Sunday, May 31, 2009

GM Cars: My Own Retrospective

Stuck inside due to wild rain storms and high wind so I thought I might put together an automotive themed post just for fun. I imagine Watchtower at least will like this entry!

GM Cars: My Own Retrospective
On the eve of the historic GM bankruptcy I thought we might take a stroll through the car makers rich history and look at some of the best and worst cars made by the company.

My criteria are as follows;
-I am picking the GM cars that I thought were the best or worst; this may be based on looks, drive ability, or really anything
-Sales numbers do not matter
That's about it.

Let start off with the worst cars GM has ever produced.

Pontiac Fiero
In theory this car may have been a real winner. A mid engined (only one in production by a US automaker), lightweight, and sharp looking two seater probably sounded great. In practice this car was terrible!

My Dad actually had one of these and so from first hand experience I can tell you:
-car was woefully underpowered
-handling was a joke as GM used common parts off the shelf to build the car, which by it's design had unique needs
-loud and as big as a small closet on the inside, taking a drive was more of a hassle than a reward.
Still this car sold fairly well and still has a fan base today. The Pontiac Fiero makes my "worst" list.

Chevrolet Celebrity
I have no idea if the dealerships were giving these cars away in the late 1980's or what but in my city almost every kid's family I knew had at least on of these things as their vehicle:

Available in the station wagon style pictured, this car makes the worst lost, maybe on looks alone! Also, these cars fell apart, which is bad.

Chevrolet Vega
This car makes the list on a purely styling basis:

I mean, this car is basically a Camaro that got shrunk in the dryer! We will call it mini camaro!

It is much harder to pick out the best cars GM has built without writing a post that is VERY long. Over the years GM has made many of the all time classics and many of the greatest muscle cars ever built. Here are my top GM cars:

1955-1957 Chevrolet Bel Air
Perhaps the icon of US cars. Classic styling and the first iterations of the small block V-8 made this thing of beauty pack a punch as well:

This car to this day is one of the most restored and modified vehicles in car enthusiast circles. Not much to add, an all time classic.

1963-1967 Chevrolet Corvette
If a you had to pick one car to epitomize "sexy" it would have to be the 1963-1967 Stingray split window Corvette:

Available engines included everything from the base 327 small block all the way up to a 427 Tri-Power big block. I have always wanted one of these cars for as long as I can remember. When I think of GM I like to think about this car.

1966-1969 Chevrolet Camaro
Perhaps no other car is steeped in history and mystery as much as the first generation Camaro. Originally built so that Chevy would have an entrant into the Trans Am racing circuit that could compete with the Ford Mustang, the first generation Camaro did that and more.

The option code Z-28 was the pure racing motor that the cars ran in the Trans Am series. A small block V-8 of 302 cubic inches (engine code DZ302), the engine had a short stroke which allowed sustained high RPM operation. The published horsepower numbers were a full 25% below what the engine made a peak RPM, a trick by GM to make the cars unwanted by the general public.

The Camaro also touched off the dark world of "special option code" models after which car collectors obsess over to this day. Called Central Office Production Orders, COPO Camaros included some exotic entries including:
-COPO 9561 denoted a solid lifter L72 big block engine that made well over 450 horsepower. Don Yenko would buy a bunch of these and make the famous "Yenko Camaro's" from the factory base model
-COPO 9560 is the most prized Camaro of all time. This option allowed the car to be equipped with the equally legendary ZL-1 all aluminum 427 big block engine. Only 69 cars were delivered with this option, and the motors were rated at over 500 horsepower:

I could get all nostalgic and include all my favorite cars from the GM line. Notable models include:
-Pontiac Firebird/Trans Am
-Buick Grand National
-Chevrolet El Camino
-Pontiac GTO (old version)

A new addition to the GM line may well the the best path forward for the troubled automaker. The seventh generation (2008-on) Chevrolet Malibu is a strong offering from GM. A couple of friends have this car, and I have to say it is as fine a product as GM has had in some time:

A nice quiet ride and a roomy interior make for a nice driving experience. Sold suspension tuning and good brakes make a nice mid size package. This car is a reasonable competitor for the Toyota Camry. GM would do well to go over how they came up with the new Malibu and then keep doing that!

On a more economic note, it seems absurd to think that the biggest bankruptcy in history will be all sorted out in as little as 90 days as I have read in some reports. The good old "Good GM, Bad GM" stand by plan seems to be option one. Let's hope this can work out in a sustainable way for the US automaker.

Have a good night.

Friday, May 29, 2009

The Unstoppable, Indefatigable, and Undefinable Bull Market of 2009

The weather forecasters change their mind a lot this spring. Today was the same dreary mess the last 2 days were, and now the weekend may be a bit wet as well. I still hope to get some tennis in, but you never know. Not too much action today in the markets so the meat of this post may be light, and then onto the usual Friday night programming.

Small Request
Some unfortunate news was learned today. Mike Morgan, who runs the site Mike Morgan Behind Enemy Lines (as well as the much disputed site Goldman has suffered a health setback in the form of a heart attack. Mike has undergone successful treatment and is on the mend.

I would ask you to take a moment and wish Mike a speedy recovery. Financial drama can be fun and we all like to dive in deep, but the real important things in life are of course your health, your family, and your happiness. Economic Disconnect sends his best wishes to Mike Morgan and hopes the fellow blogger has a full recovery.

The Unstoppable, Indefatigable, and Undefinable Bull Market of 2009
2009 has seen a vicious move up across the equity markets. There have been some rare pull back days, but the advance has been nonstop for the most part. Sectors across the entire spectrum have rallied. Key breakout areas are withing sight and then who knows how far this toro could ramble.

With such a broad based move to the upside, one should be able to discern some reason for the action. Reading across all kinds of media I have seen various reasons given, all unrelated to each other and isolated islands of thought. Putting it all together I have my reason for the 2009 Bull Market:

I have absolutely NO idea

I am not using sarcasm here. That will come later. I just cannot put together a valid reason for the rally as nothing adds up.

Take a day like today for example. Pretty quiet until the last 30 minutes or so, and then a huge gap up right into the close. I can remember a time when nobody wanted to hold over the weekend because you had no idea what kind of news was going to come out. Now there is a rush to grab for the two day break. Either there is some real confidence out there, those in the know are tipped that any news will be good, or maybe a Friday up day looks nice. Who knows.

Tyler Durden at Zero Hedge loves to look at this kind of stuff and here is his take on today's action:
Going back to today's ridiculous close, the chart below shows it all: the complete tape painting volume spike at the very end of the day speaks for itself. And as computers now simply issue forced stock recall orders to each other, painting the tape wet with manipulative intent and volume spikes into the last 20 minutes of trading every day, their human creators are left on the sidelines, trying to outshout each other as to the reason for why the market keeps rising while the economy keeps tumbling.

Is there ever going to be any transparency in this market again?

That was some move in the last minutes of trading!

The late 90's boom was due to IT overspending and unbridled hope in the Internet. The early 2000's boom was predicated on real estate values and all the associated spending that flowed from that enabled by free credit. Those two bull markets were easy to see in real time, this is not hindsight kind of reasoning.

Today's bull market seems to be built on buying stocks. I am serious, and don't call me surely!

The vast bulk of current trading is being handled by the big boys playing paint the tape. The hope is probably that a market that has risen enough will collect more boats, or something to that effect.

There is some reason behind the buying. I think the theorem goes something like this;
-When all stocks were going to zero, the DOW was at 6600 and the S&P was at 666
-When the credit boom was at full throttle the DOW was at 14,000 and S&P was at 1500
-If you split the difference right down the middle you arrive at DOW 10,300 and S&P 1083
-This seems like a fair compromise

I know, very scientific. This would be my guess and so those would be my upside targets.

The problem with this kind of dart shooting exercise is that there are real realities that have to be confronted:
-Unemployment is till going up. A lot. While the rate has slowed by some weird second derivative amount, the numbers are still shocking
-Foreclosures of course are tracking the jobs and are set to skyrocket as well
-Earnings right now are still too optimistic and the numbers are being met by, drum roll, staff cuts. This too will run out of usefulness

Those are three big ones that come to mind. There are of course plenty more.

So I hereby name the 2009 Bull Market the "Split the Distance Bull" as the exact middle from the bottom to the top is being raced to with abandon. Just remember to abandon ship when we get there!

LOL Cats
It has been a while since the funny kitties have been featured. Here are two:
funny pictures of cats with captions
see more Lolcats and funny pictures

funny pictures of cats with captions
see more Lolcats and funny pictures

Film Clips
If you notice the graphic in the top left of the page you can see it says "Get Him a Body Bag. Yeah". If you know where that is from it is funny, if you do not, all will be unveiled.

The quote comes from the great film "The Karate Kid" and occurs near the end. After Johnny hits Daniels leg, his team mate celebrates wildly. The quote can be heard at the 23 second mark of the following clip:

Love it!

A new era classic is "The Shawshank Redemption". While there are about 5 scenes that qualify for the hall of fame, no other is as powerful as "The Tunnel" (if for some reason you have not seen this film, skip this!!):

Rock Blogging
Of course we shall have some music, I think it is required by law. Well, at least in some states, or states of mind anyways!

My mom always loved the band ABBA. Let's just say they are not my favorite. But there is one song that men all over the world do know, "Dancing Queen". If you have ever been out at a club late night or stayed late at a wedding party this song does cast a magic spell on the ladies, so as a tribute to the power of ABBA, here it is:

In recognition of the great run gold and silver have had this week (and yes it is KILLING ME!!!) take a listen to a vintage Linda Ronstadt performance of "Silver Threads and Golden Needles":

The film "Streets of Fire" is one of my favorites. The soundtrack is just incredible as well. Diane Lane plays the singer, but she did not do the actual singing. Try out "Nowhere Fast":

Wow, a little lady heavy this evening! Time to get things stepped up!

Before Ice-T was on cop shows he was a rapper and he also founded a wicked metal group called "Body Count". Rock out with "There Goes the Neighborhood" (Warning; some rough lyrics, skip if easily offended):

When a band has been around for like 100 years it can be hard to pick a song. Aerosmith has been around since the Dinosaurs died in a fiery meteor impact, and I have selected "What it Takes" for this evening:

Last call!

If you want to really get going, the masters never change. End the night on full rock mode with Black Sabbath's classic "Sabbath Bloody Sabbath":

Have a good night.

Thursday, May 28, 2009

There are Limits to Knowledge, Understanding, and Control

Rainy, cold, and very dark for two days now with another on tap for tomorrow. The weekend looks good and "I have that going for me, which is nice" (obscure reference). Get your Friday night entertainment requests in so we can have a good time tomorrow.

Mortgage Market Dislocation Shows How Heavily Mortgages Rely on FED
One of the major arguments against any kind of major government intervention is that is causes dislocations which would not exists otherwise. This has the poor side effects of making intervention both a.) impossible to remove and b.) impossible to predict.

Consider mortgages. No bank in the country would write mortgage loans right now unless everything was so spectacular (property value, buyer qualifications, big down payment, etc) it made the loan too good to pass up. There are not many of those. The FED and the Treasury have in various ways stepped in to promote mortgage loans by lowering borrowing costs by rate cuts and intervention as well as banking bailouts and backstops to promote liquidity.

We all know that home prices must come down and that many home debtors must lose their home to restore some semblance of value to housing. There is no other way around this. Sadly the FED thought they could get rates in the 4% for everyone in the country, and actively promoted this idea. Of course blow back is a common American enterprise, and so we today we are presented with an amazing account of the mortgage market over the past two days that will have consequences for the foreseeable future.

The report is from The Field Check Group, a mortgage market research firm that specializes in real time information processing. This report has made the rounds quite a bit, but I think it very important and so I will provide a link to the full report here, and comment on what I saw in the report.
-Wild swings in the loan rates may scare off buyers who had their mind set on a sub 5% rate
-FED cannot control the treasury market; time to stop pretending
-There is NO MORTGAGE MARKET at real market rates; only a FED rate fixed market backed by FNM/FRE/FHA massive purchases exists

The report has so much more to offer that I really recommend reading it over when you have a good moment to read it all. Fascinating example of what market manipulation results in; chaos.

Massive Job Losses After a Jobless Recovery Part II
A few posts back I had argued that the real impact of the current job loss cycle was being wildly underestimated because unlike in most cycles, this loss epoch came after a very weak "jobless recovery". Today Clusterstock had a great chart that gave a mental picture to what I was thinking:

The time frame that interests me is the 2001-2005 snapshot.

Notice that in 2001-2005 job losses from peak moved down for 30 months before starting a weak uptrend that took another 16 months to get back to where employment had been at the prior peak. During this time the jobs being created were in the real estate sector, mortgage sector, leisure and entertainment sectors, health care, and government.

Now take a look at the line for this episode of job losses 2007-. I am going to go out on a limb and project that the relatively quick "U" shape of several periods in the past have almost a zero chance of happening. I expect this time will look just like the 2001-2--5 slow roll, only much bigger.

So on a day like today when CNBC is wetting their pants that initial jobless claims dropped some 1-2% from the previous month, they may want to do a little math;
-How long would it take initial claims dropping 1-2% for that number to get back to zero? How long until initial claims even break 400,000?

Hint: It will be a LONG LONG TIME.

There are Limits to Knowledge, Understanding, and Control
-"A good man always knows his limitations" ---Harry Callahan from the film "Magnum Force"

I have a day job. I work in the easy to understand and predict field of DNA manipulation. I write this blog to share my interest in things finance and to have fun doing it. If I can add a bit of humor, understanding, or insight to any and all that read here that is my reward. But I am not an economist. I am not a daily stock trader. There are limits on the time I can spend on this kind of thing and I understand that.

A couple of examples come to mind. Yesterday I wrote about the 10 year treasury action. I would have loved to really get into the nitty gritty of everything that one issue entails, but bonds are a blind spot for me. I really do not have a great understanding of yields and their application in many forms of finance. Another example is the Chrysler bankruptcy and the bond holder lawsuits. I would love to really know why the "Super Duper" tranches of bond holders get one deal while the "Sort of Senior Note Holders" get another while the "Not Really Senior, but Not Junk" tranches get yet another slice. I simply have NO IDEA. I still think the implications of it legally (another blind spot) are important, but it a bit beyond me to cover. My point (there is one) is that I know there are limits to my knowledge and understanding and thus I control my actions accordingly.

That said I know I pick on folks like Hank Paulosn, Ben Bernanke, Tim Geithner, Bill Gross, and Paul Krugman a bunch. Those guys are smart. Those guys are the real deal. If I pick on them it is because sarcasm is like my medium for art, my canvas if you. Plus it is so much fun.

But I think those mentioned, and many many others, are missing a key point. It is the point Harry Callahan made in the quote above and the point I tried to make with personal examples:

There are Limits to Knowledge, Understanding, and Control

A few of examples.

The FED's efforts at Quantitative Easing seem to have hit a wall and they are now being taunted by the bond market to really make a big move. I am sure the FED thought they could get it done with words and some spending, but their bluff has been called. They miscalculated. Here, there was both limited understanding (the FED thought they knew how things would go) and a demonstrated limit to their control (yields went up anyway). This had terrible consequences in the mortgage market as the first section of the post highlighted.

Another example is the spectacular failure of the PPIP program. Today we learned that most of the program is now to be scrapped, and the rest is scaled back. Remember that Tim Geithner said that the PPIP was "Plan A, there is no Plan B"? What happened?

It seems that the Treasury and the FDIC had a lack of knowledge about the true nature of the banks they had tried so hard to help. The major banks had the temerity (love that word) to ask publicly and in written form if they could openly game the PPIP instead of just gaming it the way it was set up. The banks felt that buying and selling each others bad assets backed by taxpayer dollars did not offer enough, so they wanted to buy and sell their OWN assets to themselves to manipulate books and make money. I mean, why play with others when you can play with yourself? Its cleaner and safer anyway! Ok, get your minds out of the gutter now!! Again we see there are limits.

The US economy is too big and has too many moving parts for any government agency to effectively manage, much less control. At times there can be the illusion of control or the appearance of somebody at the steering wheel, but those times are more chance than direct effect of action.

If the FED, the Treasury, and the FDIC just did was in their direct control (and their explicit charters) things would have been terrible for the economy. There would have been serious issues and serious pain. But things would have worked themselves out, as they always do, and some kind of gradual recovery would have been put in place based on FUNDAMENTALS. Instead we have had a terrible economy, serious pain and no end in sight to the endless spending and losses to taxpayers trying to maintain the illusion that things have been "set right".

At this point the citizens of the US have no knowledge of the amount of patience the government has to try and pretend there are no limits to theirs.
Have a good night.

Wednesday, May 27, 2009

10 Year Yields Moving Up; Why the Bears Cannot be Right

A little short on time this evening. I am in the process of picking a contractor to build a stairway/deck in the back of the house and I am collecting estimates and had to meet with a builder this evening. Why everything has to be so expensive I will never know!

Processed Meat Debate
Economic Disconnect has been having a back and forth with the fun blog Illusion of Prosperity as of late concerning a certain processed meat known as SPAM. I eat salads 3 times a week (Mon-Wed-Fri) and include SPAM as my lunch meat of choice. It seems that there is a basic lack of understanding of the wealth of products offered by the Hormel company in this space, so I thought I would wade in.

First off, there are many SPAM's. There is turkey SPAM, Lite SPAM, Low Sodium SPAM, and SPAM made with Bacon, which really is a masterpiece. You may also be interested to know that SPAM now is available in single serve packs so you do not have to open an entire can! Its true, see them here. SPAM is the perfect guilty addition to my salads as I hate salad dressings but find I need a little substance to the lunch.

The company Hormel Foods (HRL) and I can offer my full endorsement of SPAM. The stock as things stand I like as well and am thinking about taking a small position to protect my SPAM source. Of course, if I like a stock then Tim Knight hates it, and so HRL is a leading short candidate for Mr. Knight. I say buy what you like!
Full Disclosure: Love SPAM and this may influence my judgement on the stock; looking to start a position soon.

Mr. Practical from Minyanville
I really miss the writings of Mr. Practical on the Minyanville site. While he still offers posts from time to time, his writing has dropped off in frequency. Today his insights were spot on as usual:
Those declaring the economy is now recovering do not understand (still) the problem: we are stuck with too much debt. The government’s solutions are to create more debt, as their next to be announced PPIP does. But an economy grows from production, not lending at the wrong price. This is a long term problem; the government has only addressed the short run symptoms.
Let me give you an example. Sixty to 70% of our economic growth depends on consumption. In order to “reflate” an economy (still the wrong way to do it but I will give the bulls the fact that you can drive up nominal asset prices by devaluing a currency), you need people to borrow money and spend it. In 2002 consumer debt as a percentage of disposable income was an all-time high of 90%
Apparently that was still low enough to spur consumers into borrowing money against their houses and spend it. This drove the ratio up to 135%! By the first quarter of 2009 the ratio dropped to about 130%. Just look at what damage that did as consumers tried to get out of some debt. The ratio is still at least 125% (we will know for sure in at the end of June as the numbers are quarterly). There's no way to know for sure, but logic says to reflate from that high level of debt is going to be virtually impossible.

Mr. Practical hits the nail on the head.

Trying to reflate assets prices may have worked if those asset prices were at some lower to medium level. As things stand, homes and many stocks were at all time highs and thus cannot participate in a reflation campaign. At least not with an intact dollar. Simple analysis often is the best, see Occam's Razor.

10 Year Yields Moving Up; Why the Bears Cannot be Right
The big story of the past two days has been the monster move up in yield (lower price) for the 10 year treasury (^TNX). A 20% move up is very substantial, though it is from extreme lows.

The coverage of this move has been very broad, with both bloggers and mainstream media joining in. From the blogroll, Jesse's Cafe had these comments and this chart:

And Mr. Denninger at Market Ticker had this to say and had this chart:

To start let me say that I agree in total with what Jesse and Karl are saying. I think that the move up is a repudiation of US debt and signifies a bond market revolt against money printing. Let me be clear, that is what I think.

And thus, I am most likely totally wrong.

For this kind of reasoning to be the catalyst behind the drop in 10 year prices would amount to something making sense in the markets.

We know by experience that this is unlikely. Perhaps impossible.

The FED's plan is to keep loan rates (especially mortgages) depressed at all time lows to allow further debt expansion and roll over. They have been explicit on this point. We can debate the merits of such a plan ( I hate it) but it is what it is.

So how does this fit in with the current market action? Is this the bond market dislocation many (myself included) have been looking for?

I say it is not.

In last Friday's post I linked to work done over at Housing Doom that showed foreign buyers for debt were on a record tear as of late. We know that for foreign debt holders to grow a brain in regards to the dollar and their overweight treasury holdings would signal a real change in thinking. I cannot imagine anything of the sort is going on. So what is?

My first hint comes from a blip in this Yahoo Finance story from today:
Some traders fear demand for Treasuries could weaken as the government issues massive amounts of debt to fund its financial and economic rescue programs. The Federal Reserve has said it would buy up to $300 billion in Treasury debt this year as part of its efforts to keep borrowing costs low. But investors are now concerned that the central bank isn't buying as much as some had hoped.

Catch that?

Traders are concerned that Ben Bernanke is going Quantitative Easing lite, and not QE on steroids with protein shakes on hand!

Now there is a "market" reason I can understand!

The 10 year is going up in yield (and down in price) because the market wants Bernanke to really get the money printing going. The market wants lower rates. The markets needs lower rates. The market wants an open ended commitment to lower rates. That this process is self destructive and may outright collapse has no meaning to the market, those are rational thoughts.

Any two day span in any instrument is too short a time to make a firm judgement. At this point I would attribute the jump in 10 year yields to market forces putting pressure on the FED to make good on their promise to go "all in" with QE. With green shoots flying up all over the place, the recovery must not be disturbed, less anyone really start to look at the stock markets valuation against expected earnings. I mean, no serious disconnect there, yes?

So what I think is happening is the FED is being gamed into buying as many treasuries as the market deems necessary to ensure low rates. The recent examples of profligate spending by the US seems to have made many think we can indeed spend (borrow) whatever we want and there will be no one to do anything about it. Maybe they are right.

Today, the bears are wrong. Next week they may be right. When they are right, things are going to get all post Lehman-esque in a hurry.

Have a good night.

Tuesday, May 26, 2009

Back to Work

I trust all had a great holiday weekend. Weather here was perfect. I played tennis on both Saturday and Monday and of course I was having some issues with going up stairs as my legs were less than happy about all of the exercise. Someone should write a book titled "Things you need to know about getting old that you will not believe when you are under 25 years old". I would buy a copy!

TALF Adjustments on the Way
In the never ending quest to cover basically every slice of debt ever written, the TALF program is being tweaked to allow commercial legacy mortgage backed securities to get in on the government guarantee game. While this process is in motion, events seems to occur which would end the extension under any normal circumstances.

Zero Hedge has a round up of the S&P comments about upcoming downgrades for CMBS:
The lives of the CMSA and Chris Hoeffel are about to get a whole lot more complicated. In a report issued today by S&P, titled "U.S. CMBS Rating Methodology And Assumptions For Conduit/Fusion Pools" Standard & Poors is issuing a Request For Comments on 'its proposed changes to its methodology and assumptions for rating U.S. commercial mortgage-backed securities." Aside from the RFC, S&P goes into detail what the changes to its rating methodology will be, and the impact from these on CMBS. The latter will immediately cause many headaches for all who rode the CMBS AAA train from 1,200 bps to 600 bps, and potentially start a selling puke shortly. In S&P's own words:

Impact On Ratings
It is likely that the proposed changes, which represent a significant change to the criteria for rating high investment-grade classes, will prompt a considerable amount of downgrades in recently issued (2005-2008 vintage) CMBS. Classes up through the most senior tranches of outstanding deals (so-called "A4s," "dupers," or "super-duper seniors") are likely to be affected. Our preliminary findings indicate that approximately 25%, 60%, and 90% of the most senior tranches (by count) within the 2005, 2006, and 2007 vintages, respectively, may be downgraded. We believe these transactions are characterized by increasingly more aggressive underwriting than prior vintages. Furthermore, recent vintage CMBS, particularly those issued since 2006, were originated during a time of peak rents and values, and as such, may be more affected by the proposed rental declines discussed in this RFC. We are currently evaluating the impact of the potential criteria changes on conduit/fusion CMBS transactions from all vintages. Once we evaluate the potential impact on existing ratings, we expect to issue a follow-up publication to this RFC.
And all this just days after the government had finally drafted what it hoped was the last and final version of its TALF term sheet. Lets rewind: in the May 19th version of TALF, in order the be eligible, CMBS "must not have a rating below the highest investment-grade rating category from any TALF CMBS-Eligibile Rating Agency." Throw in a downgrade of 90% of the 2007 vintage and it's time to go back to the drawing board.

Basically, the impending downgrade would make Super Duper CMBS ineligible for TALF. And as Zero Hedge pointed out this weekend, the collapse in all (especially AAA) CMBS spreads was predicated upon the successful implementation and execution of TALF. Now, as S&P rates about 84% of the CMBS universe, the unintended consequence of a rating agency demonstrating a little character and integrity, stands to throw the entire TALF plan into a tailspin, as even with the most recent amendments, almost all Legacy CMBS issues would become ineligible.

I am suspicious of any monetary instrument that is called "Super Duper" anything, but that is another story.

The take home point is that after the coming downgrades a huge portion of CMBS will not qualify for TALF under the present criteria. As this is simply impossible, I agree with many other voices with the easy prediction that the TALF qualifications will be relaxed to include all of these instruments. This is yet another "backdoor" way to pledge taxpayer money without any debate or oversight. I wonder how long until the Treasury gets into the election game as they are fixing everything else anyway.

Revealing Headline
I came across this headline and short story today over at Clusterstock that has deeper meaning that it appears:
Bears Keep Getting Screwed Out Of Their Downturn
This was supposed to be a big week for the bears. After slowing down the bullish momentum over the last couple of weeks, it finally appeared as though they might take control of the action, once again.
You'd think that between all the talk about losing the AAA rating and the nuke tests and the housing non-recovery, the bull market (or sucker's rally or whatever you want to call it) might finally wilt. But today is proving to be just the opposite.
All of the major indices are up over 2% and the NASDAQ has gained over 3.4%.
One trader we talked to, who was convinced that this would break the back of the bull hasn't given up, calling the situation a "hanging chad."

I like this story because it really captures what is going on. I understand that bull markets are born at times that may seem completely crazy. While there have been no real structural changes in the markets, this rally just keeps going on. It seems to be becoming almost a running joke that the markets are flying higher in the face of truly terrible data. Whistling past the graveyard if you will.

Consumer Confidence Full Report
Economic Disconnect feels that one of the most useless data points available is the consumer confidence numbers. This information is nothing more than a referendum on what is on the news and what kind of speeches officials give. After two months of smoothing over a more "positive" message, amazingly more people feel better about things because they were told things are better. I guess that's something.

While all the headlines praised the confidence surge, a full read of the report had some very different information:
The Conference Board Consumer Confidence Index™ Increases Sharply
The Consumer Confidence Survey™ is based on a representative sample of 5,000 U.S. households. The monthly survey is conducted for The Conference Board by TNS. TNS is the world's largest custom research company. The cutoff date for May's preliminary results was May 19th.
Consumers' overall assessment of current-day conditions improved again. Those claiming business conditions are "good" increased to 8.7 percent from 7.9 percent. However, those claiming conditions are "bad" increased to 45.3 percent from 44.9 percent. Consumers' appraisal of the job market was also more favorable. Those claiming jobs are "hard to get" decreased to 44.7 percent from 46.6 percent in April. Those saying jobs are "plentiful" edged up to 5.7 percent from 4.9 percent.

To recap:
-Consumer confidence surged from 40.8 to 54.9
-Claims that business was "good" jumped from 7.9% to an eye popping 8.7%
-Claims that business conditions were "bad" was limited to only 45% of respondents
-Claims that jobs were "hard to get" plummeted from 46.6% to a basement level of 44.7%
-Claims that jobs were "plentiful" exploded to the upside in a move from 4.9% to, this is true, 5.7%

Clearly this is a very positive report.

Rising Bond Rates Threaten Planned Debt Tsunami
After a posting lull, the Financial Ninja was back in top form today with a great post:
"There isn't enough capital in the world to buy the new sovereign issuance required to finance the giant fiscal deficits that countries are so intent on running. There is simply not enough money out there," -Kyle Bass

FN: Giddy talk of "green shoots" has completely drowned out a more sober and rational assessment of the global situation. Random statistical noise in various minor economic indicators have over the past two months resulted in wild exclamations of "the worst is definitely over".
It most certainly is not.
With every major economy in the world attempting to solve this economic crisis with both loose monetary and fiscal policy, it was only a matter of time before the global credit markets would reach their limits.
These limits have almost been reached.
The long end of every curve of every major economy has been steadily climbing. The rate of change has now accelerated and interest rates on these important benchmarks have now reached "pre-crisis" levels. In a ZIRP world this is definitely a bad sign. Formerly respectable governments from the US to the UK have gone the "banana republic" route and started monetizing their debts in a desperate attempt to prevent long rates from rising, to no avail. A veritable tsunami of debit issuance now sits just over the horizon, waiting to dumped on a crippled and saturated global debt market.
The UK will eventually lose it's coveted triple 'AAA' rating and the US cannot be far behind. Rising rates will drag everything from mortgage rates to credit card rates higher. Everything from residential and commercial real estate to businesses will feel the pain of higher borrowing costs. The central banks of the world have no more real options left. They've lowered the rates they control to zero and have flooded the financial system with liquidity. Their balance sheets are now swollen with toxic assets and outright debt monetization won't bring rates down.
With each interest rate tick higher another "green shoot" dies...

Plenty to think about from that post and the link above has some graphs and supporting stories.

With all the debt that needs to be sold, foreign buyers may want to think about their own "exit" strategy. Also, they may want to consider just how much is too much. I offer them this warning sign:

Have a good night.

Friday, May 22, 2009

Run ON the Dollar or Run TO the Dollar?

Spectacular day today here in Massachusetts. Over 80 degrees and no humidity. It is going to cool off a bit the next couple of days, but I will take it.

Overwhelming Majority of Voters Oppose State Bailouts; Too Bad For Them
The well regarded polling company Rasmussen Reports got ahead of the game and asked the following question:

Do you favor federal bailout funds for states like California that are encountering “serious financial problems.”

The results came in as you would expect with 59% of voters are opposed to helping any state in particular, and 66% opposed to helping California specifically. Full write up can be seen here.

While I appreciate both Rassmussen and the voters who gave answers for their effort, they both could have saved their time. The states are going to get bailed out no matter what public opinion is. We have seen this show before.

But wait, did I not hear the words of Treasury head Tim Geithner in which he stated that help for California is not feasible? I read his remarks, and you have to see what he really said. Mr. Geithner said explicitly that the LAW as it stands does not allow for state support by TARP or other Treasury programs. The LAW he said.

Certainly we have seen that the LAW has little bearing on the actions of the FED or Treasury. Also, the LAW could change in 10 minutes after a rushed vote by a panicked congress eager to make sure their state gets their fair share of aid. I can predict with 100% confidence that a state bailout program will be put in place either overtly through cash handouts, or behind the back through bond guarantees and loan backstops.

Run ON the Dollar or Run TO the Dollar?
In yesterdays post I highlighted a bunch of sovereign debt and/or banking debt downgrades from all over the world. With countries like the UK getting hit, how long until the USA gets the same marks? Today all across TV and the media the prospect of a lowered credit rating for the US was the top story.

If serious doubts about the dollar were taking root we would expect to see symptoms of a move away from US debt (through treasuries):
-A lower dollar (it has weakened as of late)
-Higher yields on treasuries (they have spiked up even in the face of quantitative easing)
-Higher Gold (it has moved up)
-Decreased purchases of US debt or outright sales by foreign countries

While the first 3 criteria have been met to varying degrees, the last point has not occurred at all. In fact treasury purchases have been at ALL TIME highs over the past few weeks! I know, it makes no sense, but Housing Doom crunches the numbers for us here. Some key data sets:

There is much more information at the Housing Doom site.

So what gives?

Foreign central banks are adding their treasury holding like they are gold or something! Notice the number 2, 9 and 10 largest weekly purchases all happened in the month of MAY of this year! Over the past 2 weeks over 50 Billion dollars in treasury debt was added by foreign banks, an unprecedented amount according to Housing Doom who follows this data religiously.

Perhaps along the lines of "if a bank places a secondary offering that dilutes shareholders by 20% then that stock is worth 30% more!" logic central banks feel that holding as much debt about to be downgraded as possible is just the ticket. Good luck with that.

Friday Night Entertainment
It is once again Friday night, and a long holiday weekend at that, so let's try to have some extended Friday night fun!

Too Much Time ON Their Hands
When I have too much free time I tend to start projects I cannot finish or get into other mischief. Some people have so much time on their hands, they start doing crazy things to their hands. Geekologie has some fine examples of this phenomenon:
Elephant Hand

Flying Eagle Hands

There are more animal hands at the Geekologie post.

Sci-Fi Short Story Read
I had mentioned this story last year, but I just re-read it this week and I really love it!
Try to find a copy (online or in print) of Harry Turtledove's great short story "The Road Not Taken". Great science fiction with an ending you will not believe. You could Wiki the tale here, but that would spoil all the fun!

Film Clips
I love chess, and thus I ,oved the film "Searching for Bobby Fischer" based on the life of young Josh Waitzkin. The entire film is wonderful with great acting and a good story. The ending scene is amazing and it results in a rare chess ending where white's queen is skwewered to end the match:

I have always loved the film "Joe Versus the Volcano" and I think it was missed by many for it's deep insight and helpful look at ourselves. No matter, take a glimps at the scene where Joe (Tom Hanks) quits his job after he finds out he has about 6 months to live, classic:

Rock Blogging
We need some inspiration for the long weekend, so we shall have an offering of quality tunes to lead the way.

Loyal reader Kevin requested a tune that was a surprising pick, but I most certainly know the song and in fact I like it very much! Enjoy Ace of Base and "The Sign":

The next selection I heard in the store today and I love the vocals and the old school music, so enjoy this classic from the Beatles.....HAHAHA sorry suckers!
Enjoy Bobby Darin and "Dream Lover":

As a hair band lover, one of the best was Motley Crue. Almost any song is a winner, but for a softer side try out "Home Sweet Home":

Loyal reader Watchtower realys that the only rap music he likes is from the Beastie Boys and I could not agree more. My favorite is "So Whatcha Want" but here at Economic Disconnect we do requests, so enjoy "Sabotage" complete with hilariois 70's cop show style video:

For some haunting vocals, lyrics, and acoustic guitar let me point you to Staind with "Outside":

A little more rocking to end the night. I bought the Metallica album "And Justice for All" after I saw the video for the tune "One". the first song on the album is still one of my favorite songs to get riled up listening to. Get excited for "Blackened":

Have a good night.

Thursday, May 21, 2009

Thursday Downgrade Avalanche

What a busy week! Home late every night, but I have tomorrow through Monday off for a nice 4 day weekend. Get your Friday night requests for any category in!

Federal Reserve Audit Petition
There is a wonderful bill authored by none other than Ron Paul that calls for a complete audit of the Federal Reserve. At first mostly Republicans were getting on board, but now even the democrats are getting wise to the idea that the FED is doing things above and beyond their charter and they are staring to take the FDIC along with them.

Democrat Alan Grayson has now pledged to rally democrat support, and this should bring even more pressure on those that would vote against such a measure. There is an online petition available here, but please note that while Economic Disconnect is all aboard this bill, the site hosting the petition is pretty far left politically and my participation in the online petition in no way is an endorsement for the site in general.

More to Every Story
Last week I had linked to the NY Times story that was written by one of their own business writes about his journey into foreclosure and bankruptcy. While forthcoming and honest, there did seem to be some more under the surface that was glossed over.

Loyal reader GawainsGhost points us to this Atlantic piece by the writer Megan McArdle who found out some more information.
It seems the NY Times writer has been through the bankruptcy process before, as his wife has done it twice. This adds to the drama of the story, but his own personal life I think is his own. Still, worth a look to get a fuller picture of what was going on.

Home Depot CEO vs Ben Bernanke on Housing
The great blog Bubble Meter picked up on words of caution given by Home Depot CEO Frank Blake (via Financial Times):
Growing optimism over the US housing market may be premature, a leading retailer warned on Tuesday.
Frank Blake, chief executive of Home Depot, said housing market signals were still mixed.
"We are concerned about the accelerating rates of foreclosures, particularly in the western part of the country," he said, noting that one out of every 54 homes in California was in foreclosure.
Mr Blake said that a slowing foreclosure rate in California during the fourth quarter had led to an improvement in regional store sales but the trend had then reversed as foreclosure rates rose again in the first quarter.
The shift "provides a cautionary note on signalling a recovery prematurely", he said. "Before we see real improvement we believe we need to see sustainable deceleration in foreclosures."
There were 342,038 foreclosure filings in April, according to data from RealtyTrac, an increase of 1 per cent from the previous month and up 32 per cent from last year.

Ben Bernanke still sees growth and a housing turnaround in 2009 (it is now mid May) but the CEO of arguably the most directly effected company by real estate trends says otherwise. Who are you going to believe?

Thursday Downgrade Avalanche
The big news of the day was the debt downgrade of the United Kingdom by ratings firm Standard & Poor's (S&P). While the validity of the ratings by many of the rating firms can be questioned, they still move markets and have bearings on holders of various debts, bonds, etc. S&P cited ever rising debt accumulated by the UK as they try to spend their way out of a overspending led recession. This mantra may sound familiar.

Mish has a "Parade of Downgrades" up this evening and I would recommend you take a look.
Among the downgrade (or soon to be downgraded) club today:
United Kingdom
Spain (several big banks probable)
Hungary (several big banks)
Irish Banks (again!)

Mish closes with one performer that has not been downgraded: GOLD

While countries the world over are playing the print-o-rama of money game, gold has quietly had another good run. Economic Disconnect is a huge fan of Gold (and Silver) but has been caught flat-footed by the recent rally and too busy to work out new entry points. I will make some solid commitments over the weekend and then put them in play next week. I am looking at a spread between GLD, SLV, GG, and PAAS. I will of course share those trades in case you would like to lose a bunch of money by doing what I do. You are warned!
Full Disclosure: Long gold and silver through various channels in positions in place since 2002-2005. No currently active positions taken out since 2006.

Break Up California???
With the situation in California quickly moving to crisis stage, ideas on what to do are sure to spring up. While the debate may be fun, we all know a Federal bailout and guarantee will be coming very soon. Still, that is no fun to write about!

Clusterstock has a great find from the site BreakingViews that posits the idea of breaking California up into 4 states!:
...But theoretically the state is salvageable, argues Breakingviews, if only because the state could both afford higher taxes and reduce state spending. Spending is far from bare-bones levels, and state employees are extremely well paid.
But Breakingviews actually proposes a much more radical solution, which is breaking California up into 4 distinct states (seriously). Think of it like good bank/bad bank, but for states.
Actually it's a little different. The idea is not that this will solve the state's financial problems, but that it will split it into four coherent political units, which would be:
San Diego/Orange County/Inland Empire (socially conservative, Hispanic, heavily military)
Greater LA (Hollywood and Hispanics, very liberal)
San Francisco/Silicon Valley (Liberal, but very dynamic and market oriented)
Central (Conservative, Kansas-like)

This is a political scientist's late night fantasy and doing this might actually solve some political problems, but in the end it wouldn't work.

You can go with the link to see the various political calculations.

With thoughts even being voiced about splitting California up, and Texas leaving the Union you know things have crosses over into the Twilight Zone (I do not mean the vampire novels!). May you live in exciting times. We do.

Have a good night.

Wednesday, May 20, 2009

Any Way You Look at It, Sideways Market Likely

Home late yesterday and again today! Trying to get some work done and out the door before the long weekend. The new lawn is starting to show some "green shoots", and these shoots are the real deal!

Federal and State Judges Ready to Back Fed/Treasury Actions
The Chrysler move into bankruptcy at lightspeed hit it's first speedbump when an Indian pension fund files for a delay/halt to the proceedings so that their position could be heard as to what kind of compensation they were entitled to under law. These things usually can result in minor to major delays for various actions.

The courts realize that the best way to minimize the jarring effects of a speedbump is to, counter-intuitively, run over them really fast. In a summary judgement delivered less than 24 hours after the original motion, the bankruptcy court judge said "out of luck chumps" to Indiana. Please see Zero Hedge for the complete written ruling.

I am sure that having no legal recourse when it comes to settling business matters will have a wonderful effect on private investment going forward.

California Dreaming
Tuesday belonged to California as there was a big vote that decided whether ever escalating taxes would solve the state's budgets issues or if the process of waiting for the FEDs to bail them out would be the road taken.

The votes are in, and the California voters rejected all tax games and funny spending tricks to finance the states losses. All eyes will be on Washington for the next move.

Mish has been all over the story, and I would point to his site and these relevant posts:
California Rejects Propositions
California Elected Officials Pay to be Cut 18%
That was fast! See, change you can believe in!

Any Way You Look at It, Sideways Market Likely
Calculated Risk often posts a couple of charts from the site DSshort. These charts are historical comparisons between bear markets in past with our current bear in comparison.

Lets start with the chart "Four Bed Bear Markets" and see what we can see (Click on charts for larger view):

Looking at this chart I come away with the following thoughts:
-It is a close call between the Oil Crisis line and the Crash of 1929 line as to which scenario the current market fits in
-If you like the Oil Crisis idea; slow and sideways looks likely, all things being equal (which of course they are not)
-If you like the Crash of 1929 idea; a slow spiral down is still in the months ahead

The other chart is called the "Mega-Bear Quartet" and this chart compares today's mess with the biggest busts in history over a longer time frame. The other culprits are the Nikkei 225 (1989-2000), Nasdaq (2000-present) and the DOW (1929-1938):

This longer term chart is a bit more provocative.

My take away ideas:
-Today's market action is hardly without precedent or historical context
-All the items listed exhibit classic post bubble behavior; big crash-long move sideways-trending up over the long term at a slow rate
-The bottom scale is YEARS; not days, not weeks, not months, but years.

I would call attention to the last point about the time scale. Everything the government has done is built on the idea that a turnaround is right around the elusive corner. The massive balance sheet growth of the FED and the never ending bailouts, backstops, and guarantees are all measure meant for a short term fix. The calls for a "V" shaped recovery, now almost the consensus, all cement this idea.

Now look at that chart again.

It is my opinion that the FED and the Treasury know full well that their plans cannot last years in effect. That is why I believe even more intervention is a sure bet. What this will entail I can only guess at this point as every trick known is in place and quite a few that were never imagined before.

Long term, only dollar devaluation, debt destruction, and forced inflation will shorten the long move sideways. Shorten, not "make short". The action in the dollar and gold today seemed to indicate a small but growing recognition of this fact.

Are pensions and those about to retire prepared for this?

Are States prepared for this?

Is the US government prepared for this?

And most importantly, are YOU prepared for this?

Have a good night.

Monday, May 18, 2009

Steps Closer to the Real "Grand Experiment"

I think just about everyone went out and had a fun weekend. Across all the sources I read almost nobody had new posts over the weekend and even the government seemed content to keep quiet for once. Calm before the storm or the new Zen of "green shoots"? We shall see.

Hot Commodities
LOL FED has a great post up today that explores some major commodity winners since the financial crisis started. I have to agree that SPAM is the big winner, I have a pantry with plenty of it in case of banking failure, swine flu, or other random catastrophe:
We’ve been saying for like six months that SPAM is the go-to commodity in times of fail, and sure enough, Hormel just posted a 6% increase in first-quarter sales. If you’re wondering what else is flying off the shelves (yes, a few things actually are), AP is out with a report this weekend, which we’ll dissect.

AP says we’re packing our carts with:

- SPAM, as discussed above.

- Macaroni and cheese, because SPAM can’t go it alone.

- Laxatives and stomach remedies, to help cope with all that SPAM and macaroni-and-cheese indigestion and constipation.

- Running shoes and fishing gear. Sporting goods are the kind of things where the initial outlay of $ can keep you amused for months, provided the item doesn’t end up collecting dust in your closet somewhere.

- Gold coins, a nice shiny hedge against inflation.

- Gardening seeds. Peek over your fence, and you’ll probably find the yuppies next door scratching in the dirt, talking about TEOTWAWKI or at least about “radical self-reliance,” attempting to turn their plot of suburbia into arable land. Well, okay, probably not. They’ve probably just gone out and gotten themselves an Aerogarden.

- Guns. Must protect the gold coins and Aerogarden.

- Booze. It’s cheaper to drink it at home than at the bar, and we still need SOMETHING to cry in.

- Condoms and memberships. Hey, I just explained that no one is going to the bar.

- Self-tanner. Angelo Mozilo idolatry at work? Nah, probably just trying to get your date to like you, and there’s no way you can afford to get to the beach. Hey, your date might like the chocolate that made the list, too.

This is your life, America.
Now, if you’ll pardon me, I’ve gotta go pour some cheap beer out on my doorstep for Dow 14,000.

I would add banking stocks to the list as they seem to be the hottest "must have" item right now.

Job Losses After the "Jobless" Recovery
It seems to be genrally accepted that unemployment numbers do not really matter anymore because they are a lagging indiactor and a V shaped recovery will solve the jobs problem anyway. While we can certainly debate the merits of such thinking, I wanted to spend a minute looking at job creation over the past few years.

It is generally accepted that about 300k jobs need to be created a month to provide a stable job force that can accomidate new workers and economic growth. After the Nasdaq tech bust and then September 11th, unemployment rose quickly, but then eased off. The credit boom and its' and associated vehicles (real estate and mortgage related jobs) were high growth areas, but most other sectors stayed weak for some time.

The site iCharts has almost any chart you can imagine and I would point you towards this chart of monthly non-farm payrolls.

It is clear from the chart that from 2004 to 2008 job creation was anemic. The 300k level was only reached a few times over that span. Now the jobs picture is ugly with job losses piling up wiping out much of the 4 years of gains in about a year.

I think about the fact that there was a "jobless recovery" that has been followed up by monster job losses. Proponents of the secondhalf recovery theme should probably stop and ask where the needed jobs for a real recovery are going to come from. Federal spending, loaded bank earnings, and low end earnings estimate beats are good enough for a 30% run up in the stock market, but they are hardly the bedrock of a recovery in the "real economy".

Steps Closer to the Real "Grand Experiment"
There were several related items circulating today that rovelve around a central point. First, the stories:
Brazil and China eye plan to axe dollar
Brazil and China want to settle accounts in their own currrencies, not the dollar.

Asia will author its own destruction if it triggers a crisis over US bonds
Japan and China can never dump the dollar (via treasury holdings) because they will collapse if they do.

Moody's Japan downgrade puts triple-As in spotlightHigh government spending and no real plan for change cause Japan to get downgraded, but the USA is all good.

In aggregate these stories bring up a thought that I have written about at length;
Can the US spend whatever it wants?
By "spend" I of course mean "borrow". With tax revenue falling off a cliff and increased federal spending as far as the eye can see (wait until the state bailouts begin, oh brother!) the US seems immune from bearing any of the usual bond consequences for this kind of behavior.

The actions of the Treasury and the FED amount to a new kind of "Grand Experiment". In this lab test tube we are going to see just how dissociated from any economic reality one actor can behave without causing a collpase.

The officials in charge think they know just how far they can push the envelope. Just like they think they know where interest rates should be and just how "contained" mortgage loses will become. I hope there is a backup plan.

Have a good night.

Friday, May 15, 2009

Retraction Friday

It was 74 degrees and very nice today. I could get used to this weather, but of course it is going to rain on Sunday and get a lot cooler next week. Still, you have to take what you can get.

I was glad I had some extra time last night to write up the section "It Depends on Your Point of View". I really like that post and think those two questions go a long way to figuring out how someone sees the financial world.

Retraction Friday
I am not sure that I should write much of anything tonight because the way things are going any quotes or information I do include will probably be retracted tonight or tomorrow. I also would like to avoid being sued by anyone should I copy a statement from them on the blog that later they claim they never said that or do not remember saying it. Who can tell.

If you are confused I will review a couple of stories from late in week that are at the minimum suspect and at worst outright conspiracy.

First up is the comments made by FDIC head Sheila Bair. All across the wires yesterday were reports that Mrs. Bair had made comments during a Bloomberg TV interview that made the claim that some banking CEO's would have to step down after taking so much government cash. You can see a Bloomberg article here, at least until it is modified or taken down.

Today the FDIC was out in force disputing that Mrs. Bair used specific wording in the interview about CEO replacements. Reuters has the "correction" here.

If and when the Bloomberg video is posted I think we will be able to make a call, but until then it seems that the allegedly independent FDIC is very keen on making sure the markets are not roiled by any comments made, or not made.

The second instance of weird really goes above and beyond simple "misinterpretation". Zero Hedge and Naked Capitalism have the full rundowns on the evolving situation and I would direct you to the links provided to get all the details.

The short form is thus:
On Thursday the Daily Telegraph (an English paper) ran a story penned by writer Ambrose-Evans Pritchard which featured excepts from the Qatar Global Investment Forum with Mark Patterson of MatlinPatterson whose firm used TARP money to invest in a Michigan bank. Mr Patterson allegedly cut loose on the program with the following harsh words:
"The taxpayers ought to know that we are in effect receiving a subsidy. They put in 40pc of the money but get little of the equity upside,” said Mark Patterson, chairman of MatlinPatterson Advisers.
Mr Patterson said the US Treasury is out of its depth and seems to be trying to put off drastic action by pretending that the banking system is still viable.
It’s a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100bn (£66bn) of the $700bn TARP funds. They think they’re doing this for the greater good of society,” he said, speaking at the Qatar Global Investment Forum.
Mr Patterson said it would be better for the US to bite the bullet as Britain has done, accepting that crippled lenders must be nationalised. “At least the British are not hiding the bail-out,” he said.

Early Friday the Telegraph story was taken down and the link to it no longer works. Tyler Durden of Zero Hedge of course saved the whole thing and has it posted on his website. He is brave!

Not content with just removing the story, Mr. Patterson went on a retraction offensive and got lawyers involved. That is never good. Mr. Patterson issued a statement of clarification to the Telegraph which used terms like "fabricated", "misstated", "misquoted", and "mischaracterized" his words. Legal action has been threatened over continued posting of the original article.

This is big time folks. The forum was attended by many other players and thus what was said is sure to come out sooner or later. Would anyone be surprised if strong arm tactics were employed by the government to get Mr. Patterson to change his tune? We now have all kinds of proof that the Treasury strong armed banks to take TARP, so it would be standard procedure for them to try and squash this kind of bad press, especially in the midst of a big market rally.

Economic Disconnect did some investigation and was able to find the letter the Treasury sent to Mr. Patterson concerning his statements. This is exclusive stuff pulled from the trash and pasted back together (it had been shredded). Here is the full text( Disclaimer, obviously this is a JOKE (ie not REAL), but in today's environment I will say that up front):

To: Mark Patterson of MatlinPatterson
From: The Treasury, you Punk
Re: Stupid words, but we can save this thing yet!

Mr. Patterson,
We at the Treasury were deeply saddened to read your comments made in Qatar concerning the TARP program. While we bent over backwards to hand out money so you and your ilk could spend taxpayer money to enrich yourselves, we are rewarded with this kind of slap across the face. Here at the Treasury we have a saying:
"Don't' Piss Down My Back and Tell Me It's Raining!"
Which yes, we stole from the "Outlaw Josey Wales"; regardless please be advised that we do not take kindly to being portrayed as ripping off the public, we are doing that, but to say so is poor taste.

Luckily after review of your comment transcript we at the Treasury have a way this can be fixed. Please find the text of what your new comments to be made, no later than Friday Morinng May 15th, will include. Do not change or alter these words in any way:

"On my comments in Qatar I would like to clarify some items that were fabricated, misstated, misquoted, and mischaracterized. While I did use the word "sham" what was not reported was that I stated that the TARP program was in fact a huge "SHAM-WOW" that was in effect sopping up the market ills of bad assets. This service is vital to the smooth flow of credit to households and small business. It has been reported that I said the taxpayers were getting "ripped off" but if you listen to the transcript closely you will hear that what I said was that losses for the taxpayer on TARP had been "WRITTEN OFF" as impossible because the deal they were getting was so awesome.

Thanks in advance for any corrections and any removal of any archived web material that states otherwise.
Mark Patterson"

The Treasury trusts you will follow our guidelines as not to jeopardize the bank secondary offerings during this silly market bounce. Not that we are threatening you, but we do control the IRS and your MySpace page does include many "friends" of the female gender that are, how shall we say, of an age bracket that may become inconvenient should the FBI want to look into it. Not that we control the FBI.

Thanks in Advance,
The Treasury, you punk.

Scary letter! (Again, this is a joke!!!!!!)

Friday Night Entertainment
Some film clips, yes?

This week we saw some Stat Trek and Star Wars talk. Allow me to show you the scene that hooked me forever as Yoda teaches Luke about the Force. "Luminous beings are we, not this crude matter":

I have had this on before, but I was in the mood for the "coin toss" scene from "Old Country for Old Men". Instant classic:

Rock Blogging
We need a little rlaxation after a wild week so lets start off slow.

A nice calming tune is Ben E. King's "Stand By Me" with great string movement near the end:

From the classics vault, remember back to Richie Valens and "Oh Donna":

Mellowed out? Relaxed? Ok, we can turn it up a bit!

I found an old live clip from 1986 of Dire Staits and "Sultans of Swing"; very nice:

I loved the band Audioslave, and I lament their disbanding. Listen to "Cochise" and know they were rock's last best chance:

If a song has not been posted in over a year I can repost it! In that case I love Guns N Roses and the song from Terminator 2 called "You Could Be Mine":

Have a good night.

Thursday, May 14, 2009

It All Depends on Your Point of View

Another Thursday in the books which means it is almost Friday! Get your film, music, books, and general entertainment requests in for Friday night's post!

You Have to See It to Believe It
In the dark days when the entire banking system was about to collapse and American Idol was sure to be postponed, we mere mortals should have been resting easy knowing we are watched over by the very finest officials and banking CEO's.

Documents obtained by Judicial Watch show just how well thought out the banking bailout was and how meticulous a process it was to hand out Billions of dollars. All you need is a number 2 pencil and a few copies of a hastily put together "plan" and presto! Solvency restored!

You really must take a look at the documents to appreciate what I am talking about. Clusterstock has the copies here.

Looking at the almost elementary school language and scribbles of amounts and bank names I am reminded of those notes we all used to pass in grade school. You know, those small, tightly folded notes with such nuggets as "Do you think Teacher Mrs. Smith is a poopy head? Yes/No".

The Sequel to Inflation, Ex Inflation
Most times sequels pale in comparison to the first iterations of films and music. There are exceptions, but the rule holds true more often than not. We are able now to start to review the newest sequel, and this one is an economic one.

Think back to a time over the past few years when gasoline was rising in price like a rocket, food prices were screaming ahead, and inflation on the real consumer level (counting rising home price costs) was very high. At that time as the calculated inflation rates (CPI, PPI, etc) were reported we were treated to a very special interpretation of inflation by the bullish sort:
Inflation, Ex Inflation
This kind of inflation report strips out anything that went up in price. Stories routinely ran items like "inflation, minus volatile energy costs, rose very modestly over the past month" and many others just like it.

Never the sort to abandon a working idea, the media has now introduced the sequel:
Unemployment, Ex Unemployment
It seems not all recently fired workers are equal in the eyes of the media. An example of the kind of dual reporting we can now expect:
Economy's improvement is fitful, reports show
Jobless claims, producer prices rise more than expected as recession slowly eases grip
WASHINGTON (AP) -- A bit of sour news Thursday -- in the form of increased jobless claims and higher wholesale prices -- suggested the economy is moving in fits and starts even as the recession eases.
Analysts said the pace of unemployment claims should ease after auto industry layoffs are completed. Inflation, meanwhile, remains under control, and any threat of a dangerous bout of falling prices seems remote.
The number of new jobless claims rose to a seasonally adjusted 637,000, from a revised 605,000 the previous week, the Labor Department said. That exceeded analysts' expectations of 610,000.
Economists noted that initial claims remain below a peak reached in late March -- a sign that the wave of mass layoffs announced earlier this year likely has crested.
"This is yet more evidence that we are now past the worst," Paul Dales, U.S. economist at Capital Economics, wrote in a research note.
Most of the increase in jobless claims was due to auto layoffs, a department analyst said. Economists estimate Chrysler LLC has laid off 27,000 workers in the wake of its April 30 bankruptcy filing.
Elsewhere, Nike Inc. on Thursday said it will cut about 1,750 jobs worldwide, or about 5 percent of the shoe and apparel company's global work force. Nike in February said it was realigning its business and would cut jobs as the global recession hurt consumer spending. The company plans to complete the layoffs in the coming weeks.
Still, many economists expect the downward trend in jobless claims to resume once the effect of the auto industry's job cuts has passed.

There are many items in this short snippet to pay attention to.

First notice that even as unemployment numbers came in much higher than estimated, it is summarily dismissed as a non event because many of the layoffs supposedly came from the auto industry. The clear implication is that those jobs should not "count" in the "real" unemployment figures, hence Unemployment Ex Unemployment! A work of art.

Forget that the huge number of initial claims (over 600k) dwarfs the Chrysler and GM layoff number, never let facts get in the way of a good story. In the same story we see that Nike is laying off 5% of their workforce. Unless only auto workers buy Nike shoes, I think there are may be a connection with monster jobless claims and the economy.

Also notice that the recession has officially begun to "ease it's grip" on the economy. If the recession has eased up, I would like to see the memo this writer got that says so. At least in this environment rising food costs (eggs up HUGE) will help those that live in fear of Deflation to rest easy. I can imagine Ben Bernanke right now saying "I love eggs and quantitative easing sunny side up for breakfast".

It All Depends on Your Point of View
As I was thinking about this evenings post I was drawn back to my school days. I started thinking about a really great 5th grade teacher I had. This teacher started making me think using reason and logic and for that I will never forget him. He used to have the class write essays that made you use both your imagination and thinking skills to flesh out an answer to a weekly question. One such question was "What if strings hung from the clouds?". I remember writing something to the effect that those strings would be great because you could climb them and see a great view or use them for traveling (hey, I was in 5th grade).

Another question the class had to write about is a bit more relevant to tonight's discussion. The question was:
Do you eat to live or do you live to eat?
Now intellectually the answer is pretty obvious, but I remember having a rough time with that one in 5th grade.

I bring this up because I think we are seeing a similar type question being asked right now, and how you answer it goes a long way to revealing what you think about things economic.

Let me set the stage for the discussion.

By now you are aware that the state of California is having major budget issues. Mish calls California a "basket case" in a post today, that I will excerpt (with his excerpts) here:
MarketWatch is reporting California formally asks Geithner for TARP assistance
California Treasurer Bill Lockyer asked U.S. Treasury Secretary Timothy Geithner on Wednesday to authorize assistance for his state from the federal Troubled Asset Relief Program, warning that depressed tax revenues may cut into basic services and halt the building of infrastructure.
In a letter, Lockyer asked Geithner for TARP assistance for California and "other financially strapped states and local governments which face a severe cash flow crunch."
"If we cannot obtain our usual short-term cash-flow borrowings, there could be devastating impacts on the ability of the State or other governments to provide essential services to their citizens," Lockyer wrote.

LA Mayor To Declare Fiscal Emergency
Meanwhile, Villaraigosa calls on City Council to declare a fiscal emergency.
With Los Angeles facing a $529-million budget deficit, Mayor Antonio Villaraigosa on Tuesday urged the City Council to declare a fiscal emergency that would grant him the authority to lay off and furlough thousands of city workers.
The request signals a more hard-line tack by the mayor to win salary and benefit concessions from the city's public employee unions, which had soured on Villaraigosa's call for a salary freeze, furloughs and increased benefit costs to save $230 million and avert the need for layoffs.

And with these stories in mind the question is:
Do governments exist to provide services for the citizen taxpayers or do citizen taxpayers exist to provide jobs and benefits for public employees?

At first blush the answer may seem obvious. In reality the line of demarcation is blurred.

Services expected by the citizens of any state (or the USA as a whole) for their tax dollars are simple. Sanitation, education, protection (legal and physical), and basic infrastructure are the standouts. These services should be provided at bare bones costs to limit the drain on private funds. Over time government the country over have gone above and beyond to include many other services that I will not list as they are too many in number and usually elicit string responses both for and against.

The point is that in many states and the US Federal Government as a whole it now seems like the very purpose of the citizenry is to provide funds to support state and federal jobs. Consider the hard line the unions of California are taking. It does not take college educated Harvard business school trained grads to do trash pick up or toll collection. Those basic services could be "shopped out" and at probably 1/5th the cost of state union worker salary and benefits. Yet the unions are refusing to give ground because they want what they see as their just price.

Even as California is facing bankruptcy and possibly being locked out of the bond market, they do not try to break contracts and cut pay but instead plead for TARP money and Federal backing of their debt sales to maintain the status quo for their employees no matter the costs to the taxpayer. This process is in motion all over the country.

So now the question as asked is a bit harder to answer, is it not?
Do governments exist to provide services for the citizen taxpayers or do citizen taxpayers exist to provide jobs and benefits for public employees?
The answer is not so clear after all.

We can extend this line of queries even further. Consider:
Do banks and investment servicers exists to provide the citizens with a safe haven for their money, reasonable investment advice, access to credit, and transaction support or does the citizenry exist to serve as exploitable resources for use as capital by banks to go after huge bonuses and risk taking?

Again, at first the answer is easy, but when you really consider how the game is played things get a little confusing.

The answers to both questions will depend largely on your point of view. If you are living off taxpayer dollars you probably feel like joe six pack is getting a steal for your efforts and you cannot understand what the problem is. If you are a banking big shot you probably cannot fathom why nobody appreciates your great skill and courage to wade into the jungle of finance.

If you are just a regular privately employed man/woman on the street you are probably wondering why almost 40% of you "earnings" disappear to taxes and you see very little for all that lost income. After getting shellacked for loses in the market you may wonder why those behind the loses never seem to take a pay cut.

Interesting questions indeed. Keep these questions in mind as events continue to unfold and you will see that your point of view is just as important as the show you are watching.

Absolute must read is here.
Now I know I am an idiot for doing things the "right" way.

Have a good night.