Panic Room

Short on time this evening so a few notes.

Silver Moves Higher, no Regrets
Silver hit my upside target of $24 today. Do I regret selling a little while ago? Nope, not at all. If you are going to trade you have to have targets to the upside and downside and you have to stick with them. I felt $22 was very attainable and $24 was the top of the resolution. I got about $23. No worries here. Besides, I have plenty of physical silver sitting pretty to enjoy the ride.

Minyanville has what they call the "Mr. T Gold Top Indicator" and the big guy was on Bloomberg TV today touting gold! Usually a reliable top marker, but with animal spirits running wild on the promise of QE2 you never know. More in another section.

Mortgage Mess to End in Five Weeks. Six tops.
JP Morgan (JPM) had earning s today and if you allow that they played with loss reserves they "beat" estimates for the 20 thousandth time since 800 B.C. What was amazing was how smug and glib the CEO was about the whole process. Calculated Risk has a partial transcript up. Some examples:

-"As a result of these actions, we're reviewing 115,000, plus or minus, loan files that are currently in the foreclosure process"
-"It's going to take several weeks to go through the files and make sure and correct any errors that are in there. The underlying stuff is all accurate. So that's the key substance. Obviously we know there's a lot of state AGs and we have conversations with them. We're hoping [to get back to] the normal process -- for us, the sooner the better for everybody involved."
-"Again, I hope -- this is a hope. This is not a knowledge. Is that when people take a deep, sigh breath, go back to the right, look to the substance underlying the files and go back to modifying, foreclosing and doing the right thing, all told, it could be a blip. Talking about three or four weeks it will be a blip in the housing market. If it went on for a long period of time it will have a lot of consequences, most of which would be adverse on everybody."

Wow.
Now I would ask how they can review almost 120 thousand files so fast? How many people are doing the work? How come nobody asked how realistic this is? It is clear the CEO either does not think anything will come of this or he is seriously full of it. Worth watching but I have already written how this all ends.

Panic Room
Stocks. Grains. Gold. Silver. Oil. Bonds. You name it and it has been panic buying for a little while now. If QE 1.0 resulted in a year long melt up, QE 2.0 induced blow off tops might be done in another week! This kind of rush buying is not healthy.

The Evil Speculator notes the FED POMO schedule for the rest of the year and submits:

Anyway – the market, right. Bottom line: The bear case is done until early January – at least in equities. Bonds look like they’re ready to reverse but in a market where equities, gold, and bonds all move up I am not willing to entertain any big bets.

Another 2 plus months of panic buying? That might get interesting!

I have no idea what is going on right now. The orgasmic euphoria out there is stronger than late 2007. Potato Sack and Boom Boom Bernanke have ignited a scorched earth policy of incinerating cash and savings to get a conflagration of equity and commodity prices. It looks like people want to play. Big time.

While the FED ponders how to get unemployment down, I have a better idea. If they keep this stuff up, why not just roll all the super-extended unemployment benefits checks into AAPL, NFLX, and BIDU and let that ride the wave to 100% gains! Then hand out the checks, or have people re-invest in the unemployment triple bull favorite stock ETF ( ticker: NOJOBBUTONFIRE) so they can get ahead in this tough economy? Geez, that was easy!

Being a wet blanket I would caution there is some headline risk out there with things like currency wars brewing, the mentioned foreclosure mess meaning losses at the banks, and just exhaustion of buyers but why worry about a 5% move down when you can move up 5X that in a month! Missing out is worse than death these days.

At the current average of .5% moves up every day we could be at all time highs by January, December if we get rid of those pesky red days of -0.002%! The law of big numbers should get in the way, but that is what QE 3-10 is for after all. How many shares of AAPL will it take to buy a loaf of bread or grab a can of corn to heat over your remaining cash that is better used as fire fuel? I have no idea, but it should go over well with all the idiots that pulled so much money out of the equity market over the last year. But that is cash on the sidelines, right? Rock on through the night!

More Fun
If you like biting wit, sarcasm, pictures of eye candy, and a general great time you should stop on over at When Genius Prevailed as the author has a great mix of great insight and a fun format. If you say I sent you you will get a discount on the page loading time. Kidding!

Have a good night.

Let's Play "You Figure it Out"!

I had to stay late at work so the traffic would have been terrible and thus the wife and I went out on the town of Cambridge for a while to burn some time. Home late but I wanted to cover a few things. Let's play a game and I hope the spell check is working!

Let's Play "You Figure it Out"!
I actually had a post in mind today after I saw an article but I am out of time to do a full review. Given that, I know my readers are the best out there so I think you can figure a few things out for yourself.

First, the section in question comes from a review of a John Hussman piece by Pragmatic Capitalism where Hussman writes:

The global financial system continues to be unsound in the same way that a Ponzi scheme is unsound: there are not enough cash flows to ultimately service the face value of all the existing obligations over time. A Ponzi scheme may very well be liquid, as long as few people ask for their money back at any given time. But solvency is a different matter – relating to the ability of the assets to satisfy the liabilities.

Regular readers may remember a missive I wrote a while back which stated:

It is a strange phenomena at work here. Unless a major world event occurs where there is a scramble for hard assets and hard money the US will continue to get away with this stuff. I actually have a fleshed out theory on this big picture wise, but I do not want to be called a conspiracy nut. If interested, email me and I will serve it up!

And of course I was saying what Hussman did, as long as nobody needs all the cash up front, this game can go on. If they do, it's over. See, I am not crazy! Well, at least not about this! Yes, this is an Illusion of Prosperity ripoff job!

Now to the game.

I have made the argument time and again that it is policy to keep blowing bubbles and hope it works. It is not more complicated than that. Don't believe me? Well, you figure it out! Here is what Brian "The Potato" Sack and then John Snow had to say about FED policy of supporting bubbles, I mean "asset" prices:

The idea behind quantitative easing is you buy government paper that’s held by financial institutions or individuals. And then they have the money. And then they go out and buy some other financial assets, stocks. And they drive up the value of those other financial assets so we get an increase in the value of financial assets which means an increase in the value of lots of peoples’ household wealth. And the idea is if household wealth goes up, then that will be a spur to spending.

We will side step the idea that QE is a mere "swap", the guys running the show think this is the way it works. I think you can figure it out from here what the "plan" is.

Next up, I have written plenty that a monster government backed housing bailout/black hole is in the works. Everyone wants results immediately but some things take time. A 2 trillion dollar hole takes time to set up. We may be there. I submit some quotes/references and you figure it out!

Via Naked Capitalism:

The next question is “what does this mean for MBS investors?” If you are a Fannie and Freddie investor, there will probably be no obvious consequences, even thought there ought to be. The government is not going to want to raise doubts about the integrity of such an important market. Servicers will continue to pay advances on delinquent accounts.

Next!

Via Zero Hedge:

Ultimately, if these issues do in fact escalate, the Administration may try to broker some sort of settlement. If such deal brokering does take place, Levitin believes that “some payment” will be exacted from the lenders and servicers. The Administration could bargain for more mortgage principal write downs." In other words, the endgame will likely end up being the extraction of material concession from the banking syndicate, in the form of systemic mortgage writedowns, with Obama's blessing, which will likely put the 25% of homeowners who are underwater on equal footing with the other 75%. It may turn out that this was the plan all along. And people naively wonder why banks have hundreds of billions in cash stashed on the sidelines. . .

Leave aside the Obama jab (like McCain would have been different??) the matter at hand is who pays going forward for all of this. I trust you can figure it out!

Have a good night.

The FED is Delusional

Short on time waiting to see the New England Patriots gets crushed in Miami tonight. Not anywhere near as much fun as waiting to go out and crush Miami, but it is what it is.

Jealous Much?
One of the main reasons I really hate stopping over at The Reformed Broker is that Josh Brown runs with a great idea for a post that leaves me thinking I need to stick with the day job. Today in maybe the best post of all time, Josh uses the medium of Transformers to annotate some major market robot players:
Decepticon Tradebots
One sample and then you should read them all:

StopDropper - Sniffs out all outstanding stop loss and stop limit orders, triggering them with short sales, covering once the stock has been drilled lower. Guaranteed profits await, also transforms into a dump truck.

Love it!

The FED is Delusional
Monday was a full court press by FED members and associated players screaming how QE 1.0 saved the economy and maybe stopped global warming. Just think of the possibilities for QE 2.0! We just might have peace in the Middle East yet if the 10 year would just drop another 14 basis points! We are all saved!

First up was Brian "The Potato" Sack who chimed in with such glowing praise for QE I felt a little warm and made sure I had not peed in my pants (via Calculated Risk):

It is true that certain aspects of the transmission mechanism are clogged because of the credit constraints facing some households and businesses, and it is true that monetary policy cannot directly target those parties that are the most constrained. Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be.

At least they have stopped pretending what their primary mission has always been. Refreshing honesty, though for a LONG time many refused to believe this. There is more in Sack's long speech but that was the main point.

Boom Boom Bernanke was stuck talking to college kids, most of which will not be able to find a job after graduation, but thanks to QE 2.0 maybe they will not need one if AAPL and BIDU go to $5000 a share and then split 5:1. Some notes from the low rate guru:

Bernanke says more Fed asset purchases could help
In a wide-ranging, hour-long forum with university students, Bernanke also defended the U.S. government's often-criticized program to support banks during the global financial crisis.

The Troubled Asset Relief Program, or TARP, has turned out to be a "pretty good investment" for taxpayers as the money loaned to banks is returned with interest, he said.

Many people don't understand that the financial bailout fund was designed to help the economy, not the banks, and that the country's economic downturn would have been much worse without it, Bernanke said.

The $700 billion program was approved by the U.S. Congress at the height of the financial crisis in October 2008. The program came to an end on Sunday as the Treasury Department's authority to make new investments expired.

The Obama administration said last week the ultimate cost of the program to taxpayers was likely to come in below $50 billion.

Bernanke, speaking to about 150 students from universities across the state, tried to allay their fears about facing huge student loans and a weak jobs market upon graduation.

"I'm sorry the economy is not stronger for you right now, but it will get stronger," he said.

That was some sickness Boom Boom. You have no shame, but you do have balls.

So TARP was for the economy, not the banks! QE 1.0-10.0 will be for the economy as well and not a shuffle game between the FED and Banks. No way. With unemployment at the same level for over a year, Bernanke still thinks a higher stock market will lead to a recovery in the real economy. Just put on a Greenspan suit already Ben!

So what can we expect from QE 2.0? I checked in with Econbrowser and there was an estimate:

In recent years, a 100-basis-point move in the fed funds rate has translated into about a 40-basis-point move in the 10-year yield (e.g., Table 2 of my 2008 study). Hence if we use the lower end of Dudley's range, we might come up with a number of (400/500)(1/2)(40) = 16 basis points as another ballpark estimate of the effect on the 10-year rate of another $400 B in long-term bond purchases.

But even if we agree that the Fed could depress long-term yields with these kinds of measures, it is a separate question as to whether it should. I discussed this issue a few weeks ago. I remain of the opinion that while the Fed is understandably reluctant to embrace QE2, it may have little other choice.

16 basis points for 400 Billion of purchases? I can imagine businesses all across the land chomping at the bit to grab this deal when it comes through!

So this all comes down to one thing and one thing only:
Does the FED think 16 basis points lower on the 10 year will result more economic activity?

There is only two ways to answer;
-They do and they are so clueless it is dangerous
-They know full well it is baloney, but hope the sheep will bid up assets all over due to the perception the FED is "on the case".

I have written before that even though I am rough on the guys over there, they are not stupid. I 100% believe they think most of us are though, and we usually deliver on that promise as well.

What jumped out at me today was the timing of these remarks. It is a full month before the actual QE 2.0 can be rolled out and I wonder if the FED was not looking to get the markets going on taking rates down ahead of that time. I try never to think like the FED because I get visions of destroying the middle class and firebombing people's savings stuck in my head and it is kind of creepy.

"Mr Bernanke, you WERE the caretaker of the Overlook Hotel Saving and Loan were you not?"


"Here's Easing!!"


Have a good night.