Insolvency on Steroids

The tennis match went very well this morning. I can remember when I was a younger man and I could play tennis all day long. Now 2 hours of playtime and my feet are killing me! When you are young all you want to do is get older. When you are older all you dream about is how you were physically when you were young. I know this is a well known fact, but today reminded me of it. Strongly.

General Motors: The Unthinkable
It is a terrible thing to see GM (or Ford for that matter) face issues so severe that going forward may not be possible. Friday's rather blinding "earnings" report was so bad the stock of GM went to levels not seen since the year 1954 (corrected for splits, etc). This is telling us something, but what is it?

Could GM close up shop? I would say that will never, ever happen. But the current operation of the company also cannot continue much longer. A complete overhaul is on the way, and of course it is going to require government sponsorship and tax dollars. Wonderful. Perhaps a "Hope Now" program for the American auto makers will get passed by the super smart congress.

I have no position in GM (or any carmaker) and I would very much like to see them get to a better place, but things look pretty bad. What is good for America is good for GM, or so the saying goes. If there is a correlation we are in worse shape than we think.

Insolvency on Steroids
Nouriel Roubini gave an interview to Barrons (you can see video at The Big Picture site, and Barry has a TON of great material up this evening so check it out) and he gives some dollar amounts for banking losses that shocked even me. Mr. Roubini estimates losses on various credit instruments to reach 2 TRILLION dollars over the next 18 months or so. 2 Trillion, wow.

The US banking system right now is effectively insolvent, so what does another 2 trillion down the hole mean? There is going to be bank failures. The FDIC is going to be very busy. How the dollar makes it out of this stretch will be interesting to see. Deflation certainly is in the cards, as deflation is a contraction in credit. Banks cannot loan money they cannot even pretend to have anymore.

So what does this mean? Quite a bit I would think. As a homework assignment I want you the loyal readers to sketch out what 2 trillion in losses will mean for this country going forward. I want to get some feedback and ideas that I will then collate and put into a longer post on this topic as I think it is very important. One will need to position themselves in a way to stay safe and maybe even get ahead. You can only make money by correctly identifying a macro environment ahead of time and positioning for it before it happens. Lets try to get some ideas going. A blog is a great tool to put my own ideas out there, but I would also like it to function as a sounding board for solid thinking from around the world. Do not be shy! Use the comments section to get started.

Saturday Night Entertainment
Comic relief as it relates to the presidential election:

more cat pictures

Try out Iron Maiden and the great song "22 Acacia Avenue":


From the obscure, here is Armored Saint with "Can U Deliver" complete with terrible video:


I remember how visually wild this video was when I first saw it, and the song itself is pretty heavy duty. Here is Tool with "Sober":


Final song for the night. I was thinking about this song I had heard a LONG time ago, and I was able to find it on YouTube. Listen to this oldie by Commander Cody and the song "Hot Rod Lincoln". "Son you're gonna drive me to drinkin if you don't stop driving that hot rod lincoln" too cool:


Have a good night.

Is the FED Backstop Causing the Current Volatility?

Heat wave here in Massachusetts. It has been 90 degrees plus since about noon Saturday. Had to run out yesterday and buy two air conditioners because our dog (a pug) cannot tolerate high temps. Late tonight a cool down is expected.

Rare Four Standard Deviation Event
With that kind of teaser, I must have your complete attention! Mish over at his amazing site has been on fire as of late, and his discussion of widening yield spreads across various bonds. I will not pretend I have full command of these issues, but the key point is that when a rare event like a 4 standard deviation occurs, something is going on. Something big. Read the post here:
http://globaleconomicanalysis.blogspot.com/2008/06/treasury-curve-steepening-bet-unwind.html

Any institution or major player that has a big position that is wrong is looking at serious trouble that came about over the course of a very short time. Stress on the street must be at a level not seen is some time. I wish I could get a graph of alcohol sales for the Wall Street bars and liquor stores over the past year, I bet it is spiking this week!

Lehman Brothers a Disgusting Joke
The whole sorry parade that is Lehman Brothers (LEH) makes me ill. Seriously ill. If you wanted to you could not make up a story so crazy and dumb as the real time progression has been for LEH. Disgusting.

LEH had said that they did not need additional capital. They blew 500 Million buying their own stock on the open market trying to stem a move down. They complained about short sellers. They went out and reported a quarter that erased 8 YEARS worth of earnings, and went out to get 6 Billion in capital they said they did not need. Whatever. This company is a joke.

Just who in their right mind is buying in to LEH's offering? I mean, unless you are a firm believer that LEH is either going to survive and prosper, or get taken out by a larger entity, buying at the offered $28 is a HUGE risk. Even a FED bailout is highly unlikely to make that buy whole again. There must be some devil in the details that I do not know. Or more risk taking. Go figure.

Is the FED Backstop Causing the Current Volatility?
The FED's terrible BSC bailout will have consequence on many levels for many years. I will not bore you loyal readers with another sorry rant about moral hazard, you know how I feel about those punks at the FED by this point.

What I want to put out there tonight is an observation about the markets, mostly the action in the financials. Pull up any chart since January, and you will see wild volatility and crazy swings. Watch LEH just on Friday of last week, and Monday-Tuesday this week and you can see what I mean.

I am wondering if players out there are at getting aggressively short various banks/brokerages to push the share prices down. Historically this kind of run would cause a "crisis" like the one at BSC, but in the new era of "bailout nation" no collapse occurs. These same players may be opposed by bottom guessers that are trying to figure out where a FED backstop would put a floor under a stock. Or the same shorters could be doing both. Either way, there seems to be a real struggle right now trying to value insolvent banks. As their true value is of course ZERO, their value as a FED backstopped institution is unknown. The action right now in stocks like WM, LEH, and WB seem to be a tussle to figure this value out.

The FED has no idea what kind of dirty Wall Street is. They would indeed be betting on a FED backstop. They would even be using the same cash the FED loaned them to push a troubled bank into a crisis so the FED has to act, thus making cash on the way down, and on the FED rescue. Thanks gentlemen. You are all wonderful people.

Have a good night.