Sunday, January 24, 2010

A Ponzi Begins to Unravel

After the disappointment from Wednesday's sell off, the market started to unravel in earnest. The weight of reality was just to much.

So now the question becomes, is this the real McCoy? I feel about like I did on Tuesday when I took a huge leverage short bet. I don't really want to short. The fact that so many investors, including bears, are doubting this pull back means it is probably the beginning of something much more.

On Friday morning I sent this email to another investor:

"its called PONZI....once you have created it, there is only one option. Perpetrate it. They all eventually end but they can last years or decades.

That is why the market is reacting so strongly to this Obama thing. CDS is EXPLODING for the banks. That doesn't make any sense does it? I mean your just splitting up into two entities or some form of that. You may affect equity value (so it would make sense the stocks would go down) but the credit risk and the risk of default shouldn't change if your well capitalized. AHHH, but their not well capitalized. So if you take away the trading lines the ability to perpetuate is cut off at the ankles. Ponzi comes crashing down. Many understand this and there is a panic to buy CDS protection.

Bernanke and Geithner understand this very well and why they have been trying to stop any real change. They know change is not an option. There is only one option, keep it going as long as you can.

My guess is Volcker and for sure Obama don't understand how bad it is. Volcker may understand how bad it is but like the 80s he just doesn't care. He will take the pain now for the future. He will push us into a horrific depression so 2025 is great a year Volcker for President!!"

As the weekend has progressed the proposed banking change seems to be lacking teeth in true reform, surprise surprise but the signal may still be the same. The old order days are numbered. It is the same thing with the situation surrounding Bernanke. I am not sure anyone in investing is really in love with Bernanke and think he is the greatest Fed chairmen America has ever had but his replacement could usher in massive shocks to the markets. It is like a portfolio manager who is managing a ponzi and than gets replaced. The new portfolio manager discovers the ponzi with investors realizing they really don't have anything.

Another reason this may be the real thing is sentiment indexes are flashing warning signs. There has been a record dichotomy of the present situation among consumers and the future expectations. The present situation has bounced along the bottom while expectations of the future skyrocketed. This pushed overall consumer confidence numbers up. Those expectations are starting to come down and with it the overall number. Expectations more than anything drive spending. If this trend continues it could be flashing severe warning signs.

ABC NEWS Consumers Confidence Index came in at -49. Worst reading since June and within spitting distance of its all time low of -54 set in January 09.

NAHB Index also came in at its worst number since June falling to 15.

Since June!! Aren't things supposed to be that much better?

Anyway, the odds are at some point the market will have a bounce that will scare the living daylights out of bears, including me. Whether that is about to start or the market has more selling to do is any one's guess. I pointed to the 1130 number as the line drawn in the sand. Sure enough, once we broke through that, whoosh, air pocket underneath. I think 1080 to 1085 is a similar level. The bulls will be desperately trying to hold that.

One thing for sure is every trend line since the March lows has been smashed at this point. The market is trading a little bit like a ship without a rudder. So far it isn't doing to well.

If this truly the beginning of the unravel of the ponzi, watch out. Ponzi's don't bleed to death, they implode. It took months in 2008 with many rallies for the system to grind its way to a breaking point. I don't really know but I would guess it would not be the same way. There will be rallies but my guess is the unwind will be sharper.

Our foundation is much weaker than January 2008. It will take alot less to push us over.

My contention has been that stock picking has become basically useless. It is why I have been working on these special private deals trying to find something with a really short investment duration that I like. I enjoy digging through investment ideas more so than looking at macro junk. However, the way the entire system is laced with dynamite means that most investments will implode if we implode. If we do start going down, almost everything will go down.

No comments: