Monday, June 30, 2008

Quick Update

Hello all. I am back from a long weekend traveling for a wedding and will be swamped in a very short week before heading out for the 4th of July on Thursday. I am also working on my quarterly letter for my fund so will probably not be posting much this week.

A couple of quick little tidbits that really don't mean much but I have some cash I have been wanting to put to work the last week so I have put on my trader hat. Today we avoided what I thought could have been a really ugly day. As a result, tomorrow starts a new quarter which brings the potential of money flowing into the markets and specifically losers since Wall Street won't have to report that they are holding these securities for awhile. We are also way oversold (though we have been for awhile). So despite the VIX not rallying I think we could be in for a modest couple of week 3 to 5% bounce (financials bounce could be violent). I don't think we have seen a major market bottom without the VIX rallying but a choppy to small rally working off the oversold nature of the market is very possible. Like I said I have put on my trader hat as there is money I want to invest in a couple of names and I was concerned about a large possible crash like move down. I was a buyer today and assuming the market appears to be stable in the morning I will be a buyer tomorrow morning. With new money moving in tomorrow if the market is not able to rally I would consider that very bearish in the near term. In summary I think the short term probability of an irrational move down has decreased dramatically and willing to focus on the fundamentals of individual names.

Like I said, nothing important or earth shattering but thought I would share my thoughts.

Friday, June 27, 2008

Cramer Panic

Sell everything. Nothing's working. Revisit when the prices are adjusted for a big recession, soaring inflation and a crushed consumer. Sell at 12,000 and come back at 10,000. Even better: short it. - Jim Cramer

So is this a contrarian indicator? I do not think so. As I said in a previous post you have to be market savvy to know when he says something that makes sort of sense. You also have to know Cramer. He is actually a decent trader historically. There is no way you can take advice from his calls because he may actually change his mind 6 hours later and in his own mind he was right because he changed his mind before he got hurt.

Historically he also panics earlier earlier than most. Think last August. Anyway I think what he said is irrelevant but I would not call it a contrary indicator.

Basically right now those who bought hope a few months ago are finding that it is hopeless. Capitulation is coming.

By the way. The markets just opened and you have a slightly modest open to the upside. Once again it shows there is no fear. We may finish up but I do not know how you can be a serious buyer besides that which you are sure has the greatest margin of safety that you want to own it regardless of what happens.

Thursday, June 26, 2008


After getting back I have spent some more time going through some things and the more I look at this the happier I am that I was not an aggressive buyer today. Look at some of this stuff.

The ABX index plummeted today.

The TED Spread surged today

Fleckenstein and Calculated Risk talking about the credit market trading desks drying up.
I have said this several times but probabilistically this has got to be the highest you will ever see for a market crash. You do not make money trying to bet on them over the long term so I am not placing any bets on an extreme move in the indexes. All I am saying is that where as 2 years ago the chances of a market crash (I will arbitrarily define as a move down in the major indexes of over 10%) was maybe 1%. Now it is maybe 20 to 30%. This crash could be triggered by many things. One of them ironically could be a crash in the material and energy names. If investors perception of this names suddenly shift they have a long long way to fall. Another would be yet another major blow up at a bank.

Things do not look good and as noted earlier there was no panic to cause me to want to initiate strong buying. Things are just sick out there. I was in an outlet store today where I know the store manager and she said sales are down 20%. Main street is as sick as Wall St.


A sumo wrestler jumped and squashed the markets today. I was actually gone most of the afternoon getting my oil changed (long story). Anyway, I of course was watching the markets (with my blackberry and with CNBC at the dealership) and was watching the body slam in progress and I thought I need to rush back so I can be buying at the close. I thought through my portfolio and thought of a short I wanted to cover, a position I wanted to add to, and a new position I wanted to initiate, all based on fundamental analysis. So from a buying perspective I thought this might be giving me the opportunity and I rush back and get back to my desk at 2:45 and spent five minutes looking through everything and what I saw stunned me. There was no panic, this did not seem to be the whoosh I thought it was going to be. Volume was medium to light. The VIX was only up 12% and in the mid range of where it has been the last 9 months. There was nothing indicating the market was going to stop going down. So I did buy a little (if the market is down this much you have to buyer somehow) but scaled back my plans drastically. We could easily consolidate and move up a few hundred points but any meaningful bounce I think is going to be short termed. There was simply no apparent capitulation or panic that I saw.

This brings me to conversation I saw on CNBC. They were bemoaning the market going down and saying that now maybe since there seems to be so much pessimism that we were now ready to move up. This was another red flag that maybe we were still going to go down. A counter to this however was that the front page of CNBC headline was "Shorting Stocks Could Be Way To Play This Market." That is a bullish signal.

Does all this stuff mean anything? Not really but if you small and nimble (in other words you do not manage $1 billion) you should be able to pick your spots and I think your foolish at not looking for turns in the market. I initiated a new long position today but it was a very small initiation compared to what I was planning. I just do not think that today was the buying opportunity that it appeared to be on the surface.


Dollar = down
Financials = down
Commodities, specifically oil = way up

As I thought the end of trading yesterday showed, nothing has changed.

Wednesday, June 25, 2008

A Day for the Bears

I thought today was very bearish. The Fed to there credit did all that I thought they could do. As one commentator put it though the end result was the statement had "Nothing for Everybody." It is always harder to take back what was given than giving originally.

Now to the markets. I read another piece that said "I'm shorter than a circus midget--and the last thing I wanted to see today was the market go down." I think that sums it up pretty well. All today did was work off a little (there is still alot more) of the oversold position we have been in. The key points today were three fold, the dollar, oil, and the financials. All of them were bearish for the markets in the near term. The dollar fell after the Fed announcement. The Brazilian real broke below $1.60 against the dollar for the first time ever (I think). Oil was down 3% earlier in the day on inventory data. It finished down about 1.5% which means the Fed did not do anything in maybe hoping to address that issue. The biggest however it the financials. The entire financial banking index as measured by the XLF was up up 2.5% earlier today!!! After the Fed announcement it crumbled into the close and was actually down on the day before finishing up slightly. The bulls were praying, hoping for some catalyst in this Fed meeting to change the status quo of the last few weeks. Unfortunately for the bulls, those 3 things in the last hour in half tell me that nothing changed. Those 3 things should be watched very closely tomorrow morning. In general I think that means we are headed lower in the relatively near term.

Today was a day from an investor standpoint to do nothing. These types of days I try to sit back and not do much. Do a little bit of research and let the market decide where it is going.

I hoped you enjoyed the movie. It did not disappoint if you are a market nut.

Cramer - Caught

An unbelievable video of catching Cramer in his flip flop and outright lies from June 13 to June 20th. Cramer says some intelligent things every now and then but you have to be market savvy to know when he says an intelligent statement. Anybody who watches Cramer for investment advice deserves to lose whatever money they invest.

Fed Day

Crank out the popcorn, grab your drinks, prop up your feet, it is another Fed day. Every Fed day since September seems like it it is the pinnacle of tension, apprehension, and drama and then the next Fed day the pressure seems to be ratcheted up even more.

I for one am glad I am not in the Fed shoes. Grant it, I think they themselves like idiots backed themselves into corners but I would not want to be called in at this point to make a decision. What do you do? You can't lower interest rates to juice the economy. That is off the table. Can you really raise rates? They won't do it today but in the next three months could you really raise interest rates or are you so handcuffed at this point? The truth is they should have stopped lowering about a 1% ago but now that you are here can you really raise it?

The perfect outcome would that the Fed would be able to raise (not talking today) 25 bps and that it would be shot heard around the world causing the speculative juices out of commodities to plummet, the dollar to rally, and the financial system to gyrate in place. The key would be the last one. Would the financial system react okay or would it send the financial market over the edge as George Soros reflexivity takes hold? The nightmare scenario would be that rates across the yield curve would dramatically spike and spreads to blow out.

Everyone seems to think that no matter what the Fed says it won't be good and the market will head down. Traders seem to be even hoping for this to get into an oversold position that you can play on the long side Friday or early next week. The fact that so many are expecting this or even hoping for this makes me think the opposite will happen. I was thinking that after the Feds announcement the market would go down but assuming the Fed doesn't do anything idiotic I think the reaction may be the opposite. I do not have a strong enough probabilistic opinion on it and so will not be playing a position but the market often does whatever it can to make the most people look the most foolish and it seems to me that would be move strongly up after the Fed announcement. Of course the Fed could botch the communication again and send the market spiraling. So enjoy the show, as always it should be a good one.

Tuesday, June 24, 2008

Where is the Fear

Fear oh fear, where have you gone. Yesterday I had a couple of names I was thinking of buying if the market opened down 100 points plus. Instead the market opened up!! After last week drubbing with a horrible Friday it would have been nice to see some fear by investors instead of the ho hum market bounce. As a result I was like no fear, no reason to do anything today.

Today it looks like we may have started our pre Fed release bounce. From a trading perspective you might accelerate to the upside going into the close tomorrow as people will not be wanting to go short (so less selling pressure) before the Fed release. Once again I am not trading it but that is what I am expecting. You could have a couple of very strong days in financials on those technical dynamics alone.

Another dynamic in all of this is redemptions in many hedge funds due at the end of June creating forced selling. I think that is some of what you saw last week and what you may see at the end of this week.

There is very little to get excited about. Huge price increases in iron ore which makes steal and in Dow Chemical products. The great secret tax (inflation) is breathing fire like which has not been seen in over 20 years.

Saturday, June 21, 2008

Inferior Goods

Calling all companies you can think of that would sell inferior goods. What is an inferior good.

Wikepedia defines it as...In consumer theory, an inferior good is a good that decreases in demand when consumer income rises, unlike normal goods, for which the opposite is observed.

So for example I would consider Wal-Mart, McDonalds, Wendy's all companies that are inferior good type companies. Not accidently they have all performed fairly well in the stock market.

In my mind this is one of the only place that will be decent investing in over the next few months / years. If you have any publicly traded companies names you would like to suggest I would love to hear them.

MBIA Downgrades and Impact

For the super nerds or if you have a position in MBIA.

Friday, June 20, 2008

Joseph Frankel Rosenfield

Very interesting read. Thanks goes to Nathan.


Rule Breaker

Rosenfield has broken rules right and left. First of all, he's never had any use for a committee to make investment decisions.

Finally, Rosenfield did as little as possible, seldom buying and almost never selling. In fact, he considers selling to be indistinguishable from error.

And instead of spreading his bets, Rosenfield doubled down.

Lessons to Take Away

Do a few things well. Rosenfield built a billion-dollar portfolio not by putting a little bit of money into everything that looked good but by putting lots of money into a few things that looked great.

Sit still. If you find investments that you clearly understand, hold on.

Invest for a reason. Rosenfield is a living reminder that wealth is a means to an end, not an end in itself.

The Volatility Came

What a day. You knew today was going to be volatile but no idea which direction. As stated yesterday my guess was up but instead it was down (that is why I don't bet on short term things, you never know). I also said it would not mean anything either way unless it was a massive move down. We were right on the cusp of what I would consider a massive move down. In general I think it was down enough and enough technical damage done that I think it was significant. 1320 on the S&P was important and we closed below it. There were so many cross currents going on that it is hard to judge. Iran, oil, automakers, capitulation call by Merrill, quadruple whitching day, etc. Trading seemed just chaotic. This down move was also on massive volume. I have not seen volume like this in months. Over 1.9 billion shares on the NYSE. While 6 months ago that number would not have been that impressive we have not cleared 1.5 in I don't know how long.

As a bear I am getting nervous that a decent bounce may be just around the corner. I think more likely though is we could rebound a couple of percentage points before truly breaking the lows of March.

Market currently is definitely not for the weak of heart. It is going to be very interesting how we open on Monday and how we react.

Iran / Israel Watch

More talk of war. News out today of Israel military exercises.

Here is a CNBC video that talks about it.

This is the intrade contract where you can bet that an airstrike in Iran will happen or not happen by October 2008. Up 1.5 which you can read as 1.5%. Graph is from the close yesterday.

Thursday, June 19, 2008

Volatile Day Tomorrow

Tomorrow is quadruple witching day which means whatever happens tomorrow in the markets means absolutely nothing unless for some reason you blow through key support levels at 1325 and 12,000. I am sort of expecting a volatile move up but obviously have not bet on it at all. Either way up or down, unless it is massively down, I think whatever happens matters very little for the short term going forward.

The most ridiculous thing I saw today was BBT (regional bank) saying they were fine and were thinking of raising their dividend. Their yield now is already over 8%. That means either the market has it massively wrong or the bank is sticking its head in the sand. Sounds a whole lot like Lehman in January when it raised its dividend and announced an increase in the stock buyback. I do not think it is necessarily these CEOs are malicious are even idiots, it is that they have fooled themselves. I have no position in BBT but am more inclined to short it now than before. They have massive amounts of commercial development exposure though they are in some better geographic areas in the U.S. Either way I do not suspect that over the next 18 months the market has it that wrong that with an 8% dividend yield they should even consider raising their dividend.

MBIA and Ambac got cut by Moody's. It is official. No more AAA's for either one of them. Probably means more writedowns as all models have to go to AA for hard to value assets related to these two.

To me the great conundrum of this whole market is how well transports are doing and have done if you cut out airlines. There is some disconnect. Either the economy is better than you would think or the market is missing something with these guys. Anecdotally I have heard story after story of truckers being forced to return with empty trailers but somehow the stocks of railroads and truckers just keep on trucking.

Wednesday, June 18, 2008

Ethanol Producers Changing Their Plans

We are probably within 6 months of corn prices peaking. As I have said we are right at if not passed the price of corn where ethanol producers start losing money. This will take awhile to play out and there is enough worry (correctly so) about this years crop but corn has its limit and that is where demand for ethanol dries up.

Delaying the opening of nearly completed ethanol plants is unprecedented, analysts at Credit Suisse said Wednesday. They expect more plant closings as the industry struggles with lower profit into next year. That could eventually mean higher energy prices for consumers, though it also could help sustain ethanol producers that make it through 2008.


"We expect further plant delays and curtailments due to a very challenging margin outlook," the Credit Suisse analysts led by Mark Flannery said. The analysts lowered their year-end capacity forecast to 9.5 billion gallons from 10 billion.

All of this I think also sets some sort of floor on corn prices in the near term. Don't expect $2 or even $3 corn in the next few years.

VeraSun delayed the opening of ethanol plants in Welcome, Minn., and Hartley, Iowa, because of the unfavorable spread between corn and ethanol prices, spokesman Mike Lockrem said. He said the company remains optimistic that it will be able to open the plants if market conditions for ethanol production improve.

Major Imbalances Exist in the Market

I thought this writeup was really good. Has some of my basic thoughts in it which I have been worrying about.

I've learned a few things over the course of my career, three of which currently warrant particular attention. First, the reaction to news is more important than the news itself. Second, stay humble or the market will do it for you. Third, discipline must always trump conviction.

With those lessons in tow, I wanted to explore another topic, one that few people have a motivation to discuss. It's the risk of a seismic equity readjustment, a possibility that has much higher odds than most people currently foresee.

This is really incredible that I have been hearing this:

We often say in Minyanville, "as go the piggies, so goes the poke." The bank index has been a prescient precursor of the S&P 500 for many years. The fact that so many now expect a decoupling between the two only serves to reinforce the risk inherent in the relationship.


It's critical to remember that the stock market crash didn't cause the Great Depression, the Great Depression caused the stock market to crash. It was an era, not an event.

Yep again:

Perception is reality in the financial markets. If the collective mindset shifts from "the worst is behind us" to "we're between a rock and a hard place," the comeuppance will be swift.

I agree here to. In fact I think this will be the catalyst for the next big counter bear rally. Dollar will finally rise and oil will fall (probably dramatically) and the market will rise but for all the wrong reasons. A 10% to 20% move up in the markets just like you saw in October, January, and April is entirely possible before people realize that oil is falling because demand is plummenting.

Conventional wisdom dictates that lower crude and a higher dollar will offer an equity panacea. Allowing some room for a Pavlovian upside response, our take is that this is the biggest misperception in the marketplace.

Since the back of the tech bubble -- and contrary to stated public policy -- the lower greenback has been the rising tide that lifted all asset class boats. It stands to reason that when this dynamic reverses, equities will not be immune from the swoon.


Be that as it may -- and it may well prove true -- the greatest trick the devil ever pulled was convincing the world he didn't exist. I'm here to tell you that the imbalances not only remain, but also they're cumulative in both cause and effect.

I could not have said it better myself:

The key -- and the tenet that continues to be tested in this tape -- is the ability to manage risk rather than chase reward.

The market has the staying power, so remember that the mechanics of the swing will always trump the results of the at-bat. Capital preservation, debt reduction and financial intelligence remain staunch allies as we wade our way through these uncharted waters.

Tuesday, June 17, 2008

David Einhorn

Many of you have probably seen this but this is a great article on David Einhorn. I thought it was fair and balanced. There were a couple of points I wanted to bring out since the story is very long.

The news convinced Einhorn that a much larger crisis was imminent, and on a Friday afternoon, he called together his analysts and they developed a plan for the weekend—to come up with as comprehensive a list as possible of financial firms with exposure to subprime loans. “We did something we’d never done before. We left on Friday, and by Sunday night, we had a list of 25 financial firms that we wanted to short. Research-wise, we did a lot less work than we usually do when we take a position. There wasn’t time.”

Over the next three days, Greenlight shorted all 25 stocks. “It was what we called the ‘credit basket,’ ” says Einhorn. “A big macro call. One percent of this, one percent of that. No large positions. We were looking for the firms that we thought had the most exposure.

A couple of things I want to point out from this. First is that traditionally Einhorn is very concentrated. He believes in making concentrated bets. He is also known as one of the most research intensive shops on the street. Yet obviously he is not tied to a formula. He is willing to break the mold when urgency comes. I am always amazed at those who quote Buffett basic tenants of investing as rigid unbendable rules. Guess what, Buffett did the same thing with railroad stocks a little over a year ago. He bought a basket (what I still argue was more of a macro call) before narrowing it down. He also did the same thing in the 60s when he was a hedge fund manager shorting a basket of stocks. I did the same thing buying MOO the agriculture ETF. I had more time to do more research and am not out of MOO and in 3 individual agriculture names (I got over 20% returns in MOO in less than six months). Investing is an art not a science. It calls for rules to be broken at times. Do not drink your own cool aide or anybody elses.

A senior partner at a buyout firm, though no fan of Lehman’s, summarized one cynical view of Einhorn on the Street: “When a guy stands to profit as much as he does, shorting a company in so precarious a condition that the Fed had just moved in to protect it, well, you have to wonder about his motivation. Yeah, there’s truth to his argument, but now is not the time. Two years ago would’ve been heroic. If he brings down Lehman, the guarantors are going to be me and you the taxpayer.”

This is a legitimate question. Alot of people have come to Einhorn's defense including myself, but this is the question that must be asked even by those who think Einhorn did the right thing. Yes I know the other side of the coin (which I am in agreement with) that what he did caused Lehman to raise capital and that the Fed and taxpayers should be grateful to Einhorn. While that is what happened probabilistically that was not a given. It could have very easily gone the other way with Lehman collapsing in a matter of weeks. Like I said I endorse Einhorn's actions and made alot of money from his publicity but do not be blind to see that there is a legitimate argument on the other side of the aisle.

Monday, June 16, 2008

Corn Fallout

Yes once again corn set a new record. I personally believe we will see a double digit handle on corn before it is all said and done though it is in the speculative stage at this point. I am in at much lower prices and will let it ride though I would not be adding at these levels.

The fallout in corn sensitive stocks was massive today though all of them had major rebounds from there lows.

The meats:
Tyson - down 1.47%
Pilgrims Pride - down 8.43%
Smithfield Foods - down 5.19%
Cal-Maine Foods - down 3.16%
Inudstrias Bachoco - up 1.31% (this is the only one that bucked the trend)

The soft drink makers (who use alot of corn syrup)
Dr Pepper - down 3.89%
Coca Cola - down 2.24%
Pepsi - down 2.22%

The beer makers would be on this list also if it wasn't for all the speculation surrounding the InBev Anheuser-Busch takeover chatter.

All of these are on my watchlists. Several may be undervalued but the question is timing. I really think corn is headed higher and that these stocks will continue to take it on the head. Smithfield Foods is the largest pork slaughterhouse in the world and the largest beef slaughethouse in the United States. They are losing there shirt right now but stocker cattle and pork bellies are finally starting to rally. I am much more bullish on the actual commodity (which is very rare for me) than the companies who deal in these areas. Beef could go up 15% and these companies would still be losing money. At some point though some of these names will be worth pouncing all over.

The Black Swan

Really interesting piece on Nassim Nicholas Taleb the author of the Black Swan. Very eccentric individual.

The important thing is this: the lost passport and the spilt tea were black swans, bad birds that are always lurking, just out of sight, to catch you unawares and wreck your plans. Sometimes, however, they are good birds. The recorders cost $20 less than the marked price owing to a labelling screw-up at Circuit City. Stuff happens. The world is random, intrinsically unknowable. “You will never,” he says, “be able to control randomness.”


Last May, Taleb published The Black Swan: The Impact of the Highly Improbable. It said, among many other things, that most economists, and almost all bankers, are subhuman and very, very dangerous........The world banking system still teeters on the edge of meltdown. Taleb had been vindicated. “It was my greatest vindication. But to me that wasn’t a black swan; it was a white swan. I knew it would happen and I said so. It was a black swan to Ben Bernanke [the chairman of the Federal Reserve]. I wouldn’t use him to drive my car. These guys are dangerous. They’re not qualified in their own field.”


For the non-mathematician, probability is an indecipherably complex field. But Taleb makes it easy by proving all the mathematics wrong. Let me introduce you to Brooklyn-born Fat Tony and academically inclined Dr John, two of Taleb’s creations. You toss a coin 40 times and it comes up heads every time. What is the chance of it coming up heads the 41st time? Dr John gives the answer drummed into the heads of every statistic student: 50/50. Fat Tony shakes his head and says the chances are no more than 1%. “You are either full of crap,” he says, “or a pure sucker to buy that 50% business. The coin gotta be loaded.”

The chances of a coin coming up heads 41 times are so small as to be effectively impossible in this universe. It is far, far more likely that somebody is cheating. Fat Tony wins. Dr John is the sucker. And the one thing that drives Taleb more than anything else is the determination not to be a sucker. Dr John is the economist or banker who thinks he can manage risk through mathematics. Fat Tony relies only on what happens in the real world.


He had realised that when markets rise they tend to rise by small amounts, but when they fall – usually hit by a black swan – they fall a long way.

I completely agree which goes completely against conventional wisdom. I would much rather sell a naked call than a naked put for this reason. I think the risk is much lower though finance would beat into your head the opposite.

Oil Price Floor

Hey all. I am back, tired, and sunburn which means it was a good weekend. Of course there was talk about the markets. My bearish opinions in conflict with a couple of bulls. Also some conversation on what no one is talking about, the treasury move last week. That was the story last week. Biggest move since 1982 which is when interest rates where double digits. Your talking a multi sigma event that is not getting much attention in the financial media.

Anyway saw this which was a little different twist. Auto companies worried about an oil crash.

"When prices collapsed in the late '70s all investment in alternative fuel technology ceased and essentially that led the auto industry to the mess it is in today. The same would happen if prices fell below $50 a barrel today."

Cole, with the support of leading US auto industry executives, is expected to call on Congress to set a floor for the price of oil.

Friday, June 13, 2008


BUY BUY BUY. The worst the news, buy some more. It is what any rational person would do right. lol Bad inflation data, though obviously better than what was potentially expected, and horrible sentiment data. All of which made for a very bullish day on Wall Street. We have been oversold for a couple of days so it was probably inevitable.

Anyway I will be in Austin all weekend for the Titans reunion (a group Britt Harris runs from Texas A&M). Will be on a pontoon boat, swimming, lobster boil, and many other activities.

Have a great weekend!!

Thursday, June 12, 2008

It is All Connected!!

Great write up in the Washington Post. Steven Pearlstein hits it on the head and it is what I have been arguing for months if not years. Everything is all connected. I hear the bulls, the ones pouring into stocks and calling bottoms in April and May bemoaning oil and inflation. Like it is a new issue completely unforeseen. IT IS NOT A NEW ISSUE!! It is connected to the issues before. For every action there is an equal and opposite reaction. One of the basic laws of life. It is why Buffett could go short the dollar in 2002 and though early, in the big picture, in the long run, he had to be right. If you can identify these themes, what is the next natural outcome from the preceeding events, you can make alot of money. It is why I am pouring into meats. It meets the categories needed for unbelievable returns with a high margin of safety. Sure, maybe I am wrong but if I am wrong I am not magnificantly wrong (how wrong can you be when meats are the cheapest they have been inflation adjusted in 10 to 15 years) and if I am right there is huge potential gains. It is connected to everything that is before it.

Energy and food prices are soaring. The housing market continues to collapse. Government revenue is falling, and taxes are rising. Airlines are jacking up fares and fees while reducing service. Banks are pulling credit lines. Auto companies are cutting production once again. Even investment bankers are losing their jobs.

The tendency is to see these as separate developments, each with its own causes and dynamic. Fundamentally, however, they are all part of the same story -- the story of the global economy purging itself of large and unsustainable imbalances that for a time allowed many Americans to think they were richer than they really were.

and this is what I have been jumping up and down about. Commodities are going up because money that was going to credit and equity is going to commodites. This compounded by the fact of the huge Fed rate cuts. This should have been foreseen, not to the degree and the speed it has happened (at least I didn't think a 9 months ago gasoline would be $4 a gallon, I did say in August the next bubble would be in emerging markets and commodities) but money has to go somewhere. That is why inflation is a monetary issue not an economic issue.

At the same time, some of the excess credit that financed mortgages and corporate takeovers has been shifted to commodity speculation, turbocharging the swings in prices of everything from corn futures to jet fuel.

Very well said.

Nothing Important

Another wild wild day in the markets today. Get used to it for a little while. The world is great trade is now gone and until it returns there will be huge pushing and shoving by the bears and bulls as investors try to find which way is the right way.

Corn set a new record again. No surprise there. It is very possible at this point you could see $8 or $9 corn and over $10 if we get a scorching July.

CPI and Michigan sentiment numbers will be out tomorrow. CPI should be scorching and be especially hot because of all the seasonal adjustments that were in the last number that made it false. You should see some catch up on the back end. Sentiment, well it will just be bad.

At some point we should see a pause from downward movement in stock prices but my guess is we are not there yet. We haven't had that huge volume whoosh day where you know people have thrown in the bag. In general there is very little I like. Meats which I have talked about and inferior goods. A couple one off value stories but for the most part cash will continue to be king. There are just still to many bulls out there having a huge disconnect of acknowledging problems in the stock market in one sentence and somehow coming to the conclusion that it won't transfer over to the economy. Now you have rates rising with the 2 yr, 10 yr, and 30 yr all making meaningful moves higher. Who knows where we go in the short term but three to six months out can we really be higher? I still think the time to buy financials will be spring to summer of 2009. Maybe by then people will stop trying to call bottoms which means the good contrarian bet is that we finally have a bottom.

Fed in Shambles

A great op ed piece in the investors business daily by Michael Cosgrove. I could not agree more. The Federal Reserve looks like they in shambles with one saying one thing and another saying another thing. In panicky atmospheres rule by democracy does not work. The panic of 1907 was stopped by one man, JP Morgan. You cannot have all these mixed messages going out all over the place. Anyway a good read.

Recent Federal Reserve activities suggest that Chairman Ben Bernanke went from being in charge to losing control of the Federal Reserve in the span of a few days.

Wednesday, June 11, 2008

Meredith Whitney Interview
Great interview with Meredith Whitney. She points out that Lehman is now trading at below tangible book which may mean it is close to bottoming (at least in the interim) unless there are liquidity issues I do not know about. I sort of doubt it with the fact they just raised several billion but who knows.

Corn Is Going Parabolic

Corn is just skyrocketing. New records almost every session now. The Dec 2008 contract is over $7.25 a bushel. The front contract is right at $7.00 This was from the Chicago Board of Trade this morning.,3206,1213+56381,00.html

The report put ending stocks for 2008/09 at just 673 million bushels compared to 763 million bushels last month. The report's main feature, according to some traders, was a sharp reduction in yield to 148.9 bu/acre vs. the 153.9 posted last month. A downward revision of 5 bushels by the USDA is considered unusually large at this point in the growing season.

A couple of points. We are probably getting near where ethanol is a break even for the refiners. However, because of the large fixed cost they will most likely run at an operating loss for awhile and they probably are hedged to a degree.

Also if the hot weather in the south (Texas is smoking in June like I have not seen in years) and the northeast moves into the midwest in the next month. Watch out. We could be looking at the worst corn crop in over 15 years or greater.

Also this means more pressure on the short term for meats as the feed costs will increase the slaughter rate driving up supply in the short term and down supply in the long term. At some point I think it is almost inevitable to see an explosion in meat prices.

Tuesday, June 10, 2008

Drunken Sailor

I have to jet but a couple of quick things. Today is where the market gets its random walk reputation. The last couple of days it just stumbled around like a drunken sailor not knowing which way to go. In my mind, today fundamentally it should have be down today after Bernanke's speech and the treasury market action. The Fed seems to be giving up the fight it can save everybody which should be a negative for equity prices. Either way this is a normal consolidation pattern you see after a huge drop like you had on Friday. The fact that the market has not been able to even give a modest rebound seems to me to be very bearish. Who knows though maybe that bounce is still coming.

Volume was back to the light side after two days of heavy volume (compared to the last two months). The AAA ABX tranches are getting crushed. They are about to break there March lows. The AA tranches and lower already have. Capitulation that this has been in fact a bear market rally seems to be around 1350. Everyone is talking about that would be the 50% reversal point from low to high. You break that and the last bulls may give it up (for like a day) the fight.

I am off to Austin. Have a great evening.

Monday, June 9, 2008

1930 All Over Again?

I am convinced we have now passed through the worst -- and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us." - Herbert Hoover, President of the United States, May 1, 1930

"irregular and conflicting movements of business should soon give way to a sustained recovery" - HES June 28th 1930

``The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so'' - Federal Reserve Chariman Ben Bernanke June 9th, 2008

The quote was from that Bloomberg story. Fed Chariman Ben Bernanke spoke at the Boston Fed conference with more posturing for rate hikes. I do not know what planet he is living on but the risks to the economy have not diminished an iota. Things are getting eerily similar to the Depression. For those who know market history would know the Fed in the summer of 1930 (I think July) raised interest rates. Could we be setting up for a repeat? I still do not believe a depression is on a horizon but I think this is growing evidence for a serious recession. We essentially almost have to have one. I will repeat, you have to pay the piper. There is no free lunch. Serious recession or inflation. Which one? I still think recession is a long term less costly answer despite the pain many will feel.

This may just be a big game of chicken. Who blinks first? The Fed or the dollar and oil? The Fed is obviously hoping the latter.

Market Points

A couple of various points:

I was in Austin on Sunday and was talking to a store manager at one of the outlets stores in San Marcos. I asked about sales and she said it has been abysmal. She said on Saturday they were 4,000 under on a goal of 14,000 for the day or 29%. She said they have been consistently fallen short by 2,000 for several weeks now. She said after 5:00 on Saturday she never seen the outlet mall so empty.

The story in the market today was not the equity market (though I will get to that later). It was the credit markets. You had a 2 or 3 standard deviation event in treasuries. The 2 year climbed substantially and the yield on the 10 year fell essentially creating a flattening of the yield curve. The violence of both these moves is very rarely seen. What is this signaling? Possibility of future Fed interest rate hikes and a very negative environment for equity indexes.

Which brings me to the equity markets. In my opinion a very bearish day on the street though you would not necessarily notice it at first glance. The financials continued to get slaughtered. The XLF was off 1.37%. This was after being up .5% early in the day. You take out Alcoa and McDonalds and I do not think the Dow would have finished up. If you also take out Wal Mart and Exxon and the Dow would have been down alot. You had the S&P 500 touch 1369.98 twice and sell off sharply (why do these technical points matter so much? Does not make sense). We may muddle around for a couple of days and consolidate after Friday's plunge but with what the treasury markets are signaling and the financials are signaling it does not look pretty for the markets.

Buffett's Bet

This is awesome. One key point is that the bet is on fund of funds so the fees collected is alot higher than just a hedge fund. Not only do you get the 2% of assets and 20% of profits charged by most hedge funds but then you get an additional 5% of profits plus charged by the funds of funds.

Will a collection of hedge funds, carefully selected by experts, return more to investors over the next 10 years than the S&P 500?

That question is now the subject of a bet between Warren Buffett, the CEO of Berkshire Hathaway, and Protégé Partners LLC, a New York City money management firm that runs funds of hedge funds - in other words, a firm whose existence rests on its ability to put its clients' money into the best hedge funds and keep it out of the underperformers.


And maybe they will. Buffett himself assesses his chances of winning at only 60%, which he grants is less of an edge than he usually likes to have.

Protégé figures its own probabilities of winning at a heady 85%.

MBIA and ABK Aftershocks

This is why I said the bond insurers downgrade last week was not a non event. It may not have been apocalyptic like it would have been in February but it should not have been ignored either. I do not know if Meredith Whitney is right on her numbers but I do know more writedowns are coming because of it.

Citigroup Inc., Merrill Lynch & Co. and UBS AG may post further writedowns of $10 billion on their debt holdings after the two biggest bond insurers were stripped of their AAA rankings, according to Oppenheimer & Co. analyst Meredith Whitney.

MBIA Inc. and Ambac Financial Group Inc., the world's largest bond insurers, had their AAA financial strength rankings reduced by Standard & Poor's June 5, taking with them the ratings on more than $1 trillion of securities they guaranteed.

Sunday, June 8, 2008

Corn is in Trouble

If you have not been following the flooding in the midwest over the weekend, the story is below. Corn was in trouble before this weekend. You had the coolest and wettest spring planting season in the corn belt since 1995. Farmers were well behind normal in plantings. There is essentially no chance for second plantings. Then you add the flooding this weekend and the corn crop has major problems. Right now in electronic trading corn is up 3%. Soybeans which hypothetically was supposed to benefit from the cool weather because it can be planted later and farmers would switch from corn to soybeans is also up 2% after a powerful rally in the last month.

Can things get worse? Everything at once is bearing down on America pushing us toward severe economic times.,2933,364282,00.html

Wicked weekend storms pounded the country from the Midwest to the East Coast, forcing hundreds of people to flee flooded communities, spawning tornadoes that tore up houses and killing at least eight people.

Corn jumped to a record as excessive rains in the U.S. Midwest may reduce crops, and soaring oil costs and the dollar's drop boosted demand for commodities as an alternative investment. Soybeans, wheat and rice also gained.


About 74 percent of U.S. corn seeds had emerged in the top 18 producing states, down from 92 percent a year earlier and the previous five-year average of 89 percent, the U.S. Department of Agriculture said in a report June 2. The USDA is to update its weekly crop condition ratings later today.

Soybeans were 69 percent planted as of June 1, compared with 52 percent a week earlier and the five-year average of 81 percent, the USDA said. About 32 percent of the crop had emerged from the ground, compared with 64 percent a year earlier.

More than 4 million acres remained to be planted with corn and 23 million acres awaited soybean seeds on June 1, the USDA said last week. Corn and soybeans planted in wet, cool soils develop shallow roots, increasing the threat of damage from hot, dry weather in July and August.

More On War

There is nothing you can do much with this but I found it interesting. I would not go make any investment decision on it whatsoever. Over the last couple of months I have been inching into gold on pullbacks. I am not making any prediction on gold, it just makes me comfortable knowing that a couple of % points of the portfolio has some exposure to a great inflation and war hedge. There has also been a large decoupling of oil from the price of gold which actually leads some credence in my mind to peak oil. Anyway like I said, I found it an interesting read.

Bears were blindsided by the past week's sudden spike in gold and commodities. But gold bugs have an explanation: the world smells war in the Middle East, specifically, an attack on Iran.

Friday, June 6, 2008


Well it was crunch time and the market got crunched. The irrationality yesterday followed today. It was just as irrational today in my opinion as it was yesterday. Together the market probably was close to rational. Just like the retail stores were not great but not that good either, the jobs number was not horrid but not that bad. The jobs lost actually beat consensus estimate, it was the unemployment number that was the problem. It is getting blamed on teenagers and college student looking for jobs. I think that is absurd. One, my understanding is they seasonally adjust for that already and two, my guess is alot of adults (think mothers, older "retirees") are all of sudden actively looking for jobs because of inflation and mortgage woes. Instead of one bread winner you need two. Probably it was overstated. It is probably 5.2 or 5.3% but the direction is still bad and isn't teenie boppers.

Oil was probably equally irrational. I already discussed Israel but a couple of other things I have read and heard today is that one of the problems, get this, is there are not enough speculators. Oil has become so volatile that the really big experienced traders who would normally take the short side of a big buyer are not there. The floor of the NYMEX has become sparse with traders. The thing is broken. On top of that the short traders can't get margin as the banks are not willing to lend.

Which leads me to my next point. I am so sick of hearing everyone acting like this is a whole new issue. That if we enter into a recession now it is because of oil not housing and credit woes. All of this is a result of something before it!!! It is all connected!!! Think plankton theory people. Oil speculators can't get margin, goes back to banks taking huge writedowns on housing. Inflation becoming a rampart problem, it all goes back to Bernanke in August of 2007 in January of 2008 splashing money everywhere!! Money flows to what tingles the brain cells. It is basic psychology 101. The only thing that has been tickling the brain cells is commodities. In 2000 with the tech blow up psychologically you fleed stocks and all that money flowed to credit. Because Greenspan flooded the market with money you created another bubble. Now what is most psychological painful is credit. All the flood of money has to go somewhere. Stocks have less psychological pain (and have held up better) but there are still memories of pain so the money flows to emerging markets and commodities. All this leads to higher inflation compounded by the fact that we had huge supply and capacity issues when Bernanke started cutting rates. I said in August (sorry I was not blogging at that time so you will have to trust me) that what Bernanke was doing was going to be extremely costly. One of the biggest misconceptions is that recessions will slow down inflation. Not necessarily!! Eventually yes but inflation is a monetary issue not necessarily an economic issue. Inflation went through the roof in the 70s into the 80s despite all kinds of recessions and it was not until the late 80s that it was put under control. We needed to go through a serious slowdown in early 2007 into 2008 and more importantly we needed monetary (the issue that drives inflation) restraint. We needed excess supply of resources to increase. We needed the fluff to be destroyed. I have said for months that the cost of trying to save everybody is going to be much greater than if we would have let some things fail. To make matters worse huge increases in minimum wage goes into affect in July which will add to the inflation fire.

The market was irrational to the downside today. As a bear I will say that but it was irrational to the upside yesterday. Inflation is the biggest thief in the world and once he get the get out jail card it is very difficult to catch him again. Recessions don't by definition automatically fix the problem. If it is deep enough and long enough it will.

By the way if you blue and want a bullish pickup, go to and watch the Kudlow clips. He never fails to deliver. Though I think he is wrong, it will cheer you right up if you need a bullish pick up.


I did not even read the story but the headline on CNBC homepage is:

Stock Selloff Offers Good Chance to Seek Bargains

Like I said I didn't even read it. Here is the link if you care to Sure if stocks go down it creates bargains but huge bargain opportunities is hardly now and may I remind them we are still 8% above the March and January lows.

Israel Saber Rattling

Israel partially helped oil limit up today on the Nymex to $138 up $11. Traders hate being short going into a weekend especially something like oil. Then you add this to the equation and boom, you the makings for an oil run.

So is there anything to this? Probably not but I heard speculation months ago that if Israel was every going to do a preemptive strike like they did in 1981 there window is now and shrinking. They can probably do it under the Bush administration. After the elections the window is gone. I sort of doubt though that Israel would telegraph it like this. So probably it is just saber rattling. Either way it was enough to send oil skyrocketing higher.,2933,363606,00.html

Israel will attack Iran if it doesn't abandon its nuclear program, a Cabinet minister hoping to replace embattled Prime Minister Ehud Olmert was quoted Friday as saying.

Thursday, June 5, 2008

Foreign Plays on Food

I am starting to shift out of grains and into meats but if we were to get any serious type of correction I will be looking at stocks that make there money from grains again. As a result I printed this out and stuck it to my wall.

A sharp spike in the cost of raw materials for food -- with higher prices for rice, wheat, soybeans and corn -- has led to export restrictions and food riots in some countries. It has also stirred up demand for related stocks, which can be found as far afield as the Ural Mountains.


Today was one of the most irrational days I have seen in several weeks. Something somewhere had to be wrong. If you are a bull you will cite retail sales (which were not horrid but really not that good either) and the jobless claims. Neither of these in my opinion should have sent the markets up close to 2%. Then you combine this with Oil being up $5.50 a barrel, agriculture commodities shooting through the roof, more inflation chatter from the Fed, and MBIA and ABK were downgraded and it really seems silly.

I said yesterday I thought the impact of MBIA or ABK would be substanial less that in February but it definitely should not have been a bullish catalyst. It is not as big of an event as it would have been in February. It is still an event and not a non event!! Banks will have to take additional losses. They insure over a trillion dollars of securities.

For the most part it did not matter what was being sold it was being bought. Even transportation was up today as oil screamed higher. The markets obviously believe the big employment number tomorrow is going to be better than expected. Considering how hawkish the Fed has been recently the market is probably right. If, I think this is a big if, the markets bust through 1410 I will have to rethink my thoughts that the markets have found an interim top and will move lower.

Like I said at the beginning of the week this week is crunch time. In the short term tomorrow will determine alot. We have just chopped in place all week. Tomorrow's employment number could be the catalyst to shoot us higher.


I do not think Lehman is done. They still have access to capital markets and in my opinion much better shape even currently than Bear. If this gains traction though watch out.

Some of Lehman Brothers' counterparties are limiting trading with the brokerage firm because of persistent concerns about its capital and leverage and a recent credit rating downgrade, Brad Hintz, an analyst at Bernstein Research, said on Thursday.

"Fixed income counterparties have become more discerning about which Lehman subsidiaries they will trade with," the analyst wrote in a note to clients.

Finally Done - MBIA and ABK Finally No Longer AAA by S&P

Standard & Poor's Rating Services said on Thursday that it downgraded the bond insurance units of Ambac Financial and MBIA Inc. to AA from AAA.
Thought this was hilarious. Moody's got outmaneuvered again. They are the ones who publicly bring it up and the S&P comes in and cuts them. So Moody's will have the distinction of the last rating agency giving Ambac and MBIA a AAA rating.

So now the debate shifts to run off value. MBIA fell on the news and is now back up. Time will tell whether this is a zero or $2 a share or $10 a share. I lean toward the lower end. Stock is all over the place today though.

Wednesday, June 4, 2008

Crazy World of Quantum Physics

In sticking with non finance postings, I am posting a couple of videos on quantum physics. The more you realize you don't know the smarter you are. The more you realize you are susceptible to folly the wiser you are. Such is the paradox of the world we line in. Despite my very very limited knowledge of the field, I love quantum physics because it makes me realize how much I don't know. On top of that it can help you from looking at things the same way. The Plankton Theory (not quantum physics) has been a great predictor on what has happened in the housing market and yet another reason why I think the end result will be some major dislocations in the U.S. economy.

Double Slit Experiment


My Favorite.
Mathematically it is argued that there are 10 or 11 dimensions. The study of this is called string theory. We live and understand 3 - width, height, and depth. We live in but have little understanding of the 4th time and have no perception of the additional dimensions that apparently exist at least in mathematics. Chew on that one for awhile.

I wanted to let everyone know in case you get curious and watch other clips is that my understanding is that these clips are pulled from some new age cult video. The clips I pulled are very basic science that I have studied elsewhere. These were just very easily understandable and covers quantum physics. I am not endorsing other clips or the video as a whole. I have not watched most of them.

Adam Bender - Amazing Kid

Make sure you watch the video.

Potential For More Economic Woes

Growth depends on credit. The winds continue to build for the potential of an economic free fall. Everyone talks about the lag affect of Fed rate cuts. The lag is just as great for tightening credit.

Accounting changes could force US banks to take thousands of billions of dollars back on to their balance sheets in the coming months in a move that is likely to curb further their lending and could push them into new capital raisings, analysts have warned.

Analysts at Citigroup said a planned tightening of the rules regarding off-balance sheet vehicles would force banks to reconsider arrangements and could result in up to $5,000bn of assets coming back on to the books.

Ding Ding...Second Round...Moody's vs. MBIA

Man what a day and it isn't even 1:00 yet. I got in really late last night and was planning to take a short nap. So much for that.

If you haven't seen this that means in the last hour you haven't been following the markets.

The Aaa insurance ratings of MBIA Inc. and Ambac Financial Corp. are again under threat by Moody's Investors Service after the two largest bond insurers reported deepening losses from the mortgage-market slump.


MBIA Insurance Corp.'s insurance financial strength rating may fall to the Aa range, although a drop to the A category is possible, Moody's said in a statement today. Ambac Assurance Corp.'s ranking would probably be lowered to Aa, Moody's said in a separate statement.

Of course the credit default swap markets says it should be rated Caa1 at best. After this Jay Brown came out yelling foul on Moody's. They also said they still have the 900 million at the hold co level. A day after the earnings release, I think it was May 12th, they said they were moving all about 100 million down. Obviously they did not do it. I can't believe the NY Attorney General is not forcing them to move that down.

Probably one of the most important aspects of a downgrade is that it could turn a credit crises (for MBIA) into a liquidity crises (for MBIA) as they would be forced to bring forth more collateral. I read somewhere if S&P cut Lehman again it would require $5 billion more in collateral to be put up by Lehman.

One interesting thing is the markets reaction. It dropped and stopped the advance but for the most part the market has been able to ignore MBIA and ABK. In February it would have sent it down 300 points. The greatest systemic risk these two companies pose has probably has passed as some banks have started taking actions in anticipation of downgrade. More surprising to me is that LEH did not react at all. I figured the short would have been able to gain traction again pushing Lehman down.

I read this comment in the comments section of another blog. I thought it was hilarious.

In other news, Moody's is reviewing its ratings on Confederate war bonds. With negative outlook.

Tuesday, June 3, 2008

Bill Miller

Bill Miller interview. It is interesting. He says everything in my mind that is right and then comes to what in my mind are faulty conclusions. He says that financials lead the broader market, that without credit you cannot get growth, and then comes to the conclusion that we should be bullish. Then he acknowledges the shift in financials from a 50 to 60 year secular bull market into a secular bear market and then comes to the conclusion that he likes financials (at least his financials). He likes his "franchise" financials. Umm, I hope Bear Stearns did not fall into that category. He may be right. I do not know. Just funny to me how we can follow and agree on the same logic and all the points until the conclusion. Thanks goes to Pete.

Local Governments Pulling Back

This is part of the bigger reason why the economy I think is headed south. The tornadoes spawned from the credit crises hurricane may well do more actual economic damage. It is a complete domino affect and the plankton theory (if you don't know what this is Google it) at its core. Economically the worse may very well be after the election regardless of who is elected. Thanks goes to Nathan.

State and city governments have yet to shrink the economy; indeed, they have even managed to prop it up. They have quietly maintained their spending at pre-crisis levels even as they warn of numerous cutbacks forced on them by declining tax revenues. The cutbacks, however, are written into budgets for a fiscal year that begins on July 1, a month away.

Big amount of dollars spent.

That share is gigantic. At $1.8 trillion annually in a $14 trillion economy, the states and municipalities spend almost twice as much as the federal government, including the cost of the Iraq war.


But when the current fiscal year ends in 30 days (or in the fall for many municipalities), state and city spending will fall, along with employment — slowly at first and then quite noticeably after the next president takes office.

Of course Florida is the worst off.

No state seems more vulnerable than Florida, with its plunging home prices and slashed property-tax assessments, not yet on the books but soon to be. In anticipation, the legislature in May approved a $66.5 billion budget for the coming fiscal year, down from $72 billion in the current one.

Monday, June 2, 2008

Randolph McDuff - You Ever Heard of Him?
Discipline" and "patience" are probably the two most valuable words in value investing. It stands to reason, then, that few places would serve as better incubators for a value investor than The Pas, in Manitoba. Close to polar bear country, where Hudson Bay winds chill the air to 40 degrees below zero and the wait for spring lasts eight months, The Pas is the hometown of Randolph McDuff, a stock picker with an astounding record.

Since McDuff began running his RMG ValueCatalyst small-company fund eight years ago, he has earned a compound annual return of 36.4%. Not a single diversified stock fund in Lipper Analytical's universe of 1,555 mutual funds can match that. Ken Heebner's CGM Focus Fund comes closest at 32.2% a year over the same period.


McDuff scouts for overlooked sectors, too, and is big on airports. Since airport privatization is still a foreign concept, airports are mostly ignored here, he says.


McDuff's favorite is Beijing Capital International Airport.

The Real Earnings Yield

I found this graph interesting. One of the bullish arguments is that the earnings yields make stocks very undervalued especially when compared to bonds. A couple of things 1) That assumes bonds are priced correctly, a scary assumption and 2) That the earnings will be similar over the next 12 and 24 months as they are today - even a scarier assumption.
This graph shows the real earnings yield. I do not think it is all that informative in showing times to buy but it does show that the real earnings yield is not all that pretty.

Sunday, June 1, 2008

Crunch Time

This week is going to tell us alot. Despite the markets rise I thought the action was very bearish. Very very light volume, the XLF continued to get killed as financials headed lower, economic news that would have bought with a vengeance a couple of weeks ago was bought tepidly or sold, and ABX broke to the downside. If we get the normal beginning of the month bounce and touch 1410 and then sell off, watch out!!

Who knows right? Just in my mind and watching things unfold, we are at one of the highest probabilistic moments of continuing downward moving back below 1370. I may have handicapped the situation wrong, I do not profess to be a great trader. Should be interesting.

Implied Ratings for MBIA and ABK = Junk

Interesting story about an internal unit at Moody's that track implied ratings based off of the credit default swap (CDS) market. Thanks goes to Pete.
Suprise surprise

The credit quality of bond insurers, which have been at the center of the subprime storm, differs dramatically. The official ratings of these companies say the insurers are in great shape; the alternative ratings say they're in dire danger of defaulting on their debts.

Once again surprise surprise

Moody's implied-ratings group paints a completely different picture. Using CDS market prices, Munves's unit assigns implied ratings of Caa1 to both MBIA and Ambac. That's seven notches below junk and 15 below the official Moody's rating.

Surprice suprise cubed

Munves says that over one year, the implied ratings have been a more accurate predictor of defaults than Moody's ratings. The Moody's unit reports that implied ratings for one year have a 91 percent accuracy ratio compared with an 82 percent ratio for Moody's official ratings.

Federal Reserve Running out of Reserves

I really do not know what all the side affects of this will be. It is on the scary side that we are backing ourselves into a corner.

As if a slowing economy, a falling dollar, faster inflation and a credit crunch weren't enough headaches for U.S. Treasury Secretary Henry Paulson, he now has to worry that the Federal Reserve will undermine the return of the one-year bill.

For the first time since 2001, the government will sell 52- week debt tomorrow, expanding its source of funding as the budget deficit approaches a record. The Fed is selling Treasury bills at the fastest pace since it was founded in 1913 to support bank-lending programs meant to boost confidence in financial markets. The Fed owns $34.3 billion of the securities, down from $267 billion, or 27 percent of the market, in December.