investors into the market and accelerate the recovery of the country’s banks.
The key protection for taxpayers, according to people briefed on the plan, is that the private investors will bid in auctions against each other for the assets. As a result, administration officials contend, the government will be buying the troubled loans of the banks at a deep discount to their original face value.
Because the government can hold those mortgages as long as it wants, officials are betting the government will be repaid and that taxpayers may even earn a profit if the market value of the loans climbs in the years to come.
To entice private investors like hedge funds and private equity firms to take part, the F.D.I.C. will provide nonrecourse loans — that is, loans that are secured only by the value of the mortgage assets being bought — worth up to 85 percent of the value of a portfolio of troubled assets.
The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money, according to industry officials. Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.

Hold on. The entire last section makes no sense. Yves says it best: "Yves here, If this isn't Newspeak, I don't know what is. Since when is someone who puts 3% of total funds and gets 20% of the equity a "partner"?"

Again, the Naked Capitalism piece has an in depth take on the whole thing. This plan is so bad even my good pal Paul Krugman hates it!

My overall take: Frustrated by a lack of ability to remove toxic assets at every turn, Treasury has finally concocted a plan complicated enough and with enough numbers, percentages, and moving parts to make everyone confused. The net effect is still the same, transfer massive losses for years to come to the taxpayer. This plan has so many aspects that pure fatigue will allow it to go forward.

So if you count the great assets transferred to the taxpayer by this plan and couple it with the Quantitative Easing policy now declared a go, you get a big time one-two punch to the dollar. How much damage can be done over the course of two weeks? I think we are going to find out.

Have a good night.

Friday, March 20, 2009

Friday Night Time Constraints

Friday Night Time Constraints
No time to post this evening as some errands took longer than expected to accomplish (don't they always?). I will shoot for a Saturday post chock full of the fun stuff I usually have for Friday night.

Two items to check out:

Great picture collection of various aspects of the current recession in "Scenes from the Recession". Pictures here.

I rediscovered an old comic I used to love. Biting humor and over the top comedy can be found at Redmeat. A sample from the archives of what I mean can be laughed at here. Too funny.

Submit article ideas, music requests, and anything else in the comments section.

Have a good night.

Thursday, March 19, 2009

TALF Expansion is the Logical Extension of Quantitative Easing

All I can say is that Friday is upon us. Usually that is enough to get me ready to enter "weekend" mode but with options expiration tomorrow and more news coming out every single minute I think this weekend may be a heavy reading exercise. With all the market interest Seeking Alpha has picked up my last 4 articles! That is very exciting.

Reason Number 5,987 Why the Government Should Not be in the Bailout Business
I have not spent any time on the AIG bonus drama due to two reasons:
1. The bonus situation is just a ruse to draw attention away from the real issues
2. You should not let number 1 happen

That said I will offer my thoughts on the issue. The "outrage" expressed by the government over the paid bonuses is fake and hippo critical. Remember Senator Charles Shumer in a classic YouTube video saying that the American people did not care about the pork in the stimulus bill because it was such a small percentage of the spending? Well, the bonus percentage of the AIG bailout money is just as minuscule. Cognitive dissonance anyone?

My main issue with the whole thing is that all of this was easy to see coming down the road. This is what some people call "moral hazard". It is a thorny briar that bleeds you slowly and results in all kinds of exceptions, one time rules, and logical contortions that are silly and harmful. Consider:
- If AIG is "too big to fail" (I am in NO way convinced of such a thing) then the firm is saved at the bare minimum of expense
- This means reduced compensation across the board
- Workers may not like it, but that is what happens when you get in bed with Uncle Sam, he is a dirty old man

Now as far as "contract law" and paying out the bonuses because they were guaranteed, tough. It is bad enough that AIG has to be saved (again, I am not convinced) but to also have to preserve the status quo at any expense to the taxpayer is just stupid.

The best lesson and the lesson that would have the most effect on behavior going forward would have been the liquidation of AIG. We cannot have that, so at least the employees, especially the higher ups, should have to do "time" as it is with the bare minimum of pay. A terrible mess to be sure, but this is what happens with government intervention.

TALF Expansion is the Logical Extension of Quantitative Easing
Yesterday the FED moved into "QE" mode. Today another arm of FED money flooding was detailed, and I must say this is even more disturbing than the move to buy our own debt with money created by magic. Is that possible? It sure is.

From the FED today (via Calculated Risk):
The Federal Reserve Board on Thursday announced that the set of eligible collateral for loans extended by the Term Asset-Backed Securities Loan Facility (TALF) is being expanded to include four additional categories of asset-backed securities (ABS):

ABS backed by mortgage servicing advances

ABS backed by loans or leases relating to business equipment

ABS backed by leases of vehicle fleets

ABS backed by floorplan loans

Mortgage servicing advances are loans extended by residential mortgage servicers to cover payments missed by homeowners. Accepting ABS backed by mortgage servicing advances should improve the servicers' ability to work with homeowners to prevent avoidable foreclosures. The additional new ABS categories complement the consumer and small business loan categories that were already eligible--ABS backed by auto loans (including auto floorplan loans), credit cards loans, student loans, and SBA-guaranteed small business loans.

I told you it could get worse!

Some of these items I had no idea even existed, call it financial innovation. I must say that a mortgage servicing advance that covers payments missed by homeowners sounds like an awesome area to accept as Treasury collateral while foreclosures are running at all time records! I am sure they are just miss priced at this point in time.

I had no idea what a "floor plan loan" was, and luckily a commentator on CR pointed to this site:
• Dealers rely on floorplan financing to buy vehicles from the manufacturers. The average floorplan loan for a dealer is $ 4.9 million, and dealers collectively hold approximately $100 billion in floorplanned inventory.

• These floorplan loans are obtained from a variety of sources: captive finance companies, national banks, regional banks, credit unions, etc.

• In order to extend this credit, the floorplan lenders need capital, and they obtain it from a variety of sources as well.

• One key source of capital for the floorplan lenders is the floorplan securitization market. To access capital through this market, floorplan lenders bundle dealer floorplan loans together into what are called asset-backed securities (or ABSs) and then sell these ABSs to institutional investors.

I would point you towards the many stories that cover the virtual ocean of unsold cars at ports around the country to get an idea of what this means.

Not content to just print money and buy Treasuries, the FED seems hellbent on making sure that the collateral backing up the treasury market is polluted and poisoned. I would argue yet again that when Ben Bernanke went on "60 minutes" last Sunday and proclaimed a probable recovery at years end he was disingenuous at best, and outright lying at worst.

If I was trying to make a plan to destroy the US currency, credibility, and ability to place enormous debt sales I am not sure I would have come up with a plan as scorched earth as this one. It is impressive in both scope and ability to pick out the worst of the worst for treasury swapping.

While everyone is yelling at the TV and newspapers about the AIG bonuses and wonder what in the world QE is, this little tidbit packs a punch more powerful than both combined many times over. The FED has opened the treasury to any and all collateral, becoming the master of all things subprime. I am sure the damage will be "contained".

Be sure to get your Friday music and entertainment requests in, we are going to NEED it.

Have a good night.

Wednesday, March 18, 2009

Bernanke is Disingenuous, Wrong, and out of Options

So many swirling intertwined bits of information out over the past 2 days! Today was a Goliath of market moving macro game changers. I will try to put together a coherent post, but I can make no guarantees as I was insured by AIG and I am "too small to matter".

Housing Starts Rebound
This story is so yesterday, but I just wanted to put in my 2 cents. If you look at the number the only "rebound" was in condos and multi family apartments. Why anyone would want to build any more condos is beyond me, but apartment building makes sense going forward. What was really funny was the ripper to the upside for homebuilders like Toll Brothers (TOL) who do not even build apartments. Home builders ran again today on all the pro housing (in theory) news, but I will cover that in a minute.

Multiple Media Appearances
Ben Bernanke, the only sitting FED head to ever be on "60 Minutes" last Sunday. President Obama on Jay Leno tonight (could not even wear a tie!) for the first time in presidential history followed by his own "60 Minutes" Sunday show and an address next Tuesday to the nation. If you thought things were fine, why all the holding hands sessions boys?

Loss of Shares to Short
More and more this seems to be yet another wrinkle in the government manipulation of the markets. Zero Hedge has the scoop.

Haters of Gold United
Over the past two days I was overwhelmed with the cascade of anti gold posts across the entire financial press. This included mainstream sources and blogs. I must have read at least 50 thousand times that "the pennant formation in Gold will resolve to the downside pulling gold to the $700 range on its way to $500" on its way to zero no doubt!

An article covering the idea of a supranational reserve currency (idea by Russia) had some telling tidbits about how most feel about gold and a gold standard of money:
Analysts said the new Kremlin proposal would elicit little excitement among the G20 members.
"This is all in the realm of fantasy," said Sergei Perminov, chief strategist at Rye, Man and Gore. "There was a situation that resembled what they are talking about. It was called the gold standard, and it ended very badly.

I would advise anyone interested in this topic to research the validity of the above quote.

I was at a loss to understand the pure hatred of gold. I still am. Gold rallied late day on the new move by the FED (covered in next section) and this surely will engender even more anti gold bias. Bears should take heart. The IMF would like to expand their cash position by 2-3 times. Who would donate money to the IMF right now? The only way for that to happen is huge IMF gold sales. With the UK looking to get some much needed cash, they too could sell whatever they have left after selling most of their gold at the lows of recent memory. All this supply would blow gold down to those types of levels the chart types are talking about. This would be a great thing.

You read that correct. I would ask the INF and the UK to sell, sell, sell all the gold they can and push the price down to $500-$700 an ounce. At that point it will be load up the boat time, and it would fit perfectly with the move to "quantitative easing" dollar devaluation in play by the FED. In two years with less central bank gold on hand to push prices lower (like it is pushed lower EVERY SINGLE FED ANNOUNCEMENT DAY to off set the inevitable hit to the dollar) and with gold in the hands of those crazy "gold bugs" everyone hates I would like to see where gold is at that point.

Bernanke is Disingenuous, Wrong, and out of Options
Today the FOMC made the move to actually implement "quantitative easing" (QA) which besides being very hard to type is still not understood by this blogger. I have said before and will again: I understand the mechanics of how this is done. I understand that it has been done elsewhere before. What I cannot fathom is why in an open market players would allow any government to "print" money to buy it's own debt and pretend those buys are real money coming into that market with no consequences.. I guess you have to be an economist!

Ben Bernanke is proving to be every bit the disaster that Greenspan ever was, and this is happening much faster for him. Let me count the ways:

Bernanke is Disingenuous
On "60 Minutes" and in other talks as of late Bernanke has said he expects a turnaround in the economy by the end of 2009 and maybe even growth in 2009. If Ben thinks things are on the mend, why would he embark on a "first time in US history" move of QA? To be fair his comments were qualified with a ton of "if..then" type statements, but still to see this monster policy move not 4 days after his "all is well" show is unnerving. If you believed things were poised to work out as is, why pull out the one final stop? Just to make sure?

Bernanke is Wrong
It is Ben's laser like focus on housing, and really mortgage rates, that do him the most harm. Bernanke has a chart somewhere (maybe Krugman borrowed it) where if you lower mortgage rates by X amount you will get Y level of home buying. While that MAY be true in normal markets, what exactly is normal about these markets? All time low mortgage rates have been around for years with no aid to home prices. What will another 1-1.5% lower mortgage rate, the target of the FED, do to relight the home buying fires except at the margins?

Bernanke should answer himself the following questions:
- For the current all time low mortgage rates, what level of home prices does his model predict?
- Are home sales anywhere near that level?
- Will another 1-1.5% lower rate make up the difference?

Homes are a dead asset class for some time. Unless the lower rates are accompanied by a return to no documentation, no income verification, no down payment loans Bernanke is going to spend a Trillion dollars for nothing.

Bernanke is Out of Options
That was it folks. The last big trick in a bag full of goodies. The only available option to the FED now is to make current TALF's, QE's, and other games bigger. That's ball game.

While I am sure there will still be some creative stuff on the way, the big guns have been fired. Bigger ammunition can be fed into the gun, at least until the fiscal bullet gets lodged in the gun barrel and backfires. Maybe loyal reader Watchtower can confirm this, but I am pretty sure a gun backfire causes serious damage to the shooter. Sadly, while the FED is pulling the trigger We the taxpayer supply the head, torso, arms and legs that will get hit by the resultant shrapnel.

Things changed today. With options expiration due for Friday I expect fireworks of all sorts, and probably from some areas not expected. Risk is high long term and short term.

I cannot shake the feeling like something very wrong was done today.

On Another Note
Loyal reader Kevin remarked that he liked the image on Sunday of what a view of Saturn would look like as seen from the moon Titan. I came across a new set of pictures that are wondrous and wild to see. Below is a picture of Saturn, as seen by the Hubble telescope, that catches 4 moons of Saturn in transit across the Saturnian face. Seen below( from left to right) are the moons Enceladus, Dione, Titan, and Mimas (far right). titan is the huge reddish moon seen near the top of the planet:

Stunning, simply amazing.

Have a good night.

Tuesday, March 17, 2009

Quick Note

Way short on time after tax meeting with accountant. Just a few quick words.

5 Things You Need to Know - One You Already Did
In today's always excellent column "5 Things You Need to Know" by Kevin Depew of Minyanville, you may have already seen item number 5 if you read last nights post. Mr. Depew was kind enough to read an email I sent to him highlighting the hilarious Yahoo Finance misspelling I was able to capture with Snagit in the 20 or so seconds that it was posted before it was fixed. Very funny.

Thoughts and Prayers for the Bennet Sedacca Family
At first I was very excited that the Yahoo headline mistake was on Minyanville today. As I checked the site I was instantly saddened to learn that one of the authors for Minyanville, Bennet Sedacca had passed away. I have read Mr. Sedacca's writings for some time and he had a special ability to see the big picture clearly. He will be missed.

Please take a moment to say a prayer or form a well meaning thought for the Sedacca family tonight.

Have a good night.

Monday, March 16, 2009

Full Court Financial Press

I am putting together my tax information to bring to the accountant tomorrow evening. I cannot remember who said it, but I agree that all US elections should happen right around tax time. What better way to go out and vote than when you are sick about how much cash the government takes from you!

Spell Checker Issues
Blogger has a spell checker and I use it to remove the most glaring spelling errors. Even so, some things still fall through the cracks. It seems it is not just a low end blogger like myself that has these issues. Yahoo Finance today at 3:15pm Eastern Time ran a headline that was must have slipped the spell checker:

I guess the ends always LUSTIFY the means!

Full Court Financial Press
It seems that the financial leadership of the government has finally settled on a plan to fix the credit crisis. After many false starts, scrapped plans, half measures, and billions in taxpayer money wasted we were treated to a full court financial press (hat tip to March Madness)over the past few days that has had a positive effect for the markets (especially the financials).

Here are the four major components of the new efforts:

- Ben Bernanke, a sitting FED Chairman, goes on 60 Minutes
On what is perhaps the most watched TV news show (behind Meet the Press I would think) FED head Bernanke went all out with the whole "everything is fine, all is under control" positive spin angle. This was set up by the President's new public stance that "The US economy is fundamentally sound" instead of the old "We may never get out of this depression" line.

Bernanke was cool and composed. I found myself almost believing he knows what he is doing. I felt he was a bit too easy breezy with his discussion on "printing money" but overall a great performance. This was a confidence boosting move and it is part of the positive talk on the economy plan put forward by Bill Clinton about 10 days ago.

- Bank CEO's and the Earnings Boasts
I remarked at the time that the banking CEO's stating they are profitable was a sure killer due to the fact that when April earnings rolled around there was no way to deliver the goods. I was of course naive to think that this was not an orchestrated show that had a prearranged result. The outright boasts of profitability were careful plants, and the teeth behind it are the next two components.

- Removal of US Government Held Financial Stocks from the "Short" List
Note: I saw this event reported on various sites (Zero Hedge, Market Ticker), but there is NO concrete report or official release to back it up.

Word has filtered out that the US Government may demand stock certificates for any outstanding shares they own (through bailout money) of insures and banks. What this will do is remove those shares from broker ledgers and will be unavailable to borrow out, ie, remove them from short seller access. This is a smart move, and one I never saw coming.

What this will mean long term I think nobody can know. What it means short term is that huge swaths of financial stocks will have fewer shares available for shorting. Now most large companies have plenty of stock outstanding, but this move is going to seriously stall out aggressive market shorts. We can debate whether this will have any real effect longer term, but the short term pressure release is already clear (AIG up over 100%, C and BAC running up over 60% over a few days).

- Suspension or "Relaxation" of Mark to Market
The final cog of the new machine will be the demise of "mark to market" accounting. This instantly allows banks all kinds of new room to maneuver. It is this arm of the attack plan that holds the most power. The banking CEO's were able to point to profits last week only if they can get out or writing down assets to market prices (or anywhere near them).

I believe there was an agreement made where the bank CEO's would go out and tout their quarters thus far and the delivery of the "mark to myth" would be put into place. Again, we could argue the long term ramifications of this move, but in the short term it is working.

Putting it all together, we see a full court financial press to increase confidence. Ben Bernanke in his 60 Minutes appearance note that one sign of recovery he was looking for was a major bank getting access to private capital. This would show credit was flowing again. I fully expect that event to be piece number five in the attack. I would look to Friday March 20th as the day a private investment in a major bank is unveiled. Right in time for options expiration as is the FED's history. If I was the cynical type I might even venture that the "private investment" of capital will be either wholly provided by the FED/Treasury or backstopped 100% regardless. While not a true indicator of a real change, it will look like one.

The government has once again upped the ante. Instead of complex acronym lending plans and vague bad assets removal ideas they have now moved to forgo any structural changes to focus on appearances.

By putting on this show complete with parts written for various players to act out, the FED/Treasury think they can make something so just because it looks like it is so. Will that be enough for the markets? Probably for the short term.

Reality is a tough enemy. Tonight take a look at the Alcoa news. This kind of report will be repeated through earnings season. Manipulation of confidence and managing news headlines was once reserved for Banana Republics and Dictator controlled states. Now the United States has decided to give it a try.

Just like a full court press in basketball, the government had better be sure they trap all the players in the backcourt. If even one player gets loose, you give up an automatic score. If this blatant and craven market manipulation fails to contain the ball, the next slam dunk may just be a total loss of market conviction.

Have a good night.

Sunday, March 15, 2009

Sunday Images

A little bored this afternoon as there is no NASCAR race on. Next Sunday is the day race at Bristol Motor Speedway, my favorite track so that will be exciting. I was cleaning out the computer and arranging some folders and I thought I might post some of my favorite pictures/posters/screenshots/LOL's etc for something to do. If anyone is still checking the blog after Friday's Beatles revelation, this is my peace offering.

Funny LOL Cats
Some random LOL pictures

Space Related
Mars, Venus, Titan, the Moon all kinds of cosmic stuff!

Surface of the planet Venus as seen by the Venera spacecraft:

Another from Venus:

Apollo astronaut lands very close to the old Moon probe Surveyor and walks over to take a look:

If you were on Saturn's moon Titan here is what the view would look like:

A meteorite on Mars as seen by the rover Opportunity:

Sunset on Mars:

Earth at night composite photo showing where the lights are on. Hello Japan!

Fish Pictures
After two nice days in a row I am already thinking about fishing

Peacock bass from the heart of Miami Florida:

Big time Smallmouth bass from the Quabbin Reservoir:

I was reeling in a Senko and this little guy decided to try and take a bite! He was not hooked and was released unharmed:

Have a good night.

Friday, March 13, 2009

Friday Fragments of Thought

After yet another wild week, today seemed really quiet. Maybe that is nothing or maybe something is big is going to happen this weekend. We will see.

Shipwrecked by OMEX
A while back I highlighted the company Odyssey Marine Exploration (OMEX). I took a small position in the company at that time. I was looking at their TV show "Treasure Quest" to be the perfect catalyst for a move up if/when they found another great site similar to the Black Swan project. We are now past the half way point of the series.

I have been disappointed with the company thus far. While I feel they are the best in the business at what they do, the material presented in their series has been mostly of historical value. I have yet to see any real possibilities for a major recovery site. They also just released their 10-k and I found nothing in it that was impressive. So far this one has been a dud.

I will continue to hold my position in OMEX, as I still admire the company and have some hopes for a big find. At this point I would say the odds are against that happening in 2009. As I wrote when I covered this stock before, it is like a lottery ticket. At this point color me unimpressed.
Full Disclosure: I own OMEX stock

Number Six With a Bullet
Gold ETF's continue their assault on gold tonnage and today it was reported that the largest fund, the SPDR Gold Trust (GLD) took over the number 6 spot in the world for gold holdings, displacing Switzerland’s central bank:
Biggest Gold ETF at Record, Surpassing Swiss Holdings
March 13 (Bloomberg) -- SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, expanded to a record, overtaking Switzerland’s central bank holdings as the world’s sixth-largest stockpile.

The fund now holds 1,041.53 metric tons, equal to more than five months of global mine production, data on the company’s Web site show. Switzerland’s gold reserves stood at 1,040.2 tons in December, according to the producer-funded World Gold Council.

Exchange-traded products linked to commodities attracted a record $8.7 billion in February, Barclays Capital said in a report yesterday. Gold and energy led $14.3 billion of inflows in the first two months of the year, the bank said.

“What’s been interesting is throughout the past year, when there’s a fall in prices, we’ve still seen people putting more into the ETFs,” Moore at RBS said. “As more of these gold ETFs are launched,” holdings “are likely to increase. They’re now part of supply and demand.”

The Obama administration soon will push Congress for legislation that allows the International Monetary Fund to “mobilize” its stockpile of gold to boost its funds, Treasury Secretary Timothy Geithner said March 11.

Those are impressive numbers.

My take home point is that while gold is practically every trader and banks favorite short right now, the buyers of these funds are not playing games. The steady addition of bullion in increasing and decreasing markets has been impressive. This gold in not "in play" in my opinion subject to price swings and technical factors. I would advise the IMF to sell a bunch of their gold and depress the price so that the bullion can be purchased by the ETF's. Hey, it worked out so well for England!

And another thing to consider: if the GLD and others end up controlling enough gold the world central banks will no doubt try to do something about it. That is going to be an interesting day guaranteed.
Full Disclosure: No position in GLD or any gold ETF; I own gold mining stocks

No Idea What This Means
A little while back I had written that foreclosure numbers would show declines as the myriad of moratoriums and other programs kept proceedings from getting started until April. I had expected the "decrease" to be highly touted by the press. So what is this?:
Foreclosure Surge in Feb. is “Surprising,” RealtyTrac Says
Foreclosures nationwide surged 6 percent from January levels, and were up 30 percent from year-ago, according to data released Thursday morning by RealtyTrac, which provides nationwide listings of properties in foreclosure and owned by banks.

The company’s data showed that foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 290,631 U.S. properties during the month, compared to 274,399 one month earlier.

The increase in foreclosure activity from January to February is somewhat surprising, given that many of the foreclosure prevention efforts and moratoria in place in January were extended through most of February as well,” said James J. Saccacio, chief executive officer of RealtyTrac.

I have no idea other than people want to leave the homes and do not want to participate in any plans to make them debt slaves forever. Good for them.

China's Treasury Stash
Today the Chinese finance Premier Wen Jiabao said he was "worried" about his country's US debt holdings. Welcome to the party pal! Yves Smith at Naked Capitalism had a great article covering this, and details that the US may have never defaulted on it's debt, but we sure have renegotiated terms! I will not excerpt because you really should read the whole thing.

This exercise by China got me thinking about a post I had written a while ago. I dug it up and you can see it here, under the header "Revenge of the Communists".

In summary of China's options regarding their treasury stash:
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 am still of the same opinion.

Friday Night Entertainment
Sorry, no puzzle tonight as I am a bit pressed for time. I know you are all very sad there will be no strings of annoying letters trying to tell you something! If you really need a molecular biology fix, then check out the tale of restriction enzymes. These are my "tools" to splice and dice DNA into whatever forms I need.

Comic Relief
Here is a perfect example of the biological phenomenon of "advantageous mimicry":
funny pictures of cats with captions
see more Lolcats and funny pictures

Rock Blogging
the day I feared would happen has finally happened. I got a request for Beatles music! And now I must reveal my unabashed hatred for all things Beatles.

I hate their music. It stinks. What's more galling is the gushing and awe given to that band by musicians and music writers alike. I remember an early interview given by Ozzy Osbourne in which he credited the Beatles with forming Black Sabbath's sound. COME ON! Sabbath plays entirely different chords, speed changes and had bluesy undertones. I call baloney. But all artists must say the Beatles were the greatest like it is some inalienable rule of nature. Safe to say no Beatles tonight. Pour forth the hate comments!
P.S. John Lennon had the only talent in the band! HA!

Now on to the tunes, if anyone is still reading.

For some real genius of rock I go with the old standby. On the Ozzy/Randy album Tribute (oh no not again GYSC!!!) they play a live show of the Sabbath classic Children of the Grave. When in the hands of the great Randy Rhoads this song gets new life as the very movement of the song takes a new shape through his great guitar work. Pay particular attention to the 3:10 time mark on as the solo almost feels alive with energy:

REO Speedwagon is always a good listen. Here is a live version of "Take it on the Run:

Another old one, remember Styx and "Mr. Roboto"?:

I had this on over a year ago, but I was thinking of it tonight. Please enjoy the very pretty "Libera Me" from the soundtrack of Interview with the Vampire:

Last one for the night. Found a rough and raw live performance of Metallica playing "Enter Sandman":

Have a good night.

Thursday, March 12, 2009

Misdirection and Sleight of Hand

A bit short on time tonight. I have birthday festivities for my 33rd year on the planet. As Indian Jones says "It ain't the years, its the mileage."

Read Today's Headlines Yesterday
Last night I mused:
"I am sure that the bank CEO's of Wells Fargo and Bank of America are chomping at the bit to tell the world how great January and February went for them as well."

Well of course Kenny Lewis of Bank of America was out today upping the rally ante with his call of tons of cash flowing through the door and no need for any more government cash. Can we get that in writing?

Again these brazen words are going to cause an issue in the next 2-3 months when even more taxpayer money is needed to bailout banks. I think the next earnings announcements for Citi and Bank of America are right around April 17th or so. Better get that "mark to market" stuff fixed soon boys! Think the entire rally is not predicated on this factor? Think again. From today's Yahoo Finance:
"How all this turned around in a week, I don't know," said Scott Bleier, president of CreateCapital Advisors. "But it's certainly a better outlook than how it looked two weeks ago."
Don't worry Mr. Bleier, I have your answer:
The rally got an extra dose of adrenaline Thursday after an accounting board told Congress it may recommend an easing in financial reporting rules of tough-to-sell assets -- a change that banks say would help their bottom lines. Upheaval in the banking industry has been dogging the market since 2007, and hope that banks might finally get relief in how they value their bad assets spurred a flurry of buying on Wall Street.

"We might find that the banks are not as bad, or not bad at all, if these assets are marked differently," said Doreen Mogavero, president of the New York floor brokerage Mogavero, Lee & Co.

The suspension of mark to market is baked in the rally cake. I would even go further as to speculate that some new "Level IV" type of accounting trick has been readied by the Treasury to hide bad asset values. You read it here first!

Misdirection and Sleight of Hand
A little short on time, but I wanted to share an observation I had today while market watching with a co-blogger.

Cast your mind back to 2001. The stock markets were reeling. The attacks of 9/11 has a ton to do with that, but the total lack of trust and transparency in the financial system due to the collapsed Nasdaq and all the funny money accounting tricks that helped it along were major culprits. Pressure was mounting to do something to "restore confidence" in our "free markets". And boy something was done.

Enter Enron and Worldcom. While certainly deserving of their notorious place in history, the investigations and criminal charges stopped at their (closed) doors. We were treated to two sacrificial lambs to placate the masses. We even got "mark to market" accounting to make sure this kind of thing did not happen again. Oh the good old days.

In reality, Enron and Worldcom were busted for doing what was the new rage: balance sheet trickery and stock option pricing games. The entire financial industry sighed a huge breathe of relief as those two took the hit and the others went about their business. Business as usual.

Fast forward to today. Fannie Mae and Freddie Mac could not even issue an earnings statement for two years before their eventual government takeover due to accounting irregularities. We have seen Level III accounting, SIV off balance sheet schemes (Enron was just ahead of their time really), Liar loan with no documentation, and CDS insurance written with full knowledge they could never be made good on. There are so many more, but I am pressed for time and do not have 3 days to list all the fraud rampant in the financial system.

Enter Bernie Madoff. I have not written much on Mr. Madoff because it is a non-story. People invested with a guy they did not know who promised monster returns. The story ends the same every time. I would have you put aside his very real crimes and instead focus on the repeat of the cycle seen before.

Madoff is the sacrificial lamb. Madoff's jail cell is supposed to say to you "Look, fraud will not be tolerated! See what happens!". It makes for great TV, but right now as Mr. Madoff sits in his cell:
-Mark to market accounting is about to be suspended; I argue a new accounting trick with full endorsement of the FED/Treasury/SEC will also be unveiled
-The investigations stop now. No more going after the fraudsters that brought you mortgage backed securities based on zero value loans, no checking on Merrill book cooking, no more asking why AIG thought writing CDS insurance nobody could ever cover was done

All the players are coordinated on this big "confidence" push. Now in hindsight the "we made money" statements made by the bank CEO's fit into context. Mr. Madoff walks to jail, banks are making money hand over fist, and all is well if you would just watch American Idol and stop asking questions.

Markets are up 12% plus in a few days. One guy is going to jail. Balance sheets are about to improve through mere smoke and mirrors. Will the sleight of hand work out? Probably, for a while. The first show bought about 8 years of inattention and sequels usually do not do as well as the original. The curtain goes up on Monday. Paying attention?

Have a good night.