Friday, December 31, 2010

Hussman - Best December Read Award

I thought the piece below was the best thing I read this month. It isn't based on technicals or speculation. Just long term valuation standards and facts. One thing that should have become apparent in 2010 is that there may be absolute truth, but at least in the financial world in the short term, truth is relative.

I encourage you read the entire Hussman piece.

Hope every has a great New Year!!

Why are Treasury yields rising despite hundreds of billions of Treasury purchases by the Federal Reserve? There are two possibilities in the current debate. One is that the Fed's policy of purchasing Treasuries has scared the willies out of the bond market on fears of higher inflation, and that the policy is a failure. The other is that the policy has been such a success at boosting the prospects for economic growth that interest rates are rising on anticipation of a better economy.

From our standpoint, neither of these explanations hold much water. On the inflation front, the recent bond selloff has hit TIPS prices as well as straight Treasuries, which isn't something you'd expect to see if inflation expectations were being destabilized. And although precious metals and other commodity prices have been pressed higher, the commodity run can be more accurately traced to negative real interest rates at the short-end of the maturity curve, coupled with a downward trend in long-term yields that has now reversed dramatically (more on that below). I've long argued that unproductive government spending and profligate fiscal policy are ultimately inflationary (regardless of how the spending is financed, and particularly if it is monetized), but I continue to view persistent inflation as a long-term, not near-term concern. A rise in T-bill yields of more than 15-25 basis points would change that assessment. Until then, velocity can be expected to collapse in direct proportion to changes in the monetary base, with little impact on prices.

As for the notion that the Fed's targeted Treasury purchases have directly aided the economy, the argument requires bizarre logical gymnastics. It demands one to believe that although the purchases were intended to stimulate the economy by lowering rates, they have been successful without lowering them, and in fact by raising them, because the expectation of lower rates was so stimulative that it caused rates to rise, so that the higher rates can be taken as evidence that lowering rates without lowering them was a success. Oh, brother.

And this is the hard part - basically if you have managed money avoiding the ugly you have gotten killed. You needed to to own trash.
The performance of these 133 factor portfolios over the past 13 weeks offers tremendous insight into the extent to which the Federal Reserve has encouraged speculative risk. Investors are chasing stocks with the greatest exposure to market fluctuations, commodities, credit risk, small-cap risk and volatility. Conversely, securities demonstrating reasonable valuation, stability, quality, or payout have been virtually abandoned by investors. Here is a sampling:


Market Beta

Raw Materials Beta
Commodity Sensitivity

Credit Spread Beta
Macro Economic Sensitivity

Small vs. Large Beta
Style Sensitivity

Silver Beta
Commodity Sensitivity

Sigma Risk (Volatility)

Operating Cash Flow Yield

EPS Stability

Value vs. Growth Beta
Style Sensitivity

Return on Invested Capital

Dividend Yield

10-Year T-Note Beta
Macro Economic Sensitivity

High vs. Low Quality Beta
Style Sensitivity

He writes at length on valuation of the market.

Even if we assume a future dividend growth rate of 6.7%, which is the fastest growth rate observed over any 25-year span during the past century (and again, includes the impact of share repurchases), the S&P 500 would currently have to stand at 748 in order to be priced to achieve long-term total returns of 10% annually. Of course, with the S&P 500 at about 1256 despite a contraction in dividends over the past few years, this analysis would imply that fair value is again about 40% below present levels. It would be nice to be able to rule that conclusion out.

Wednesday, December 15, 2010

United Kingdom Prepares for Massive Job Cuts

As riots and protests were occurring across Europe today (incredible the lack of coverage by the U.S. media) the Guardian is reporting that Brits are preparing for massive job cuts.

From the Guardian:

At least 100,000 public servants will receive grim news over the Christmas holidays or soon after as councils, police forces and other public services race to meet a deadline of 1 January to formally announce job cuts.

An analysis of local authority documents reveals that the number of council redundancies directly resulting from the coalition's austerity measures is expected to break the 100,000 mark by early in the new year, fuelled by the swingeing cuts announced this week to councils' budgets and the pressure to start cutting before the new financial year in April.

This comes on top of the 33,000 drop in public sector jobs over the three months to October that was detailed yesterday in official unemployment data and is likely to lead to a torrent of "at risk" warning letters hitting doormats across the country in the next few weeks.

100,000 may not sound like a huge number (or maybe it does) when you first hear it but lets compare apples to applies. The population of the United Kingdom is 61.8 million. The population of the United States is 307 million or 4.96x bigger. So that is the equivalent to the United States government announcing 496,000 job losses in basically one day. Throw in the 33,000 government jobs already lost in the last couple of months which is the equivalent of 164,000 U.S. jobs and the United Kingdom is announcing the equivalent of 660,000 United States jobs losses in just a couple of months. That is a massive number and is akin to the United States losing 600k jobs a month at the depth of the Great Recession.

No wonder there were riots all over Europe today. If you did not see this video it is worth the watch. It is from Greece today.

This is the beginning, not the end. Why? Simply nothing at the foundational level has yet to be fixed in the United States or in Europe.

Guest Post From Llano Llama

Was posted in the comments by Llano Llama and I agree so much with it that I thought I would make it its own post. Thanks

There are so many angles on this.

I think Prechter is making the better case because he is taking into consideration more of reality. Unfortunately, to explain things clearly, laying out the arguments and counter-arguments requires multiple book length treatise that few would ever read. Our ability to process complexity is limited so we prefer simple answers and simple models. But alas, the economic world is not a simple linear predictable beast. It is a non-linear, non-equilibrium, path dependent, complex interaction of systems and sub-systems.

If anyone asks, I push the path dependent idea first. People seem to understand that we will get a different result if we raise taxes in 2011 rather than leave them at current rates. If they are more economically inclined, they will understand that Europe moving to a tighter monetary union and sharing the pain is very different than breaking up the EU/EMU.

If they are still listening, I try to lay out some cases where the expected simplistic story didn't occur. For example, in 2008 we heard that oil going over $140/bbl was a sign of runaway inflation or Peak Oil. And yet a few months later oil traded to the $30s. Similarly, you will hear that "A central bank in a country with debt denominated in their own currency can force as much inflation as they want." And yet Japan has gone about 20 years in some form of economic stagnation. Apparently, there are more forces at work than mentioned in the simplistic story.

At that point the discussion is either about human nature, the limits of Capitalism, or "should I buy gold?"

Monday, December 13, 2010

The Must Watch Videos of the Year - Peter Schiff and Bob Prechter

There has been no bigger debate over the last two years than that over deflation and inflation. Perhaps the biggest deflationist Bob Prechter debates one of the biggest hyperinflationist Peter Schiff in the two videos below. They both believe the same thing, a complete collapse is coming in the next few years. They couldn't be more different in how that collapse will occur. Schiff believes we are heading towards a hyperinflation and Prechter believes deflation will come with a vengence and that banks will fail and people will lose deposits etc. (hyperinflation comes on the back end)

Unfortunately they both are just throwing out scenarios. There is little to go off of to conduct fundamental analysis. Collapse is coming, that can be fundamentally analyzed, how it occurs can't because it is based on social mood and political decisions. For my two cents, I think Prechter will be proven right but not to the extent that he is predicting. Deflation will lead to inflation. Dow will never get to 1,000 like Prechter is predicting. Hyperinflation is a political event and Dow well above 1,000 will cause collapse to jump start massive inflation.

I really think one of the more important things to listen to in 2010.

Part 1

Part 2

Wednesday, December 8, 2010

Money Printing?? - Hasn't Happened

Maybe I am being naive but I think I figured out the technical way the Fed worked before almost anyone on Wall St. (Hoisington had it figured out) The knowledge and my efforts have cost me dearly as the perceived truth is much more powerful than actual truth. (i.e. David Teppers comments become gospel though completely 100% wrong in how the whole thing actually works) In other words it is a puzzle I wish I never would have solved. Sunday on 60 minutes Bernanke said the Fed wasn't printing money after saying in 2009 and 2002 he could. Now all of a sudden several Wall St firms analysts are echoing him. No one thinks!!! If the Fed says it must be gospel so when Bernank said he was printing money everyone assumed he was without actually looking. I have about determined Wall St. never thinks. It is 100% about gaming others, not fundamentals.

Below are a few excerpts by Morgan Stanleys David Greenlaw. (who also had it figured out earlier than most) The entire thing I can be found here. It is the best description I have read explaining a very complicated topic.

QE2 departs from the textbook. The issue is confusing because all of us who took a basic undergraduate Money & Banking class learned that a central bank's open market purchase of securities was effectively the same thing as printing money.[My comment - no one actually challenges the textbook. No one challenges perceived truth!!!] But the experience of the last few years has taught us that this logic is not always correct. In fact, Fed officials have been reluctant to adopt the QE terminology because the impact of asset purchases is all about rates - not quantities.


Fed will respond to inflation as needed. Interestingly, the market moves that we are seeing in currencies, commodities, inflation expectations, etc., appear to reflect a belief that the Fed has been printing money - or will do so at some point down the road as the money multiplier normalizes. Bernanke tried to address this point in the 60 Minutes interview. He indicated that the Fed could raise rates in "15 minutes" if necessary and that he is "100%" certain of the Fed's ability to respond to an inflation threat. Of course, it remains to be seen whether the Fed will follow through on this pledge - and it remains to be seen what the FOMC will consider to be a legitimate inflation threat. But the market moves that appeared to coincide with the reintroduction of Fed asset purchases reflect speculation - as opposed to a fundamental supply/demand shift - because there hasn't been any money creation to date. Ultimately, the success or failure of the Fed's asset purchase policy will depend on an interest rate transmission mechanism, not a quantity channel.

Tuesday, December 7, 2010

A Day to Take Note Of

Very very interesting day today. I thought so during the day today and was reading some commentators tonight who thought so as well. The first prints of the day I covered some shorts and towards the end of the day I put half of it back on. Yes, that was a bad short term trade but the reversal today was amazing in ALMOST ALL asset classes. In technical terms hammers in the NASDAQ, S&P, gold, silver, copper, VIX etc.

Tomorrow will tell you alot. If we don't follow through to the downside it is ignorable but if we start selling off confirming today's price action it could get really interesting.

Today's news of course was the president became Republican showing there really isn't much difference between two parties. Republicans won today, Democrats won today, and America got screwed. You have to cut spending on the other side of it and the bond market noticed that didn't happen. Maybe that is when this all finally blows to bits, when the bond market sells off hard causing interest rates to spike. Typically bonds and stocks move inversely. That hasn't really happened this year. Bonds went way down looking like the economy was going to crunch while stocks continued to climb. However, when the game is up, both can go down. Look at Spain. Bonds go way down and stocks go down with it. There is some differences since Spain can't print its own money.

Anyway, today was a day to take notice of. Very interesting and tomorrow will tell you alot.

Wednesday, December 1, 2010

More of the Same

Strong day on Wall St. I wasn't surprised that we were up (was expecting it yesterday with the start of a new month and Europe being sold hard the last few days), but as usual I was surprised how fercious the up move was. Because it was so strong it puts the odds that the market has higher to go. First watch 1227ish and than 1250. That is if the market doesn't reverse tomorrow, which could still happen. The reason we were up so strong is very suspect. Many are credited the "strong" China number last night which doesn't make alot of sense because the futures yawned at the number and the Chinese markets finshed flat. It started with Europe and unlike when Europe sells off hard and the U.S. markets shrug it off, when Europe surges it gives an excuse for the U.S. to surge. So up up and away we went. ADP employment numbers were strong but annouced layoffs were the highest they have been in 8 months. There was also a rumor that the U.S. would bail out Europe which was quickly denied.

I think the market continues to rest on Europe first and China second. If the problem spreads to where Spain has to be bailed out - game is up. The question is which game. Will Germany buckle and allow the ECB to start its own version of QE or will haircuts be taken on debt, losses taken, and we revert back to some sort of capitalism? More and more thoughts on some sort of QE in Europe.

Tomorrow the ECB meets and it is likely the bears only hope for the remaining of this year. The market seems to be indicating that it is expecting some form of signal that the ECB will loosen up buy more government debt. It is entirely unclear that will indeed happen. If it doesnt and the Euro starts heading down again, than todays rally should reverse tomorrow somewhat. Not really expecting it will but we will see. Someone was out there today buying European debt today and it almost had to be the ECB.

Gotten a few comments that I havent been blogging as much lately, and I haven't. I have been really busy but it is getting really old talking about the same thing over and over again. This is bad but it doesn't matter because the government will print more money. The last couple of weeks the market should have been down really strong with Europe falling apart but it wasn't. Probably bullish in the near term. The market won't start going down strong until something happens outside of Bernankes control. That will come from politicias, the populace, or an oustide nation (i.e. China). Like I said - if tomorrow the market doesn't reverse, the odds are strong that the market heads higher between now and year end.

Monday, November 29, 2010

David Einhorn on Consuelo WealthTrack

David Einhorn was on Conseulo WealthTrack. Very good interview as one would suspect from Einhorn. I encourage reading or listening to the entire thing. Below are some highlights.

On what has changed (this is my big thing, the market can go up every day until it doesn't but absolutely nothing has changed fundamentally that caused this whole mess. It is worse)

CONSUELO MACK: Has anything changed? Are any of the watch dogs doing their job better?

DAVID EINHORN: Well, the truth actually is, what we’ve seen is, even in the bigger financial crisis, the same watch dogs have just repeated the same behavior, just in a much bigger way. So what we’ve seen, the same kind of sort of forbearance towards Allied Capital has been granted to the big banks, the big investment banks, and so forth.


CONSUELO MACK: So even with what we’ve seen, with the banks being more prescribed in what they are able to do, I mean, using much less leverage, being more scrutinized, you don’t think that that’s enough?

DAVID EINHORN: It’s just not enough. If you look at the big banks, they’ve gone from maybe 25 or 30 times leverage to 15 or 16 times leverage, or something like that. That’s still a lot of leverage. And it doesn’t count the derivatives books. And you have these huge notional derivatives books that, they’re just sort of tail risks that are sort of out there, and nobody really knows what’s in them, and nobody knows what risk they pose, and you certainly know that if any of the big four or five books that have the massive derivatives books was going to be on the cusp of failing; you would need to bail them out, the same way, in the future, that you would in the past. Notwithstanding whatever the new rules supposedly say.

on gold

CONUSLEO MACK: Now, one of the things you just mentioned is inflation. And we are seeing inflation in hard assets. And one of the hard assets that you own at Greenlight Capital is gold. It’s your largest position. So what does gold represent to you, in your portfolio?

DAVID EINHORN: To me, gold represents money. And there’s different types of money. Some people think gold is a commodity, and they want to think about jewelry demand, and how many weddings there are in India, and so forth. And how much is coming out of the ground. I think of gold as money. And you can have dollars, or you can have Yen, or you can Euros, or you can have Pounds, or you can have gold. And there’s other currencies in other countries, but those are the sort of the major currencies as I see it, and I think that the merit of gold is, given our current monetary policy and our fiscal policy, as well as the problems in the other major currencies, gold is the money, I think, of choice, that we would like to have a meaningful amount of our assets denominated in.


CONSUELO MACK: For individual investors, who don’t have the kind of flexibility that you do to trade and, nor the sophistication, I mean, how should we view gold, as individuals? I mean, should it be in all of our portfolios? And should we, too, view it as a substitute for paper currency?

DAVID EINHORN: I think so. I think it makes sense as a diversifier, and to have this sort of money, particularly because this is the kind of money that Chairman Bernanke can’t print more of.

On owning banks

CONSUELO MACK: So as an investor listening to you, would you touch a bank with a ten foot pole? At this point, would you invest in one of the major money center banks?

DAVID EINHORN: No. We wouldn’t invest in the major money center banks.

Wednesday, November 17, 2010

QE Explained - Cartoon Style

Below is a video that has been featured on many blogs and has gone viral (over 1.3 million hits). It was so good decided to post it here also. Don't endorse all of what is said but it isn't to far off.

Catch Up

Wow it has been a long time. I have been traveling some and been busy with other things. It also gets tiring writing about the same story. If you look at the headlines over the last two years, little has changed. Why the market decides to care now or care 6 months ago and not care a month ago is beyond me. We have been here 3 or 4 times over the last two years. Are we on the precipice of this thing falling apart or does the governments still have some wiggle room to keep this going? Europe is again falling apart, U.S. muni bonds are blowing out like they haven't been since 2008, an anti move against the ponzi perpetrator - the Fed - is growing in momentum, obvious spending cuts going into next year, China pulling back- are we done or is this another false break and there is yet another move up? If we are done going up why now versus last August? Logic need not apply.

The chart below was on zero hedge. It is the most amazing chart you will ever see. It shows domestic equity outflows. It has been 28 weeks in a row with domestic mutual equity fund outflows. All time record. That is over 80 billion dollars. Somehow the market goes up. Who is buying? I don't know. The government? Investment banks? I don't know.

There are three really interesting things going on right now. China seems to be slowing, Europe is cracking, and U.S. muni bonds have sold off hard. All three are very dangerous going forward. I just don't know if there is another push higher or not. Europe is more dangerous than Wall St. gives it credit for. The bickering among European leaders is what will topple the Euro.

The NY fed manufacturing index was horrid. Worst drop since 2001 I think. Components that make up the number were also really bad. Tomorrow is Philly Fed. I think that number has more importance than normal. Will be interesting if it diverges or confirms NY.

Friday, November 5, 2010

QE Impact on Japan's Stock Market in 2001

I had been wondering about this. From David Rosenburg:

Let’s learn from the Japanese lesson with its QE experiment. The day the Bank of Japan launched the program on March 19, 2001, the Nikkei surged 7.5%, from 12,190 to 13,103. It went on to make a fresh high on May 7, at 14,529 (just under two months after the announcement) — rallying another 11%. Fully three-quarters of the post-QE rally to the May highs occurred in the first four days. And that is all she wrote.

Three months later, as it became painfully obvious that the real economy was not responding well to the shock therapy, the Nikkei index slid 16% to just over 12,000. Moreover, the day before 9/11 it had already tumbled all the way down to 10,500 (down 27% from the nearby post-announcement high and 14% lower than the day of the announcement itself!).

That is a huge move higher in a short amount of time on the QE announcement. My follow up question would be how much the QE was telegraphed. In otherwords did the market know QE was coming for sure like it was in the U.S. How much was the rally priced in here and how much do we still have to go?

Thursday, November 4, 2010

Ron Paul Is About to Totally Revolutionize the House Monetary Policy Panel


Odds are you haven’t heard of the monetary policy subcommittee. Officially known as the House Subcommittee for Domestic Monetary Policy and Technology, it’s a subdivision of the House Financial Services Committee that has mostly occupied itself with pressing questions of issuing commemorative coins and whether or not to eliminate the penny.

That’s about to change. Ron Paul, the Republican Congressman from Texas, is the ranking member of the monetary policy subcommittee, and when the next Congress takes over he’ll likely be the chairman of the subcommittee.

And Congressman Paul has some big plans.

“I will approach that committee like no one has ever approached it because we’re living in times like no one has ever seen,” Paul said in an interview with NetNet Thursday.

Paul said his first priority will be to open up the books of the Federal Reserve to the American people.

Time will tell how much power he will really have and how much he can really do. I have a feeling at some point this will be a big 2011 story.

Say Hello to Your Market God - Ben Bernanke

Well if there was any doubt left over how much the Fed really monopolizes everything, it should have ended today. EVERYTHING was up and UP BIG.

I thought Art Cashin said it best today when he said:

It is becoming far more evident that the true purpose of QE2 is not to hold down interest rates. It is, instead, to raise asset prices, especially stock prices.....QE2 is beginning to look like an open-air multi-month version of the PPT.

Bernanke has taken over the throne of market god and he believes he has the wisdom to know what asset prices should be. Let's not believe in the market and what prices the market sets but we need a czar to decide where stocks should goes.

What this means is the markets are firmly in control by the Fed and the markets will not go down until an event occurs that the Fed can't control. What would that look like? Europe fracturing at the seams. Or Japan. Or Ron Paul gets some power over the Fed.

It is absolutely amazing to me that the Euro continues to climb. Look at these bond spreads. European stocks are making new yearly highs also. This should be yelling danger.

The problem with this of course is the Fed is the market. This is no different than the upteen manipulations throughout history. Look at the chart below. It is a manipulated market and the manipulator eventually lost control. Can you tell which market it is?

This is of course the silver market and the manipulator was the Hunt brothers. So pretend you know it is a rigged market. You know it is going to crash but pretend that is all you could invest in. At what point do you invest? Do you go long and try to get out somewhere near the top? Do you short and if so where? 10, 20, 30? How long is it going to last? Because the graph covers such a large time frame you lose the sense of time. That was really a 3 to 5 year event before it all played out.

The market is bigger than any manipulator. Eventually the manipulator loses but it could take a long long time. Bernanke will lose this and it will leave a trail of tears but in the interim I have no idea how you or I or anyone elses successfully plays it without it just being a gamble.

Economic data hasn't been bad this week. I find it interesting that the market surged on the worst data of the week. Jobless claims were way above expecatations. A few more Americans lost their jobs. Perfect - the stock market can surge.

Tuesday, November 2, 2010

The Elections and the Coming of Spring

Most of Wall St. is focused on the Fed decision tomorrow. I think the election today has far more ramifications for the market than more QE which will distort asset prices but do little for the economy. Since February I have said, and written several times in various blog posts, that a huge Republican tea party led win would be extremely bearish for the markets and the economy. It seems we will get a chance to see if my thesis is indeed true. The economy at this point is a sham. The only thing propping it up is government spending and government transfers to the private sector. This is completely unsustainable but to keep the economy propped up and growing, not only do you need to maintain it but you need to grow it!!! Using play numbers but if the economy is $20 and the government spent $2 dollars the government is 10% of the economy. Next year the government spends $4 (a 100% increase) and assuming the rest of the economy stays the same causes the economy to grow 10%. (2 increase / 20) Of course that growth is very low quality growth and now the government is 18% of the economy. Well the next year all things equal (again assuming no private sector growth) the government has to spend $4 dollars just to maintain what it did previously. To have the same percentage impact as the year before the government needs to spend $6.20. (economy was $22, the government made up $4 and to get the same 10% increase needs to spend $2.20 on top of the $4 so needs to spend $6.20) Now of course that isn't all true as some of the spending may increase productivity or generate its own future growth (though most of government spending is waste) but the point is mathematically without strong productive private sector growth it becomes mathematically difficult for the government to continue to have the same impact. Add now a massive Republican win and the feel for a need of a balance budget, resisting stimulus measures, state and local budget cuts, and you are potentially looking at a massive black hole economically.

The markets are used to gridlock being good for the markets. It hasn't been gridlock that saved the economy or the market over the last several years. In fact it has been cohesion that Keynesianism is the right way to go. Think back to the fall of 2008 with the huge TARP senate bill that failed to get past. It was on all the tv networks and as soon as it failed the market plummeted. It was right before the election and many senators, especially Republicans, quickly switched their votes a couple of days later. That was gridlock and that started a collapse that was reversed. This time I don't think there would be any switch of votes to save banks and the more Tea partiers that win would ensure that. What has caused this massive market rally and extremely tepid economic recovery is massive government spending that was possible because and only because you had cohesive government to jam whatever had to be jammed through. Create gridlock and there is no more that can be jammed through.

There is an entire other aspect to this that Wall St. isn't looking at. Oversight of the Fed. Currently Ron Paul is the ranking minority member of the Domestic Monetary Policy and Technology subcommittee in Congress. What does that mean? Well he is line to take over the subcommittee chair. So what? Well that subcommittee is directly in charge of overseeing the Fed!!! So the individual who would like the Fed abolished will be overseeing it? Sounds like a friendly subcommittee. Of course Ron Paul won't be able to have the type of power to abolish the Fed but he will have the power to push certain legislation. His audit the Fed bill got gutted at the subcommittee level. Wall St. isn't talking about this at all but it seems to me to be HUGE!!!! It isn't a lock that Ron Paul will get that position. It used to be that the heads of subcommittees went directly based on seniority. Today that is still normally the case but you need to be favored by party leadership. That historically hasn't been the case for Ron Paul as he was looked as an individual with crazy views but Ron Paul's status has climbed in the last several years as he is associated with the tea party movement and is now seen as right on many topics he was previously ostracized for. This was John Taylor's take on the situation in his latest letter (Taylor is head of FX concepts - one of the largest currency trading shops in the world).

...After the Republican victory things will change. The Fed will be hamstrung, as Ron Paul, a conservative standard-bearer and harsh critic of the Fed, will head the sub-committee overseeing its actions. Liquidity expansion or new programs will probably drop sharply under his watch. Paul would argue that the Fed’s unfettered ability to “debase” the currency is about to come to an end.

This is potentially a landmark shift.

How will all this affect the markets. Well right now the markets are celebrating the idea of a split government. I don't think the markets realize how things will change. It is the absolute inverse of November 2008. Remember then the markets made a new low in March of 2009 after the elections as the markets (and me) failed to realize the implications of Obama and the democrats taking charge and the willingness to do whatever it took to get asset prices up. Even if it meant ponzism. The Democrats partnered with the Fed in an evil alliance to push asset prices and the economy up no matter what the long term costs. As a result of this faulty idea that gridlock is now good, the markets may have another day or several months of moving up on a Republican win (I personally think it will be a very short rally) but I think it will not take terribly long for the markets to realize that gridlock and a competing sheriff in town is not economic or ponzi friendly. In fact it is downright unfriendly. To keep growth going the government is going to have to continue to increase its overall spending. Right now that is not the way 2011 is materializing as state and local budget cuts take hold before the Republicans take over. Maybe the Republicans will again not act like Republicans after this election and take the free spending way of former President Bush but the influx of the tea partiers and the feel of 1994 when a Newt Gingrich conservatism swept the halls of Washington will probably keep the resistance up to the way it has been done.

This is also extremely dollar bullish as the Republicans will not be most likely making an alliance with the Fed who is hell bent on destroying the dollar. Ron Paul is as passionate about hard money as anyone around and his influence will grow as well as being joined by people who think like him.

A major shift is upon the markets. The Republicans will try to do the right thing. Unfortunately, I think currently the situation is unfixable. There were multiple chances to fixes over the last 10 years but the opportunity passed as the idea to hide it through banning short selling or changing mark to market accounting played into the current sham. On the outside chance it is fixable it means massive pain in the interim. The best analogy I can think of is some major disease. The doctor tells you that you need surgery but your chances of surviving surgery is about 10%. (If you would have surgery 3 years ago there was a 80% chance of surviving) If you don't have surgery you will live two years. That is all the time if you have left. If you do have surgery you will live for 30 more years. The democrats and the Fed are taking the route of living the year. The Republicans seem like they would prefer to take the chance of the surgery.

As John Burbank of Passport Capital said at the Value Investing Congress a few weeks ago, the United States now has to be looked at as an emerging market. No longer are the economic prospects as important as the political landscape. Washington matters much more than Wall St.

This election may just awaken the bears from a winter hibernation. For the bears, a Republican landslide may just be their spring as they stumble out of their dens from a long winter more grumpy than ever.

This has been my thesis for almost a year and it will be interesting to see if it plays out. One thing is certain. If I am right it proves yet one more time that the market really isn't a discounting mechanism at all. Just a drunk sailor where prices really carry no informational value. A far cry from what capitalism in the United States used to be.

Wednesday, October 27, 2010

Wall St - Main St Disconnect

Somehow the market is shrugging off more horrific news as Portgual's government seems to be unraveling. The market of course has been a farce for over a year now. Even PIMCO's Bill Gross is now openly calling what is occurring a ponzi. There isn't a much better graph of the disconnect between stocks prices and reality than the chart below. Not much shocks me but this chart surprised even me today.

Sunday, October 24, 2010

Away From Wall St Live the 99ers

Currently futures are surging. Why? Ha, I have no idea. Your guess is as good as mine. Away from "wealth and prosperity" and a surging stock market is the real economy - what is really going on in America. 60 Minutes had a very interesting piece on the 99ers. Those who have been on unemployment benefits for close to two years as the longest downturn since the Great Depression continues. My fear of course is that somewhere between now and thirty six months from now, many Americans will look back and think that these 99ers had it pretty good.

See video below:

Friday, October 22, 2010

Emergency Alert on Home Prices

Clear Capital puts out monthly data on housing prices but today they did something very unusual. Two weeks into the month they issued a house price warning. Apparently, according to their numbers house prices are starting to collapse. Down nearly 6% in 2 months. That is a plunge for an asset class that usually has very sticky prices and a warning sign potentially of things to come.

Wednesday, October 20, 2010

Flip Flop - The Inverse Matrix

Today was the complete inverse of yesterday. I honestly wasn't that shocked. There was some surprise but as I pointed out yesterday, the market really hasn't had a topping process. Today we closed below previous highs, the S&P 500 is up .01% from a week ago. It looks like a more legitimate rollover. Not saying it is going to roll over but it looks better than it did yesterday.

The Euro also rallied hard. Again though it closed at a lower high. I actually more comfortable with the Euro here than the stock market and for the first time in my life I shorted the Euro today. Just a little bit. You have a good set up. You cover above 1.40. That is your stop. After the big surge I like the way it traded all day. We shall see if it has a new high in it or it is done.

The rumor today was more on QE. How many times can you rally on the same rumor? Seriously!! The rumor seems to be having a smaller impact each time but still.

Anyway - tomorrow will be telling. Jobless claims in the morning and it will be very interesting if the Euro rally today was a one day wonder.

Tuesday, October 19, 2010

What Color is That - Red???

I saw a color I hadn't seen in a couple of months today. In fact I had just assumed it got taken out of the color spectrum. Yes it was red. Red across my screen. I had to go buy a pair of sunglasses because it was bright compared to the "nice soothing" green that we have had for months.

A bunch of things converged at once to create this move. Apple and IBM earnings which were good but were already priced in and than some. China with a surprise rate hike overnight. Continued problems and protests in Europe. German business survey that came in below expected. PIMCO, the Fed, and a host of others indicating intentions to sue Bank of America for bad mortgages. Now if any of this news would have come alone it would have been "good" news because it meant more money for the ponzi. All of it together poses risk to the ponzi. Hence you have a major selloff and boy was it a doozy. Gold was down over $40. Copper, oil, the Euro, everything was sold hard. The dollar screamed higher. I had been thinking for a couple of days that we were seeing a possible topping pattern in the Euro. Remember I thought that 3 weeks ago and it ended up being false. This time not so false. Many will be confused by the gold move. Remember gold has gone parabolic the last 10 to 15%. Was it fundamental or liquidity driven? At least for today it shows it was liqudity driven. That poses continued risk to the downside for gold.

I think the elections are starting to become a drag also. The Republicans are really starting to pick up steam. I have postulated for months that a big Republican win would not be good for the markets. A small Republican win could possibly be because it would increase gridlock somewhat (I even think a small win would not be good for the markets over the longer term) but a big win could mean that Republicans try to fix things. A balance budget, more constraints on the Fed etc. Stuff that was much needed several years ago but now I think it would collapse the ponzi. It would cause a big drop in the economy because Washington is holding up the economy. In otherwords I don't think it is fixable anymore which means it is either up or die. You can go up until you can't and than you die. So die now or die later. That is a little dramatic but the analogy for the point I am trying to get across works.

So the markets? Shzz is it tough. We haven't broken any major technical stuff. Need to go below 1155 before that happens and really below 1130. From a pure guessing point, assuming we have put in a top, the highest probability is that by the end of this week we will be lower than we are now. Somewhere next week, maybe mid week or maybe later the markets bounce hard and the Euro bounces hard correcting this latest sell off. It will the last buy the rumor before the elections the following Monday and the Fed on Tuesday. After that you roll over and a huge sell the news event. If you short now you will be risking that A) the high really isn't in and B) you have to go through a big rally next week. If you don't short now you risk that you actually don't get the bounce.

In general I feel like the Euro has had its topping process. It is done and it is going to be heading much much lower (remember a big Republican win is probably bullish dollar). The markets didn't have as nice of a topping process as I would have liked. A topping process isn't a necessity but it is nice. Remember however that in June/July of this year the Euro bottomed first and than the stock market bottomed a week or two later at 1010. It could be similar.

Wednesday, October 13, 2010

Kye Bass Notes from the Vaue Investing Congress

I listened to Kyle Bass give an hour presentation this morning. Below are my notes from his talk. He had some incredible slides I hadn’t seen anywhere else. It was the scariest presentation I have ever heard. He is convinced the collapse of Japan is very very soon - within in the next 2 to 3 years. He sees no hope for Europe or the United States. Thinks it is almost impossible for the United States not to be in a recession by Q1 of next year. United States could still hypothetically fix the long term problems (think he was talking about from a math standpoint) but there is no way politicaly that is a possibility. Other thoughts talking to him after the presentation is that if China’s currency depegs from the dollar that China’s currency appreciates 25% and than plunges. Thinks the dollar needs to devalue 50%. However, thinks there is a high likelihood that the dollar surges at some point when things start to unwind. This will be the last gasp of the United States. I put huge emphasis on market history and talking to him I have honestly never heard anyone spout off economic history and historical facts as quickly as he did. I was in awe. He talked as if he lived during those times.

Starting with the United States.
- He put up the very familiar graph of consumer debt going back to 1900. It showed a small downtick recently but still massively above any long term historical perspective. Household debt has fallen from 104% to 98% of GDP. This drop is almost exclusively foreclosures. Consumers still aren’t choosing to delever.
- The next graph showed how the marginal benefit of debt has plummeted. According to Kyle each dollar of debt only produces $.07 of GDP currently. We can create all the debt we want at this point and it won’t help.
- He than showed a graph of unemployment duration and how headline unemployment massively understates actual unemployment. He made the point that the recent Nobel Prize winner won based on his study showing how increasing unemployment duration and unemployment benefits increases unemployment. Thought it was interesting that is who they decided to give it to considering what is happening today.
- He than showed the labor participation rate graph and how it has collapsed. He referred to the prior graphs on employment and made the point that the United States have been losing jobs for years and will continue to lose jobs overseas. Either you need wage deflation which will not happen or the dollar needs to lose 50% of its value.
- He shifted to the CBO projections for the next 8 years highlighting specifically 2013 and 2014. He titled the slide The Anatomy of a Utopian Economy. He pointed to the assumptions and said they are not possible. Humanly mathematically impossible.
- His next slide was titled what can $1 trillion can buy. He hosted a conference at a ranch the week prior where he posed this question and talked a lot about it with various people. You could implement the entire Pickens plan transferring every car and metropolitan center for natural gas usage. Making the transportation system the envy of the world and much more competitive. You could transfer every coal plant to a nuclear facility lowering the cost of energy to a fraction of what it is and make this country much more competitive. One could pay every unemployed person $67,000. A trillion dollars could buy a lot of things instead of what we are focusing on. By early next year the Fed will be the biggest holder of treasuries in the world surpassing China and Japan. Another trillion simply to extend unemployment benefits is absurd.

- He showed a lot of graphs in this series not directly related to Europe and most of them were really busy. The first one was that world wide governments need to issue 4.5 trillion.
- He than started talking about Iceland and mentioned some book (couldn’t get the name and t was written decades ago) talking about global crises and cultural epicenters and how Iceland and some country in the South Pacific would never default. Well Iceland at the time of the banking crises had 35% debt to GDP. Icelandic people were shocked at what happened and how the banking assets completely devastated the country. Ireland is in the same situation. In his mind there is no way they don’t default. The banking assets are huge. All of Europe could step in but mathematically it would not be easy even for that to occur.
- He than showed a graph of banking assets (I think it was specifically MFI) to GDP across countries. Said he was visiting a Harvard professor (again – couldn’t get the name) who specialized in sovereign problems. Kyle asked him how these countries could possibly get out of this. Kyle said the professor took off his glasses, leaned back, and said “Oh my God – I had no idea it was this bad.” Kyle’s point was that if someone who focused on it didn’t see this how in the world can someone like Trichet or Bernanke have seen it or doing anything to prepare for it. His point is that no one is looking at what is going on. It never mattered to look at this stuff.
- He also showed government debt compared to government revenue. Said investors should care about this and it shows the same picture.
- He showed balance sheets of several countries. He talked about how Ireland has cut 10% of government expenditures but government revenue has dropped 15%. The deficit may be up 40%. There is no way out.
- He spent along time talking about the IMF and how it works. I was unfamiliar with all of it and need to listen to it again to understand it. Basically the IMF is an optical backstop. It was created by the U.S. based in Washington but run by Europe. The backstops are never meant to be spent. Kyle had a meeting with Barney Frank a few weeks ago. When talking about the IMF Barney leaned over and said (paraphrased) – C’mon Kyle, it’s not real money. It is just a journal entry.” Kyle said after almost coming out of his chair he collected himself and his retort was if it isn’t money than why not make the number 15 trillion.
- The IMF is made up of nations who pay into it. This is supposed to cover drawing rights over time. Hungary was the first to draw on these rights. They drew 800%. Greece would need to draw 3000%. This is money the IMF knows it will never get paid back.
- The next graph was showing sovereign defaults over the last 200 years. Every 50 to 70 years have sovereign restructurings. In the past it was all about war. To the victor went the spoils and to the loser came restructurings. We have no war and yet we have more debt compared to any war period in the last 200 years.

3) Japan Will Default Not If.
- The government has 2.5 quadrillion in debt (think that was the number). Showed a graph and said this is what happens when a government steps in and tries to hide previous mistakes.
- Every 1% move on interest rates increase Japan government interest expense to 10 trillion. Inflation isn’t possible for Japan.
- Showed the Japan’s balance sheet and showed how the interest expense now exceeds government revenue. He said this is when Keynesiasm runs out.
- Some of this can work for a long time but last year more people exited the work force than entering it. It will continue. This is like a ponzi end game when more investors leave the ponzi than come in.
- What the big macro funds have missed over the last 20 yeas was the huge trade surplus. It switched in 2008. It is the game changer and will be the catalyst for what changes Japan’s situation. It is like taking Japan’s biggest asset and switching it to a liability overnight.
- If thesis is right - the largest buyers of government debt become net sellers. Than showed articles pulled from Japanese papers showing how the two biggest buyers have to start selling.
- Thinks the yen is intrinsically worth 250 to 1 compared to the dollar.
- He has a series of bets on Japan that pay 50 to 100x. No one believes what is going on. The tail risk you can buy is extraordinarily cheap. Cost less than one basis point in some instances. No way for retail investors to buy it. Need a couple of hundred million dollars.

New York City - Value Investing Congress

I am currently attending the 6th Annual New York Value Investing Congress. Flew in yesterday which was its own nightmare. It is always fun to try and fly in and out of LaGuardia. Either way I always thoroughly enjoy this conference and today has not been an exception. Tomorrow is when the two big dogs I really want to hear speak give their presentation – Kyle Bass and David Einhorn.

One of the more interesting morning sessions was John Burbank of Passport Capital. His presentation was entitled the Math of Democracy. He discussed how he has gone from apolitical to maxing out his limit for political contributions which is $115,000 a year. He says that the United States now must be studied as an emerging market and analyzing Washington is pertinent. You need feet on the ground in Washington. Investors need to be visiting Washington and engage in the political process. Essentially, since we have become an emerging market you have to look at the domestic investment landscape in 2 year cycles. Bottom up investing is now not possible anymore.

His view is that the Republicans will take over the House and the Senate will be a toss up. As a result it will be gridlock for the next two years. This carries risk if spending slows down. After the gridlock - he thinks 2012 could be a watershed moment. He encouraged all in the crowd to become active politically and started running through the numbers on how easy it is to impact elections. If as few as slightly over 20,000 people in the United States maxed out there contributions possibility it would double amount of money that went to political campaigns and those people would drastically shift the outcome of an election.. He thinks we are either going the Argentina road or the Germany road and the next two elections will determine that outcome. He also pointed out how a Washington investment has the highest return of any investment he has seen – at over 100 to 1 and if you look at government discretionary spending only compared to political donations the leverage implied is close to 400 to 1.

In general he likes emerging markets (not in reference to the United States) but says that is consensus now and is very illiquid now and if that turns it will go down sharply. Likes anything China has to bring across its borders (potash, copper, crude oil, soybeans, coking coal), and Big Western Caps.

It was a very interesting presentation.

Another interesting presentation was from Amitabh Singhi of Surefin Investments talked about the investment landscape in India, Pointed out that India has over 5,000 listed companies which he thinks is 2nd only to the United States. The opportunities to talk to companies and find inefficient markets is much greater. He talked about India’s problems such as infrastructure, housing, commercial transportation, power distribution, judicial issues, and corruption. All these give investors opportunities.

It has been an interesting Congress so far and some very interesting conversations. I will try to write some more over the next few days.

Wednesday, October 6, 2010

Sentiment Off the Charts

Things are absolutely crazy. I have never seen sentiment like this before looking back through history. Everyone seems extremely sure where everything is going.

All from the daily sentiment index:

Dollar bulls - 4% currently 77.439 (bottom at 74.17 in Oct 2009 - 7% bulls)
Euro bulls - 97% currently 1.3928 (peak at 1.5147 Oct 2009 - 93% bulls)
Gold bulls - 95% currently (don't know if there has been a higher high than that)
Silver bulls - 96% currently (98% bulls on Feb 29, 2008 - 3 days later it made its high and declined 57% within 9 months)
Equity markets - 88% ish bulls (don't have the latest number) - (87% ish was the April high)

I have never seen so many investors so sure on where everything is going across a wide swath of markets. Take the non farm payroll number this Friday. Everywhere I turn I read - If it is bad and more Americans are unemployed that is equity bullish because it means more quantitative easing. If the number is good than that is bullish equities because the economy is doing better than what was thought.

These number don't tell you when exactly a turn is coming but at some point a turn is coming. Not only are these extremes but the coordination of the extremes are unbelievable. Stay nimble.

Today was fairly constructive to restart a topping process. NASDAQ was knocked down hard with several high fliers getting really beaten down. Time will tell.

Tuesday, October 5, 2010

Knock Out Punch

The bears got knocked out today. Just absolutely brutal. Not so much the massive spike but what it erased. Tops in markets are usually not one day affairs but multi day or multi week topping process. The last week or two looked like a classic topping process and today erased all of that. It most likely started a new leg up and then the market will have to have the topping process all over again. It would seem likely now that 1170 in the S&P would be visited and that possibly the DJIA will see a new high for the year. If the market is close to topping it probably moves the time table to mid/late October before the market would start going down in a serious way. Imagine the market as a bus. It takes awhile to turn a bus around compared to a smart car. Strong up moves usually don't just end with the market going straight down. Like I said, for over a week now the bus had been turning. So much for all of the effort by the bus driver.

Some will credit the service ISM today which adds to the overall confusion of what is exactly going on in the economy since that was another good number but the market was flying before that number came out. So I don't really think it had much to do with anything. So why the strength in the equity market? The dollar was getting pounded...again. The Euro looked like it was putting a top in also. We are on hold now also for that. Euro 1.40 seems likely at this point though that rise has to be coming to a close soon. I don't really know why I come to work anymore. I can roll over as soon as I wake up, take one look at my phone glancing at what world currencies are doing and tell you exactly what the market is going to do during the day. To circle back to the Service ISM number, the number wasn't bad. That should have been dollar positive. Instead the dollar lost more value after that number came out.

The latest iteration of this global mess is what is openly being called a currency war as every country is trying to destroy its currency the most. Sounds insane but somehow that means strong economic policy. In actuality it means the ponzi can live another day.

I was covering a little bit today licking my wounds. Maybe today was the top but it would shock me. Right now the central banks and the sloshing of liquidity is firmly in control and as long as the dollar keeps going down, stocks will keep going up.

The destruction of the this country will ensure your 401k statement will look good.

Friday, October 1, 2010

ISM - Not Pretty - Even Uglier if You Lift the Skirt

Yesterday I was saying how the Chicago PMI was a very very bullish economic number except it didn't match any other economic number. Well today the ISM widened this divergence. Not a good number and the internals were especially weak. As a result the dollar got pounded again and the stock market went up.

Basically all you have to look at is this:

New Orders June Through September:

June 2010 - 58.5
July 2010 - 53.5
August 2010 - 53.1
September 2010 - 51.1

Inventory June Through September

June 2010 - 45.8
July 2010 - 50.2
August 2010 - 51.4
September 2010 - 55.6

Inventory is building and new orders are declining. Enough said.

Thursday, September 30, 2010

A Screwed up World - And Investors Are Supposed to Invest How?

Chicago PMI number came out this morning and it was a very very bullish economic number. Came in at 60.4 versus expectations of 55.5 compared to a previous read of 56.7. The problem is the entire thing doesn't match up with any other September data. It doesn't even match up with the Midwest data as reported by the Fed. So what in the world is really going on and how is an investor supposed to know?

From the Wall Street Journal entitled: Chicago Fed: Cars Drag Down Midwest Manufacturing Activity.

Manufacturing activity slowed in the Midwestern U.S. during August, as automakers chose to stop building up inventories, the Federal Reserve Bank of Chicago reported Monday.

The Chicago Fed’s Midwest Manufacturing Index dropped 1.4% to a seasonally-adjusted level 79.9 in August, from a downwardly revised 1.9% in July. The July index stands at 81.0, down from the original estimate of 81.4.

What in the world? The inconsistencies continue. The new orders portion of the Chicago PMI. The regional Fed numbers that have come out the last week showed weak or declining orders. The most ridiculous part of the Chicago PMI was that prices paid (so input prices) came in at 55 versus 57.2. All the regional Fed indexes saw big increases in prices paid.

So the question is what in the world is going on? These things don't actually measure output. They are surveys. Does the Chicago PMI focus more on Catepillar (which is booming) and less on the general economy? What is the real picture?

One thing is for sure. The number this morning is bullish dollar and the stock market is one massive currency trade right now. If this reverses the dollar the market is going to have problems.

I tried to bet a friend $10 paying 2 to 1 that the market would end down today after this number was released. He wouldn't take it. It is going to be interesting. Bull runs often end in a burst of positive news. Like I said this number is bullish dollar which has been bearish stock market. Tomorrow the ISM number comes out. Will that match the Fed regional numbers or the Chicago PMI? Good grief we lived in a messed up world.

Wednesday, September 29, 2010

David Tepper - High on Hopium or Embracing a Ponzi?

David Tepper is a famed value investor who manages and is the founder of Appaloosa Management. An incredible fund who has had an incredible record. He is semi close to legendary status. He has been in the news lately for his comments last Friday on CNBC when he basically said the markets are a two headed coin. If the economy recovers the market is going to continue to boom. If the economy continues to falter the Fed will step in and perform some additional quantitative easing and the market will rise. These thoughts have been repeated numerous times in various market circles.

There is much ridiculous with Tepper's comments and to be fair I do not know in what context everything was said. On the surface it sounds absurd. Besides having a misunderstanding of what QE really is, he is basically admitting the entire system is a ponzi. All ponzi's initially implode. Last time the market was here heading up (back late last year) the chatter was about how this was going to be a V shaped recovery. WHEN WAS THE LAST TIME YOU HEARD THAT FROM A BULL? No longer is the argument that the economy is in great shape and going to be a great V shape recovery. Now the argument has shifted to the Fed will save us and won't let the market go down. How well did that work in 2008? In fact it is the same exact argument that emerged after the initial argument in 2007 failed. The initial argument in 2007 was that it was going to be a very shallow recession. After that argument failed than it became the Fed was ahead of the curve and going to save everything. After that it was the Treasury and John Paulson was going to save everything (remember the Paulson bazooka?) After that is was we are all going to die.

So now the prospects of a V shaped recovery are off the table but if you listen to Tepper there is no risk. The market will only go up. Ponzi 101 until the entire thing collapses.

A friend of mine sent me something else by Tepper which I actually really liked. However, the premise is completely wrong in the context of how he uses it.

“In 1898, the first international urban-planning conference convened in New York,” he said. “It was abandoned after three days because none of the delegates could see any solution to the growing crisis caused by urban horses and their output. In the Times of London, one reporter estimated that in 50 years, every street in London would be buried under nine feet of manure.”

He paused, allowing people in the crowd to snicker to themselves, then went on to recommend a handful of investments most would consider highly risky, among them debt in AIG and equity in financial companies like Bank of America and even some banks in teetering Europe. “I know, everyone hates the financials,” he said. “But the PIIGS”—Portugal, Ireland, Italy, Greece, and Spain, considered to be the most troubled European economies—“every single one has a deficit-reduction plan! The ECB—the Bundesbank—bought back government bonds!” He paused for dramatic effect. “Holy Christ. It’s like the chastity belt is off, and the girl is starting to play.”

The crowd tittered nervously. “On the way to work this morning, I got a headache because I was listening to one guy talking about how there’s gonna be hyperinflation. And then after him there was some guy telling me there’s going to be a depression and deflation. Neither—neither—is most likely going to happen,” he said. “The point is, markets adapt, people adapt. Don’t listen to all the crap out there.” - David Tepper

Like I said - I really like what he said above. It embraces capitalism. The market will solve the problems. HOWEVER, the market right now is not allowed to work. Furthermore, unlike other "problems" debt is inherently different. It is the millstone that holds you down. It cannot disappear unless it is paid off or defaulted on. Once you have to much debt the market is handicapped until that is resolved. If the problem was to much housing, I wouldn't worry about it. The market would fix it. If the problem was China wasn't consuming enough, wouldn't worry about it, the market would fix it. If the problem is to much debt, the market would fix it, it would be really painful, but if it isn't allowed to fix it, it can be catastrophic. Tepper is comparing not apples to oranges, but apples to asparagus.

He may be right though in one respect. It may be alot more ponzish than anyone would care to admit. In a ponzi it doesn't go down gradually. You wake up one morning and you lost 100% from the day before. It is possible that the government can keep everything together until over a very short time period - they can't.

Meredith Whitney - Tragedy of the Commons

Meredith Whitney was on CNBC yesterday talking about her new report which places a rating on all 50 states. She started looking at them a couple of years ago in her analysis on the banks and was startled to realize how similar things looked. She thinks a financial crises is coming within the states and that bond holders at the municipal level are going to be very disappointed. I would love to get my hands on this report. She did say Texas is by far the best positioned state. Not even close when compared to other states.

She also talked about how bad a quarter it will be for the banks and discussed some of her thoughts on the economic future.

Video below: (having trouble determining if the video is posting correctly - can be seen here

Monday, September 27, 2010

Friday's Follow Up

Well the market took the durable goods number and ran with it. Like I said, you needed to watch the market reaction. It wasn't a fundamental number. The market reaction said the rally is still on. As a result, as a bear, I continue to hide in the bunker, try to maintain my current shorts, and don't short anymore. Fundamentally, as mentioned, durable goods order is not a number I watch much anyway. Even the core number is incredibly volatile. If you want to find a bearish tilt to it you can look at the 3 month annualized rate. As David Rosenburg pointed out it has dropped from 39.3% in May, to 23.9% in June, to 11.5% in July, and 8.8% in August. Like I said, that is if you want to find a bearish argument. In general I think it is just better to ignore it fundamentally and take the cues on how the market reacts to the number to judge the mood of the market.

So the market loved that number on Friday. That is what matters It seems it is extremely unlikely the market doesn't break 1150 as a result. The problem for bears is if we really break 1150 there aren't any great levels to look for a potential top. You have maybe 1170 and than your back to year highs. The market is convinced that there is no way equities can go down as the Fed and all of its power will keep them going higher. Even if the premise is completely a joke, the belief and growing belief by everyone makes it extremely difficult for the market to go down. It becomes reflexive as George Soros likes to call it.

Again it comes down to Europe. Irish and Portugal spreads were wider again today. Moody's downgraded the unsecured debt of Ireland's Anglo bank. Right now it is assumed the Euro will only go up which is a ludicrous assumption but market sentiment is higher than it was in November 2009 when the Euro peaked. As long as the Euro is moving higher I think it is impossible to be super bearish. Any U.S. economic weakness will be "good" news as it means a higher QE 2 number in November.

Friday, September 24, 2010

Durable Goods Number

Very good durable goods number ex transportation and the futures are flying. Ex transportation durable goods order was up 2% on expectations of being up 1%. All the numbers were revised higher from the previous month.

So we have the mirror image from last month. Very good number, markets at highs looking like they are going to break higher, and futures flying pre market. The way this market trades in response to this number throughout today will be fascinating. The durable goods number is so volatile on a month to month basis that fundamentally it is hard to glean anything from it. However, the bulls have the excuse to send this market screaming. If they can't and the rally fades it will tell you alot.

Thursday, September 23, 2010

Market Musings

It has been awhile since I have mused about some of my market thoughts. Main reason is because I haven't really had that strong of an opinion. After realizing (to late) that we weren't breaking down at 1040 a month ago, it has been a matter of hiding in a bomb shelter for us bears. Starting last Friday I started thinking it was possible we could be reaching some sort of topping process. I told several friends I would hate to be short before the Fed meeting and I would hate to be long after. Monday was a big up day but we have lost basically all of that as of today. Are we consolidating or have we indeed been in the topping process I suspected over the last week and are now ready to break down?

One of the main market data points that a month ago made me scratch my head and wonder if something wasn't right (and like an idiot I didn't act upon it) was the durable goods number. Usually, I don't pay much attention to that number (which is why I talked myself out of doing anything last month) but last months number was horrific. Durable goods ex transportation was down 3.7%. If I remember correctly the previous expectation was close to flat. It was a horrible absolute number and a horrible relative number. The market crunched pre market and than rallied and basically ignored a horrific data point. It caught my attention but like I said, talked myself out of doing anything much to my detriment. So this number is going to be interesting. If it is bad and the market sells off hard I think it will be interesting. If it is good and the market pops and than sells off to only finish slightly up or even down I think that tells you alot also.

What I describe above is just a trading signal I will be watching. More fundamentally it is still Europe Europe Europe. The European stock market is now down 3 days in a row and the economic data this morning was flat out lousy showing a very disturbing slowing trend. Ireland is now considered the 5th most likely sovereign to default joining such illustrious names as Venezuela, Argentina, and Greece. Portugal spreads are also widening. Spanish banks seem to be rolling over. Not a good situation. The thing that is holding up right now is the Euro which was surging after the Fed announcement on Tuesday. It may have a little higher to go based on trading technicals but that rise also seems about done. Based on European debt spreads, Europe appears to be in worse shape than it was four months ago. It is just a matter of time before the market pays attention again.

In general the market feels like it has topped. I am watching European government debt spreads, the Euro, and copper to try to give some clues if this is indeed the case. We have the end of the quarter coming up so the likelihood is the market doesn't just fall apart but it will be very telling if it fails once again in this area.

Monday, September 20, 2010

The Ultimate CDO (or Ponzi) - EFSF Rated AAA

Remember one of the main causes of the housing crises and the mess we find ourselves in today? Well it was the structured products and how Wall St was able to take junky credit mortgages, wrap them together as one security, and sell them convincing the rating agencies and buyers that they were AAA. Basically, throw one hundred junk mortgages together and boom, you have the perfect mortgage. The argument was because of diversification it was really safe.

Well that thinking with tons of leverage almost caused the entire system to collapse. It would have collapsed except the government took all the risk.

Welcome to today and the governments have managed to do the same thing. According to the New York Times "The European Financial Stability Facility, as the fund is known, was rated AAA by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings. Standard & Poor’s said its understanding was that 'guarantees from member governments supporting the repayment of E.F.S.F. obligations will be unconditional, irrevocable and timely, and thereby consistent with our criteria for sovereign guarantees.'"

That is tragic or funny (depending on your perspective) on all sorts of levels. 1) The facility has not been pre funded. It is only going to be funded if there is an actual problem. I am sure everyone is setting money aside so it can be guaranteed to be there if need be. Truly AAA material. 2) What is even worse is that 3/4 of the countries that make up the EFSF aren't AAA. Basically we have just taken a bunch of junky mortgages, thrown them together and presto made it AAA. In this case we just took a bunch of junky countries and made them AAA.

Of course there is no problem now so the market prices it as if there will never be a problem.

More brokenness as our system slips towards the abyss.

Friday, September 17, 2010

Anglo Irish Bank = Creditanstalt?

I have been saying watch Europe watch Europe watch Europe. I still think that is where the next leg down in this whole mess will originate. Well news from Ireland just caused a major reversal in Europe and while U.S. futures are still positive, the luster has been taken off. Creditanstalt may be upon us.

From the Irish Independent

These are desperate economic times. So desperate that the subject of Ireland defaulting on its bank and sovereign debts is now routine conversation among academics, bankers and economists.

However, up until now, such an idea was rarely entertained by senior politicians, but in a surprising move yesterday the leader of the Labour Party, Eamon Gilmore, came very close to suggesting such a course of action when he talked about the Government "negotiating'' with bondholders in Anglo Irish Bank.

While Mr Gilmore trenchantly denied such an approach meant defaulting, he certainly came very close to that position.

If the market sees this as a gesture towards default, it's over. It is like the banks CEO being forced to come out and say everything is fine. When I got a call two days before suggesting I take money out of Bear Stearns money market funds as a precaution, I knew the game was up.

It continues...

Of course, Mr Gilmore (and his position got some support from Barclays last night) has some options. One is to simply press to reduce the total amount owed to the bondholders, allowing Anglo to book a gain from having to pay out less interest than originally agreed.

The second approach, one championed by the 'Financial Times', is to tell the bondholders you intend to swap their bonds for shares in Anglo.

This would effectively leave the bank, which is a heartbeat away from technical insolvency, in their hands. This is known as a debt-for-equity swap and is very common in downturns when companies run into problems. Technically it is also known as a distressed exchange offer. This approach could be taken, but again it comes with significant risks which need to be acknowledged by political commentators like Gilmore and others pressing for this course of action.

The problem with this idea is that there is no way Anglo Irish Bank is worth €16.5bn at the moment. So if the bondholders swapped all their bonds for Anglo shares they would be settling for less than par value. This is a selective default.

Of course, the big danger is not what would happen in Anglo if this course is taken, but what would happen at the other Irish banks. By how much would their fund-raising costs go up?

That is exactly right. Anglo Irish is big but not that big. The question is contagion. Is it Creditanstalt all over again? (the Austrian bank that declared bankruptcy in May 11, 1931 that really got the depression going).


The final danger is: would an Anglo technical default raise the funding costs for Ireland Inc itself? Again it is hard to say. There are two schools. One suggests that by cutting Anglo loose, Ireland becomes a better credit risk and funding costs could actually drop.

Others suggest once you welch on any debts, your funding costs elsewhere rise and you may even be locked out of the bond market entirely.

That is a danger and it may spill over to Portugal sovereign or Spain etc. but I think the bigger danger is other European banks. A) the funding costs could shoot up with an entire knew liquidity squeeze and B) all of a sudden you have precedence for sovereign nations not to take responsibilities of the banks. A for sure popular choice among the electorate. I mean if Ireland allows a default on one of its large banks why should Greek people suffer? Or Spaniards?

Something almost has to happen now in the next week. Irish - Bund Spreads are exploding.

Wednesday, September 15, 2010

Charlie Munger Interview

A couple of days ago Warren Buffett was being quoted as saying how amazing the United States is going to be and how bullish on America he was. Well there may be some schism with the famous partnership because Munger is not as optimistic.

Yesterday Munger participated in a interview of sorts with CNBC's Becky Quick at the Ross School of Business at the University of Michigan. He spoke and fielded questions for 2 hours!! The video is freaking long but worth every second. It can be seen in its entirety here. He talks about the economy (about 10% of the video) and says employment problems are around for a long time and that many industries haven't seen the worst of it.

He also said "Tom Friedman said its like the car that has to run across 300 miles of hot desert without a spare tire. We have used all the standard tricks that it is safe to use and now we still have the damn desert to cross without the spare tire."

I don't want to give the impression he is cataclysimic because he is not. He thinks it could get as bad as Japan but doesn't think the odds are that it will. Of course in my opinion Japan is a positive outcome.

Another thing that really struck me was that he talked about the bailouts, and how they were a must. He said you do not want to know what would have happened if they didn't occur. He than goes on to talk about how the Germans had such a great system but how Hitler came around with enough economic hardship. My question is this: what has changed from the bailouts? I completely agree. No bailouts and the world would have changed in ways you cannot imagine. However, that is why I am so bearish on where we are currently. The bailouts did not change anything and just ratcheted up the pressure. Instead of cleansing the sewage system we just got more sewage that is more toxic than ever. So if what would have happened was going to be so bad that even someone like Munger who is a hard core capitalist endorses them, you have to think of the probability of it still happening since the problem is still there. It is unwise not to be prepared for at least the possibility.

The the very end may have been the biggest nugget as far as overall wisdom though not related to the economy at all. He said you must study Singapore's Lee Kuan Yew, the first prime minister of Singapore. That he, almost single handily, created the best system in the history of man including Athens and the United States. For any life alive today it is a must study.

Like I said, it is freaking long, but well worth your time to watch the entire thing.

Monday, September 13, 2010

Japan to Lend to California?

Now to the really absurd item of the day. A Japanese state owned bank is planning on lending the state of California billions of dollars to build a high speed train to run from San Francisco to Los Angeles. You just can't make this stuff up. Part of the reason Japan is making the loan is to help Japanese companies in the bidding process. That makes alot of sense. Let a bankrupt country make a loan to a bankrupt state so they can hire a company from your country to paid with money from your country. If we are going to play ponzi why do it in such an inefficient manner? Just give the money directly to the Japanese company?? This money being spent can't possibly be expected to be paid off from earnings. Instead the gamble I am sure is that someone will refinance it down the road. The way our system is run.

From Bloomberg

Japan said it’s ready to lend California money to help pay for a planned high-speed railroad as trainmakers from Asia to Europe compete for work on a project that will cost at least $40 billion.


California won $2.3 billion of federal funds to help build the high-speed train, the biggest award in Obama’s high-speed rail funding program. The state also approved in 2008 a $10 billion bond sale to help fund the line, which is due to start services in 2020.

The California State Auditor has said that the state’s business plan for the high-speed rail network doesn’t include steps to replace all of the $17 billion to $19 billion in federal funds initially envisioned for the system.

Bill Fleckenstein Latest Views

The market is back to stupid mode and matching any bears worst fears I mentioned was possible a couple of weeks ago. I don't feel like talking about it, at least this second. In the interim: The Diary of a Mad Hedge Fund Trader had a good interview with Bill Fleckenstein which can be found here.

I have always liked Fleckenstein and enjoy his thoughts. He covers his thoughts on gold, the bond market, emerging markets and other odds and ends. I tend to have deflationary thoughts when I look at the world and Bill tends to be more inflationist. I feel like if you are going to make the inflationist argument he has the right one. That is an eventual collapse in confidence and not just money printing. If you have a collapse in confidence in the currency the end result leads to massive hyperinflation. Why deflation leads to inflation. Not surprisingly he hates government bonds and loves gold. When talking about gold he mentioned that he has to stay long gold until there is some legitimate other alternative which he does not see. He seems fairly agnostic about the economy and the stock market. I wished he would have talked a little bit more about his views here.

Good interview. There are few inflationist who make logical argument that make alot of sense but he is one of them. Eventually it is a loss of trust in the currency that will start the inflationary parade. I just tend to think it is farther off than some.

Tuesday, September 7, 2010

More European Problems - A Return to Greece

Euro got pounded today. Like I said, I think it if the market is going to take a significant turn down at this point I think it has to be a sovereign issue. It has to be something investors aren't focused on. Everyone is so bearish on the U.S. economy that the likilhood of U.S. economic data driving the market down at this point seems remote.

Well more and more focus is shifting to Europe. A Bloomberg article describing hiden Greek debt is the latest of a string of stories that have surfaced recently (though this one really doesn't have anything new). Sounding alot like Lehman.

Four months after the 110 billion- euro ($140 billion) bailout for Greece, the nation still hasn’t disclosed the full details of secret financial transactions it used to conceal debt.

“We have not seen the real documents,” Walter Radermacher, head of the European Union’s statistics agency Eurostat, said in a Sept. 2 interview in his Luxembourg office. Eurostat first requested the contracts in February.

Radermacher vows new toughness when officials from his staff head to Greece this month to come up with a “solid estimate” of the total value of debt hidden by the opaque contracts. “This is a new era,” he said.

So many things in the above paragraph that would be hilarious if the stakes weren't so high. They were given billions before the data was disclosed? Greece has snubbed Europe for 7 months (since February)? A new era? Ha

And the game among the players continues. Again this would be hilarios if the consequences were not so high.

Banks worldwide increased their total exposure to Greek debt in the first quarter of the year by 7.1 percent, or $20.7 billion, to $297.2 billion, according to a Sept. 6 report by the Basel, Switzerland-based Bank for International Settlements. Norway’s sovereign wealth fund, the world’s second largest, said in August that it had bought Greek bonds, along with those from Spain and Portugal, because of higher yields and as those governments push to reduce their deficits.

The article has much much more. Nothing changed in June with the ECB attempt to buy time. There is only so many ways to patch up a leaking dam. Keep an eye on European spreads and the Euro.

Ireland Ireland Ireland

Americans are far the most part clueless on anything other than what is going on in America. Below is one set of problems going on in Ireland.

From the Ireland Independent:

Anglo: a weapon of mass financial destruction

JUST how much worse can things get at Anglo? With the bank writing off a further €8.3bn of bad loans, it is hard to avoid thinking the nationalised lender is determined to single-handedly bankrupt the State.


If these sound like enormous numbers, it's because they are.

With Irish GNP, the only meaningful measure of our economic output, down to less than €130bn, a €35bn-€40bn tab for bailing out Anglo works out at between 27 per cent and 31 per cent of our total economic output. All this for just one rogue institution.

Mortgage Crises Gets Worse with 36,500 now in arrears

A sharp rise in the number of families unable to repay their mortgages was being seen last night as a sign the mortgage crisis is worsening.

The number of homeowners who are three months or more behind on their repayments surged to almost 36,500 in June.

Financial experts said the shocking figures showed that thousands of households were now stuck in a financial quagmire.


Financial adviser Karl Deeter, of Irish Mortgage Brokers, said: "The growth in arrears as well as the rate of growth in the arrears is heading only one way. Sadly, our only growth industry in 2010 is that of debt deterioration."

To default, or pay through the nose

Should Ireland let itself go bust? It's not the Green Jersey option, that's for sure. But national pride aside, is it time to think the unthinkable? Should we jump off the runaway debt-train and default?


The 'debt limit' catalysts for Ireland are racking up: historically high bond debt spreads; soaring Anglo losses; a plummeting tax take; Nama; a yawning budget deficit; rising GDP to debt ratio; credit rating downgrades and a battered domestic economy (GNP).

We have borrowings secured to last to the end of next year and we have enough reserves to pay our national bills for a while, but the threat of debt overwhelming us and pushing us into default down the tracks is very real.

If we are heading towards going bust anyway, or at least some dolled-up form of sovereign default like going to the EU Stability Fund support, should we do it now, while we still have some reserves and bargaining power?

Wind up toxic bank, urges Conor Lenihan

Scandal-ridden Anglo Irish Bank should be "decommissioned" as soon as possible, a government minister told the Irish Independent yesterday.

Although Innovation Minister Conor Lenihan would not be drawn on a timeframe for a wind-down of the now state-owned bank, the comments are further evidence that the Government is moving away from a 'good bank/bad bank' solution for the institution.

These aren't only Irish problems.

From The Baseline Scenario:

Irish Worries For The Global Economy

Ireland’s difficulties arose because of a massive property boom financed by cheap credit from Irish banks. Ireland’s three main banks built up loans and investments by 2008 that were three times the size of the national economy; these big banks (relative to the economy) pushed the frontier in terms of reckless lending. The banks got the upside, and then came the global crash in fall 2008: property prices fell more than 50 percent, construction and development stopped, and people stopped repaying loans. Today roughly one-third of the loans on the balance sheets of major banks are nonperforming or “under surveillance”; that’s an astonishing 100 percent of gross national product, in terms of potentially bad debts.

The government responded to this with what are currently regarded as “standard” policies in Europe and America. It guaranteed all the liabilities of banks and began injecting government funds to keep these financial institutions afloat. It bought the most worthless assets from banks, paying them government bonds in return. Ministers have promised to recapitalize banks that need more capital. Despite or perhaps because of this therapy, financial markets are beginning to see Ireland as Europe’s next Greece. In the last few weeks the perceived probability of default by Ireland (as traded in credit-default swap markets) has shot up, so that markets now price a 25 percent risk that Ireland will default within five years.

From Bloomberg:

Irish Ask How Much Is Too Much as Bank Rescue Trumps Austerity

It may just be a few billion euros too far for Ireland’s beleaguered taxpayers.

Anglo Irish Bank Corp. said Aug. 31 it needs about 25 billion euros ($32.1 billion) in state funding, equivalent to about two-thirds of this year’s tax revenue. Standard & Poor’s, which last week cut the country’s credit rating to AA-, said the state may have to inject as much as 35 billion euros.

and this is ridiculous...

“When you talk about letting a bank collapse or fail and imposing losses on the lenders, you would be imposing losses on depositors and imposing losses on the European Central Bank,” Alan Ahearne, an adviser to Lenihan, said in an interview. “It is unthinkable.”

Unthinkable???? Are you freaking kidding me?!?!?! A for profit institution where investors supposedly take risk - it is unthinkable for it to fail? That is just absurd thinking and why the world is in this mess. Talk about getting me angry!! It is unthinkable that it is assumed it can't fail. Instead the taxpayers can pay it. They can take the risk that investors and bank employees actually never took but just pretended they took.