Sunday, February 28, 2010

Lining Up Like Dominoes

The age of the systemic risk is upon us. After Greece who knows who. Many people think Great Britain.

From Bloomberg:

While the eyes of the world focus on Greece’s debt crisis, investors in Edinburgh are busy preparing for the U.K. to be next.

Turcan Connell, which caters to rich families, expects the pound to lose between 20 percent and 30 percent against the dollar once investors turn their sights on Britain as the government sells a record amount of debt. Concern that Greece won’t be able to cut its budget deficit helped send the euro 5 percent lower against the dollar this year.

“Alarm bells were ringing in Greece for a long time and when it happened, it happened very quickly,” Haig Bathgate, head of strategy at Turcan Connell, said at the company’s offices in the Scottish capital. “The U.K. is in a similar predicament. It could be hit very hard.”

That is the problem with these things. The market ignores ignores and than bam, your in crises. This point isn't lost on Brits.

“When there’s a fiscal crisis, the markets tend to punish that country very quickly,” said Bathgate, who is responsible for 560 million pounds. “I don’t think Britain is in nearly as bad a position as Greece. We’ve got a good taxation system, however the position of the economy is very dire.”

World Economic Data Continues to Roll Over

As far as what is going on in the real world outside the stock market, the news out of China tonight ranks pretty highly in importance.

From Bloomberg:

China’s manufacturing expanded by the least in a year in February....The Purchasing Managers’ Index fell to a seasonally adjusted 52, the Federation of Logistics and Purchasing said today in an e-mailed statement in Beijing. That was less than 55.8 in January and the median 55.2 estimate in a Bloomberg survey of 15 economists.

Of course they can't but help try to explain it away. Always an excuse. This one more ridiculous than normal.

A Chinese holiday may have affected the numbers....“We were looking for a lower PMI because of the Chinese New Year, which always hits new orders, particularly exports, as well as the beginning of the effects of government policy" said Stephen Green, an economist at Standard Chartered Plc in Shanghai.

Two things. One - the Chinese New Year is an every year event. It isn't like this was a surprise. I mean you can mark your calendar. You know when it is coming. Two this economist basically said as such. So they already brought down there estimates adjusting for this seasonality but are quick to try to explain the bad a number away using that as an excuse.

You get into the details and the number starts looking uglier.

Today’s reading was the weakest since manufacturing stopped contracting in March last year. Ten industries, including clothing and footwear, reported contractions in export orders versus 10 posting expansions, highlighting the risk that global demand may be weak this year.


The output index slid to 54.3 from 60.5. A measure of orders tumbled to 53.7 from 59.9. An index of export orders fell to 50.3 from 53.2 in January.

To Bloombergs credit (unlike say CNBC) they make an attempt to get the other side.

The number is “really ugly,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong. “The weakness cannot be explained with the Lunar New Year holiday effect and indicates a slowdown in growth momentum as well as easing price pressures, which is likely to limit monetary tightening.”

This is a fairly important number followed very closely every month because China in a way is the worlds hope (which i believe is ridiculous). Can China grow enough to bail out the world?

This makes the U.S. ISM number coming out tomorrow morning at 9:00 central 10:00 eastern very interesting.

Right now there is a pretty big battle going on between this latest China data and the supposed bailout for Greece. Interesting the Euro is actually down even though Asia and U.S. futures rallied early on the Greece news and after moving down a little stabilized after this China news.

Friday, February 26, 2010

More of the Same

So looking at the economic data it was a mixed bag.

GDP was revised up not down like I thought but the devil is in the details. Inventory caused the increase up which means much less. The core GDP number which surrounds consumption actually moved down. As a result, not a pretty picture.

Chicago PMI seemed to be smoking. Inventory continues to be restocked. Would expect this another month or two.

Michigan Consumer Sentiment came down but wasn't revised drastically lower.

Finally exiting home sales were like I thought horrible hitting a seven month low causing months of supply of inventory to increase back up to 7.8 months of supply.

Market initially sold off on existing home sales but than got shrugged off.

Actually this all has a theme, once again the market doesn't care about the average American. In fact the market needs the average American to get worse off so the government can keep pumping and even increasing new money that gets recycled back into Wall St.

Its all so surreal.

Thursday, February 25, 2010


I blog for me. It is why I don't worry about proof reading and making sure everything flows. It is why I will talk about fundamentals, or trading news, or whatever is on my mind. So today I want to rant.

Historically I have always shied away from claiming the market is being manipulated. This topic is rarely discussed because you are quickly labeled a nut. More and more there is evidence saying otherwise that the discussion is becoming more mainstream. I have no idea but today was ridiculous. You have violent riots in Europe....jobless claims that are surging (oh yeah, "trailing" so it doesn't matter, and bc of snow so we can also discount...shhh they have been moving up for weeks now)....consumer sentiment plummeting (oh yeah, also "trailing" and a "contrarian" indicator - ridiculous) home sales hitting an all time low since 1961 when data was first kept (no one mentions residential investment is ALWAYS leading) and for THREE FREAKING weeks the futures keep getting gunned at various point during the normal trading day and after...i see it every day on my futures trading screen as I personally trade them. The news flow could not have been worse the last three days on every front and world markets are going down while the U.S. markets are essentially flat.

Who knows. Tomorrow is GDP revisions. Possible revision down there. Than in a span of 15 minutes about 5 minutes apart you have Chicago PMI (have no idea what that will say), U Michigan Consumer Sentiment (I would guess that would be down) and existing home sales (which I think will be a big miss). If all of those come in negative, the floodgates may open at least for a day no matter who is trying to manipulate.

Accounting Shocker - Even For Me

You want to know what is wrong with America? You don't have to go much farther than look at the accounting board - FASB which has become a politicized monstrosity. This makes me livid with anger. It is shocking for me and I expect such outcomes. The only thing worse than MTM accounting is relying on estimates from parties who have an interest in the end results. Jonathan Weil does an excellent piece of reporting on FHLB and the accounting absurdities.

From Bloomberg

Next time you see some company complain its “mark-to-market” losses aren’t real, remember this name: the Federal Home Loan Bank of Seattle. It used to claim that, too. And it couldn’t have been more wrong.

About a year ago, the government-chartered lender blamed accounting rules after it wrote down its portfolio of mortgage- backed securities by $304.2 million to reflect how much their fair-market values had fallen. While those declines counted against its earnings and regulatory capital, the bank said they were “well beyond any expected economic loss.”

The bank’s executives said they expected to lose a mere $12 million of principal over the life of the securities. That estimate proved far too hopeful, though.

Remember that $304.2 million number.

The bank, one of 12 regional Federal Home Loan Banks that supply low-cost loans to about 8,000 member banks and finance companies, now says it expects about $311.2 million of credit losses on its portfolio.

What???? So let me get this straight. They took a mark to market loss of $304.2 million. Complained and complained and lobbied and lobbied that the accounting rules were ridiculous. As we shall see, where part of the hearing that got the rules changed AND the the ACTUAL LOSS IS GOING TO BE BIGGER THAN EVEN THE PREVIOUS MARK TO MARKET LOSS????? ABSURD!!!!!!!!! Can it go worse? Well yeah actually.

The bank became a poster child for everything supposedly wrong with mark-to-market accounting. At a March 12, 2009, congressional hearing, U.S. Representative Ed Perlmutter of Colorado cited the disparity between the bank’s writedown and its much smaller anticipated loss as “an example that really was disturbing.”

The congressman leading the hearing, Paul Kanjorski of Pennsylvania, pointed to a similar instance at the Federal Home Loan Bank of Atlanta. The bank reported an $87.3 million writedown on its mortgage-backed securities for the 2008 third quarter; however, it said it expected its actual losses would be only $44,000.

So this bank became a poster child and why the rules were wrong. And wait, the FHLB bank of Atlanta reported $87.3 million in writedowns but only expected a $44 k loss. That is less than a loss on one home?? What are these guys smoking and how do people actually give it any credibility? Well the answer to the second question is they already know the outcome they want so the facts don't matter. And the absurdity of the accounting when the rules got changed.

Here’s how it works in practice. When the Atlanta bank reported its results for the first nine months of 2009, it showed net income of $201.3 million. That included the $263.1 million of credit-related charges. However, it excluded $943.4 million of other mark-to-market writedowns on its securities portfolio. Those got dumped into a line item on the equity statement that banking regulators don’t count.

Like I said. I expect this sort of stuff and I was still shocked. It is easy to see why our system is insolvent when you have numbers being reported by government entities and companies that are no where near reality.

Wednesday, February 24, 2010

What Do You Blog About?

What do you blog about these days? How the market basically didn't go down after a massive drop in consumer sentiment index to lows not seen since like 1983? (some people are saying this was a fluke but would like to point out it matches what the ABC Consumer Confidence Index has been saying for weeks). Maybe you can blog about how the U.S. markets went up 1% after the a plunge in new home sales. Fewest new home sales since data was collected in 1961. Oh yeah, economists forecasted sales to increase. Maybe I can blog about what is going on in Europe as Greece implodes within, banking assets are fleeing the country, and Europe still doesn't have a plan?

Tomorrow you have jobless claims and durable good orders. Both are fairly important and I have no idea what will come from them.

Friday is the revised GDP report and existing home sales. I would expect the GDP report to get a nasty revision down and existing home sales to be a miss.

Markets are in denial of a second double dip recession and are ignoring the bad news and moving up on any good news which is coming fewer and fewer in between. Volume is anemic as no wants to sell and no wants to buy. If the news continues to be bad there will be one piece of news that finally pushes the markets over the edge.

This market is very frustrating as one tries just to survive when reality hits the market.

Monday, February 22, 2010

Charles Munger and His Wisdom in Parable Form

This would be awesome if the truth was not so apparent. Charles Munger is Warren Buffett's partner. A man's who wisdom is highly sought. He wrote an Op-ed piece in the form of a parable. The title says it all. "Basically, It's Over - A parable about how one nation came to financial ruin."

The entire op-ed / parable can be found at Slate.

The Europeans rapidly repopulated Basicland, creating a new nation. They installed a system of government like that of the early United States. There was much encouragement of trade, and no internal tariff or other impediment to such trade. Property rights were greatly respected and strongly enforced. The banking system was simple. It adapted to a national ethos that sought to provide a sound currency, efficient trade, and ample loans for credit-worthy businesses while strongly discouraging loans to the incompetent or for ordinary daily purchases.

but greed soon took over

But even a country as cautious, sound, and generous as Basicland could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life. These dangers were significant by 2012, when the extreme prosperity of Basicland had created a peculiar outcome: As their affluence and leisure time grew, Basicland's citizens more and more whiled away their time in the excitement of casino gambling. Most casino revenue now came from bets on security prices under a system used in the 1920s in the United States and called "the bucket shop system."

and sound advice ignored

How was Basicland to adjust to this brutal new reality? This problem so stumped Basicland's politicians that they asked for advice from Benfranklin Leekwanyou Vokker, an old man who was considered so virtuous and wise that he was often called the "Good Father." Such consultations were rare. Politicians usually ignored the Good Father because he made no campaign contributions.

and sorrow came to the once great nation

As it worked out, the politicians ignored the Good Father one more time, and the Basicland banks were allowed to open bucket shops and to finance the purchase and carry of real securities with extreme financial leverage. A couple of economic messes followed, during which every constituency tried to avoid hardship by deflecting it to others. Much counterproductive governmental action was taken, and the country's credit was reduced to tatters. Basicland is now under new management, using a new governmental system. It also has a new nickname: Sorrowland.

Friday, February 19, 2010

August 17th, 2007 - Different Sort of PR

Like I said, all about sentiment.

Found this CNNMoney article from August 17th, 2007. Interesting the change in the way it is portrayed. Full article can be found here.

The Federal Reserve, reacting to concerns about the subprime lending crisis that's rocked financial markets in recent weeks, Friday cut its so-called discount rate half a percentage point, to 5.75 percent.

The article quickly points out that it is a symoblic gesture but the spin machines back then was quickly out in full force talking about how important it was.

But one economist suggested that the Fed's discount rate cut has more than token significance. David Wyss, chief economist with Standard & Poor's, said the cut could help convince banks it was okay to keep lending to companies or consumers that actually are creditworthy.

"This is an important move. It's not just a symbolic action. The Fed is telling banks that the discount window is open. Take what you need," Wyss said.

and of course the market in the short term manipulated how the Fed wanted it manipulated.

Wall Street cheered the cut. The Dow Jones industrial average surged 300 points at the open and finished the day up about 230 points.....The Nasdaq composite closed up 2.2 percent while the S&P 500 gained nearly 2.5 percent. Stock futures were trading lower before the open after another wild day Thursday but surged following the Fed's announcement.

I remember that day very vividly. Futures were tanking. The Fed made a point to shock the market into a massive gain. Success. Just manipulating the minds of investors. It can't last forever though longer than you would believe possible. Short term you have to be impressed with what the Fed can do.

Sentiment Holds Steady

As I tried to stress yesterday the Fed change does not change anything intrinsically. The raise in the discount rate is symbolic. So the question was, is this going to affect sentiment.

So far today the answer is no. After the Fed announcement futures promptly tanked over 1%. Asia was down over 2%. This all reversed as the Fed went on a marketing campaign explaining to everyone what "the Fed did and did not mean." Several Fed governors spoke, Bernanke spoke this morning, many interviews with former Fed governors on various media outlets and they successfully succeeded in convincing everyone this really did not mean anything.

If you remember, they lowered the discount rate compared to the Fed funds rate in August 2007. Then the markets were in a panic (that got calmed allowing the markets to go to new highs before the market rolled over for good) and the Fed shocked everyone by lowering the discount rate right before the market open. There of course the purpose was to make it look like a major deal and a major shock and the market soared.

Like I said, it is all about sentiment. It didn't matter in 2007 and fundamentally this didn't matter yesterday evening but the Fed was able to manipulate the sentiment in the short term for the purposes they wanted to achieve.

Going into today the question was if the Fed would be able to do that or would sentiment change? Answer appears like it was a successful day for the Fed and an massively overbought market is becoming more overbought.

Thursday, February 18, 2010

Fed Shocker!!! Will Ponzi Be Able to Stand on Its Own??

WOW. Surprise move from the Fed after the bell. Futures down 1%. Euro and the Pound getting pummelled and the dollar surging. Financials whacked getting sold off as well. Gold getting sold. Copper coming down.

What did the Fed do? Raised the discount rate by .25%. From Bloomberg:

The Federal Reserve Board raised the discount rate charged to banks for direct loans to 0.75 percent from 0.50 percent and said the move will encourage financial institutions to rely more on money markets rather than the central bank for short-term liquidity needs.


The Fed Board said the outlook for policy remains “about as it was at the January meeting of the Federal Open Market Committee.”

This is a jaw dropper. Creates scores of question. Why now? Why today? Why not during the Fed meeting or on a Friday after the bell? Option expiration is tomorrow. This is sure to catch many banks off guard. PPI was hot today. CPI comes out tomorrow morning. Is that number going to have a surprise? Politically what is going on to cause this? The 10 year and the 30 year have been moving up. Is this in any way related to the funding needs for the country and they need the curve to flatten to sell more government bonds? It goes on and on and on.

In actuality this does not mean all that much intrinsically but the game has been to manipulate investor sentiment. This could be a big game changer for sentiment. Though this does not mean much intrinsically, it could be a massive game changer for the ponzi scheme. I do not believe the market can stand on its own. Financial institutions have to lean on the government.

Like I said, this alone does not really mean that much. The chain reaction is what will need to be watched. This could have profound contagion ramifications!!

An Equity Love Affair

You got to love the love story being played out in front of us. So romantic. Higher inflation, higher jobless claims, signs of stagflation, Greece bonds widening back out, and a never ending bid under equities. Add to that copper is flying again (25% in a week) as is oil and the entire economic complex seems like it has lost its marbles.

And as for the next crises coming to a newspaper near you, according to the UK Guardian Great Britian is continuing to rachet up deficits. From the article:

The British government has posted its worst borrowing figures on record for a January in another blow to Britain's attempts to reassure other countries it is not the next Greece or Spain.

Apparently this is the first deficit during the month of January, which is a tax friendly receipt month, since 1993. And the miss wasn't small.

The Office for National Statistics (ONS) said public sector net borrowing – the gap between the exchequer's tax-take and its spending – was £4.34bn compared with a repayment of £5.27bn a year earlier. The figure was also much worse than the £2.8bn repayment forecast in a Reuters poll by City analysts, who in previous months had largely underestimated the state of the public finances.

The yields on government bonds are starting to move up again as well. The 10 year is at 3.8% getting close to that magical 4.0%. Need another crises so yields go down so we can fund more large deficits. Isn't this pathetic.

Tuesday, February 16, 2010


I hope everyone had a great Valentines weekend. I spent some time on a South Texas ranch and even got a pretty bad sunburn. Yes, as Dallas was under snow South Texas was hot enough to get a sunburn. Crazy state.

The bears are in full retreat mode. The hand writing appeared to be pretty much on the wall after Thursday. Some leftover bears tried again on Friday only to get pummelled. Once the market breached 1080 it was off to the races today. I have a hard time seeing how the market does not test 1100 at this point but we will see.

What continues to stand out to me (glaringly so) as something that just doesn't look right is commodities. Copper up MASSIVELY again today. Oil was up over 4% or $3 dollars a barrel. It made a little more sense than it did last Thursday because the dollar was really weak today but it still raises questions in my mind and points to a flood of some unseen liquidity.

The news out of Europe over the weekend was just gruesome. There is no plan. There is infighting and disagreements. At this point (to my amazement) the market has not called their bluff. As a result the market is willing to take it at face value that Europe is prepared for a bailout when if you read European newspapers it sounds like Napoleon is more likely to rise from the dead than the people of Europe hand over billions in bailout money.

There are times the market does crazy stuff that confuses people and I can usually figure out why the market may be doing something. The market can do whatever it wants and does not need an explanation but for instance - when unemployment is a really bad number and misses and the market skyrockets. Doesn't make sense right? Well the market may be more concerned about interest rates or a stimulus package. You start thinking about it and you can understand it. I simply cannot understand the market the last week. Everything I thought would happen that I thought would drive the market down, occurred. I give myself an A for figuring out what would occur in the political world and F in understanding how that would relate to market action.

At this point 1100 to 1110 needs to be held for the bears. Sort of the last stand. Don't really have an opinion on the short term. Ironically at this point the market looks overbought. Some push higher seems to be a given.

Thursday, February 11, 2010

Psychological Beatdown

If you would have described to me the events that would have transpired this morning I would have told you the market would be down 3% minimum. I have no idea why the market did what it did today. None whatsoever. Psychological this week has taken a chunk out of me. Not really sleeping, trying to handicap the various outcomes, and than to see the market do what it today? Brow beating. Today the S&P only finished up 10 points and the fund was pretty flat (I got rocked in my personal futures account) but it might as well have gone up 100 S&P points and I lost everything with the way I feel. I just need sleep.

Let's review shall we?

Last week Greece is having funding issues. Europe is in a free fall. On Tuesday Europe announces bailout and the market surges to 1180. Over the next few days it falls back as uncertainty builds over the bailout. Today around 6am (I was up for it) Europe announces no plan and basically says they will look at it in March. In March!! So just as I figured a bailout is not something Germany could undertake and despite all the posturing they couldn't come together on an agreement. There is no plan!! Market tanks right? No. It goes sideways while the dollar spike, European stocks plunge losing around 1.5% in less than an hour and Euro plunges. Then the U.S. market surges!! Along with the market surge commodities also surge. Copper was up like 5% today!!!!

No logic. None

Looking forward I don't really know what the short term is. All I know is the fundamentals and I will continue to try to figure a schizo market on when you can actually make money on the fundamentals. The main thing is can we completely take off the table new highs. If I know that, all this other is pretty meaningless as you just ride out the bumps. Fundamentally we are insolvent. Something that hardly got any press coverage today was the governor of New Jersey declared a state of emergency for snow..ACTUALLY NO...declared a fiscal emergency for their budget deficit. From Bloomberg

New Jersey Governor Chris Christie declared a fiscal emergency and said he will withhold $475 million in school aid to help close a $2.2 billion budget deficit with less than five months remaining in the fiscal year.

Christie, 47, a Republican who took office Jan. 19, also said he will reduce funding for hospitals and colleges, delay capital projects, cut subsidies for New Jersey Transit and eliminate state programs that “sounded good in theory but failed in practice.”

That is where we are fundamentally world wide. In the short term I really don't know. It is possible we tank tomorrow (I still the odds are high for that believe it or not) depending on how Europe trades. As I have mentioned this could also be like August 2007 where absolutely nothing is resolved but the market goes to new highs three months later for no reason before dropping 60%over the next 15 months. That is what is so important to figure out.

I could talk about other things like Australia jobs report, China, and the jobless claims. All that stuff was an afterthought as it occurred.

One more thought on today. Warning this is a conspiracy theory but it has happened alot. It occurred around the Long Term Capital Management debacle in 1998. Greenspan did it again in 2001 after September 11th. My thought is that the Fed knew there was no plan, an announcement was going to be negative, and so coordinated with the ECB to flood the market with money with the announcement. This deluge of money props up the market on what would otherwise be a very bad reaction by the market. My main reason for thinking this is once again commodities. The dollar surging like it did earlier in combination with commodities was one of the weirder moves I have ever seen. The higher the beta (like copper) the more juice it got. I have really no idea. It would at least explain something if it were true.

If that is the case, it was a short term boost. The purpose was to prevent a crash for today.

Wednesday, February 10, 2010

Calm Before the Storm??

Very boring day compared to yesterday. It is the calm before the storm. Now whether that storm causes markets to go higher or lower I think is becoming less clear. The longer this drags out the more unclear it gets. It is becoming more and more bifurcated which I don't like. I still say I would be a more nervous bull than bear. A positive development sends the market to 1080 to maybe 1100. A negative development sends the market to 1,000 or 950.

Still, the market seems to be on pins and needles waiting for the final outcome.

Just speculation but what happens if negative developments come out of the meeting in Brussels tomorrow and we get a bad jobless claims number? OUCH. The meeting in Brussels is not going to be easy. Read When Genius Failed: The Rise and Fall of Long Term Capital Management to get a sense of how hard a bail out can be to orchestrate among multiple players. Now throw in different countries, cultures, tax payers, political careers etc. etc. and you see the problem.

I still think the odds for a negative development and huge move down is high.

Greek Strikes

If your a tax paying German you have to be watching what is going on in Greece causing your blood to boil.

Below are two videos of Greek strikes and protests that basically brought the country to a standstill even as they desperately productivity, not gridlock.

From DW-World.

(I tried briefly to get the video to be embedded but got better use for my time currently. If you want to watch the video you have to click on the link)

The German Spiegel is carrying a similar story with the headline "Berlin Considers Greek Bailout as Union Strikes."

The German government is considering bilateral action to help Athens out of its current financial woes, according to media reports. Meanwhile public sector workers in Greece are striking in protest against new austerity measures.

Just not sure how these strikes play politically. One of the big issues is the drastic cuts the Irish took a year ago in their own crises. They took care of business. You give money to the Greeks when the Irish didn't come with hat in hand?

Rumors and Rumors of Rumors

Today was the weirdest day since 2008. Tons of things going on behind the scenes (what Art Cashin refers to as inside baseball). In general it was a day to watch and gain information. People who were trading really had not idea what was going on. It was pure speculation. It wasn't even good poker because there was no way to calculate odds. There were rumors flying everywhere. Even rumors on why rumors said what. Crazy, crazy day.

So first the bull case. There is a still a possibility this is like August 2007 where the problems came out, the market panicked, rallied afterwards to knew highs until November of 2007 before rolling over. I consider this very low probability as long as we remain under 1080 and than 1105.

Fundamentally I am extremely bearish and that has only increased in the last six months. I see very little to be bullish about whether you are talking about valuations or economic prospects. You talk to bulls and all they want to talk about is how good it is going to be and hence forward valuations are cheap. NO ONE has a FREAKING clue what six months from now is going to look like much less eighteen months to have any sort of idea of current forward valuation multiples. I will take the under on how strong economically we are supposedly to be.

So fundamentally I am bearish and it just a matter of getting the timing right.

In general, this Greece thing I think is going to drag on for awhile. The longer it drags on the more the market is going to get antsy. I really don't see how Germany is going to have any sort of meaningful bailout. I think the most politically they could do is some form of debt guarantee that kicks the can down the road.

The fact that on the Greek bailout news when it was all assumed to be good and done that we couldn't get above 1080 I think has to be looked at as bearish. There could easily be a pop tomorrow if Europe responds favorably to all this but until proven otherwise I think it will be short term.

I have trader friends who ping me alot and one of them asked me what I thought this did to the odds of a crash (I define as a down move of over 5% in the S&P 500 in one day). I said I thought they have gone up. In my mind we are still on crash watch alert. Germany has to be very careful at this point. If the wrong thing is said or the market doesn't get the assurance it doesn't think it is going to get, the disappointment could be ugly.

One other side point. Financials really did not perform well. Credit also did not perform very well. The two most important things to keep your eye on.

Tuesday, February 9, 2010

Nervous Bulls

I am about to head to bed for awhile but will be back later tonight. Quick thoughts is I thought today despite being up was fairly bearish. Not saying something from Germany couldn't come out and cause a pop but if I were a bull I think I would be much more nervous than I am as a bear.

Today felt like a day of desperation for the bulls. How many rumors were flying to gun the market right before it fell apart? I'll have more thoughts later most likely but in general I thought today was bearish for the near future.

Greek Bailout Rumor

Update: AP Wire and CNBC saying Reuters rumors untrue. WOWWWWW!! Talk about billions of dollars being thrown around based on a false Reuters report. Like I said, no one has any idea what is going on. This is a pin ball machine. Doesn't make sense to trade. Better to watch.

Market was about to give up the ghost in what looked like a very very ugly reversal when Reuters reported (or was statistically leaked) that the German Government is "in principle" is ready to help Greece. What that means I have no idea. Other tidbits trickling out is that no concrete decision has been made or what kind of measures will be taken. Portugal President Dos Santos is claiming he is not aware of such a plan.

Basically no one knows what is going on. The market looked it was about to break down in a very ugly way. The Euro was turning over. Citigroup was plummeting after S&P put them on negative watch. This press release is a game changer for the day.

What happens after I have no idea. Times like these I step away. I have no idea what is going on and neither does anyone else. So that means people are moving around based on emotion. Better to see how this settles out.

Monday, February 8, 2010

Quick, Trichet Coughed....What's it Mean??

This would be hilarious if there weren't so much on the line.

From Bloomberg

The euro rallied from near a year low versus the yen after a European Central Bank spokeswoman said President Jean-Claude Trichet will leave a central bankers’ meeting in Sydney a day early, sparking optimism policy makers will help Greece address its fiscal woes.


The euro rallied from near a year low versus the yen after a European Central Bank spokeswoman said President Jean-Claude Trichet will leave a central bankers’ meeting in Sydney a day early, sparking optimism policy makers will help Greece address its fiscal woes.

So there are investor paparazi keeping track of every move by Trichet to try and decipher why he is using the restroom now, what salad is he ordering, or what suit he will pick. Really?

There is some kind of action coming for Greece. There always is. Fundamentally though I don't think it matters that much as their is more proof that the world is in a global deleverging cycle.

Crash Alert

Today did alot to narrow and move around the various probabilities. In general, it was very very bearish. Not only did the market finish on its lows, not only did debt continue to sell off, not only did the financials never look like they had anything going for them all day, but Europe market reaction simply stunk it up. Europe was down like 5 to 6% in two days last week. The bounce day today was very anemic. It quickly went up about 1% and than over the next few hours gave it all up going into negative territory before finishing the day up between .5% and a 1% for most of Europe. There may be more bounce to come but in general that was a dismal showing.

Really for good reason. I read stories on what kind of champagne the bankers drank at the G7 and the meeting in Australia but nothing of substance came out of it. More of the same. The market obviously had to be disapointed if they were expecting anything over the weekend.

Today was an important day for the markets. If the markets would have surged out of the gate the technicians would have been jumping up and down. As it was, the price action was abysmal.

No one is talking about it but I believe a crash (move down of more than 5% in a day) is really high. Where normally such a move is maybe in the thousands of percent in any given day, I think the probability is pushing 5%. Now the inverse of that is that there is a 95% chance it doesn't happen. But if I am right that it is as high as a 1 in 20 chance that the next day or two could see that big of down move, it is nothing to sneeze about.

I will actually be spending the night in my office (second time I have done this) (already have the blow up mattress monitoring Europe throughout the night. Who knows, maybe the market catches and not that big of a deal but if we break down below the 1040 area, it is a long way down.

Saw this on Bloomberg:

Greek Finance Minister George Papaconstantinou said he can’t call for outside aid as his government struggles to cut the European Union’s largest budget deficit.

“The worst possible signal which we could send out is one calling for outside help,” he said in an interview with Bloomberg Television in Athens yesterday.

Wait a minute. Isn't that a defacto cry for help by saying you can't cry for help?!?! EEEKK....I don't think that is good.

Sunday, February 7, 2010

Probability Scenarios

After a blistering rally on Friday, the markets will be very interesting to start out the week. The way the market rallied would leave one to believe that there is more upside in the very short term but I wouldn't bet on it. I haven't really seen anything out of Europe yet that would suggest investors fears will be diminished. It may still be coming but it is much harder to bail out a country than to bail out an institution within a country. The reason is that those outside the country with different nationalities have to do the bailout. That is an extremely hard sell on every psychological, game theory level.

Without that type of bailout though it doesn't seem the problem in Greece, and correspondingly the rest of Europe will go away. This from the economist:

TAX-COLLECTORS and customs officers in Greece have already walked out in protest against planned austerity measures by the government. On Wednesday February 10th it will be the turn of civil servants, doctors and other state workers. A much bigger strike is expected later in the month and past experience suggests that protests could turn nasty. Yet unless Greece gets a grip on its public finances, the government will struggle to finance its loans. Similar anxieties are emerging elsewhere in Europe.

The initial gut reaction is probably, "those lazy Greeks. They don't want to take responsibility for their own actions a their own debts. There going to cause massive problems world wide bringing down Europe in the process." That was my initial reaction anyway but thinking about what if the same thing was going on in the U.S? Would I be doing anything different than the Greek people? No. I have been screaming that our path is leading to destruction. The government has made decisions I have opposed. Why would I reap their consequences and why would I give up my comfort to save an unsaveable system? I would probably be protesting or more likely converting into gold and moving. When you sit back and think about your reaction may be much different.

So to putting on positions. I had some limit short order that were hit on the hard bounce up on Friday. Thinking about it over the weekend there are basically three scenarios that I see as possible in the short term.

A) After maybe a few more points and a day or two the rally is over and we will be moving down extremely hard. Basically moving down to the 900s in the S&P within a week or two. I put this at a 40% chance.

B) Europe is oversold, there will be some words of reasurrance, we will get a several day bounce back up to 1080 to 1100. This week will be an up week and will put alot of doubt in bears. It will be only a few days and the smooth comments from Europe over the weekend will be forgotten shortly. After which we will start heading down hard. I put this at a 40% chance.

C) This is August 2007. The banks started showing signs of strain, there was a mini panic in the markets. The Fed took some steps, the markets rallied into November of 2007 making new highs before rolling over for good even as debt did not rally with the equity markets. Likewise, today some words or actions are done out of Europe. The market unexplainablly buys it (they bought the government stress test for banks, don't think it can't happen) Europe rebounds but stays much lower than its January 2010 highs while the U.S. diverges and heads to new highs before rolling over again in a few months. I put this at a 20% chance.

I think of everything in probabilities. Showing you how my mind thinks. Because the last one is the most deadly to me, that is the one I have been thinking about almost exclusively. Basically all combined it is not a favorable risk reward set up to do anything and so when that occurs I do nothing. It is almost always better to do nothing than something. As new details come out, the probabilities in my mind will change and I will reassess taking a course of action. There is still some short exposure I wouldn't mind adding if the risk reward tradeoff in the short term shows it is a good entry point.

Fundamentally, long term, we are headed down as we are stuck in a cyclical deflationary cycle. In the end that is all that matters.

Friday, February 5, 2010

From Germany

Perusing some German papers tonight and stumbled across a couple of interesting things.

From the Deutsche Well

Data released on Thursday showed that the number of people out of work in seasonally adjusted terms rose by 6,000 to 3.6 million in January. And in seasonally unadjusted terms, unemployment increased by 342,000 this month.

Not that big of deal EXCEPT

However, January's unemployment jump is still less than the 350,000-rise predicted by economists.

That is a BIG miss. Economist were predicting an increase of 350,000 and instead Germany lost 6,000? Germany's economic numbers have been looking really weak lately. The German labor department is trying to blame it on really cold weather but that 6,000 was a seasonally adjusted number. If you don't seasonally adjust they actually lost 342,000 jobs. OUCH!!

Also from the Deutsche Well

A German-based business information agency says Western Europe will face a fresh wave of bankruptcies this year, with insolvencies in Germany likely to reach record levels.

EEEEKKK!! Now you see the problem. If the EU saves Greece and eventually Portugal and Spain it will be Germans who do it. Well you can see the Germans have their own problems.

Let's add one more to the mix. From the German Local

Fears that uncertain recovery in Europe's biggest economy could stall were stoked Friday when data showed that German industrial production suffered a sharp setback in December.

Output fell 2.6 percent from the previous month according to seasonally adjusted figures provided by the economy ministry, following a gain of 0.7 percent in November and a drop of 1.7 percent in October.

On an annual basis, the fall in December was 7.1 percent, and along with fears over eurozone debt levels, the news helped pushed the euro to a nine-month low of $1.3648 on foreign exchange markets.

Analysts polled by Dow Jones Newswires had expected a rise of 0.5 percent but instead, Germany suffered its steepest fall since February 2009 when the country was mired deep in its worst recession since World War II.

Germany is Europe's biggest economy. It doesn't appear to be just a credit issue over there with Greece, Portugal, and Spain. These are economic numbers and an entire second dip looks like it may be occurring. Orders aren't looking to good either.

On Thursday, the ministry reported that orders lost 2.3 percent in December as global uncertainty weighed on foreign demand for German goods.

The rest of the article has words of hope for the Germany economy from various economics and analysts. Lets hope so because Germany is being forced to consider saving Europe.

More Confusion

Futures are everywhere after the non farm payroll report which showed a loss of 20,000 jobs in January but a drop in the employment rate to 9.7%.

Confusion is everywhere as reporters are trying to square an unsquareable number.

This was on the front page of cbs.marketwatch.

U.S. economy sheds 20,000 nonfarm jobs in January, pushing the unemployment rate to its lowest level since last summer.

HA. So we lost jobs which pushed the unemployment rate to its lowest level. Hilarious. As most of you know the Non Farm Payroll Report is actually made up of two reports. Job losses are measured by surveying actual companies the unemployment rate is measured by surveying people.

The people survey has all kinds of requirements that to be counted you have had to look for a job in this many days etc. My guess is the participation rate in people actively looking for jobs must have plummeted. I'll find out later. Regardless, in general you need an increase of 100,000 jobs for the unemployment rate to stay the same. Obviously you can see the dichotomy with this number.

Futures were down 1% at one point. If this gets a bid in the market and brings a bounce I think it will be a gift to short.

Thursday, February 4, 2010

Investor Confusion

If you watched CNBC today it was a mass of confusion. No one knew exactly what was going on. Was it jobless claims, was it Washington, was it Europe? Most were caught off guard.

You know when your watching a movie and a rope is holding something important, the camera lets the audience know that it is slowly unraveling even as the bystanders in the movie have no clue. You as a viewer see the impending doom but there is no way to tell people in the movie. So it is right now. It seems to me the threads have started to unravel. Some more popped today.

Jobless claims came in very poor today. The blog credit writedowns said everything that needed to be said about it. You can read it here.

That was bad. I think the major story though is still Europe. Europe is starting to fall apart and the contagion aspects of that are massive. Moving forward I have thought about changing my day to where it starts at 3:00 a.m., about the time many European markets open. Unfortunately, I think much of the trading action over the next few weeks is moving towards Europe and that will determine in large part what is going on in the United States. As a result, unless you are trading futures, you will be stuck with action like today where the market gaps down.

In general, I think you use every opportunity of strength to short. I shorted Tuesday, Wednesday, and was selling at the open today. It has been along time since I moved this aggressively. Any bounce between 1070 and 1080 I think you short also. Is there a possibility we have another run at 1100? Yes but I think probabilistically unlikely at this point.

One thing that was so irritating on the way up from the March lows for someone who was bearish is the market never seemed to give you a chance to get out of your short positions. I feel like that will be case in many respects for the longs as well. Markets go down alot faster than they go up. We may have started something that will be mind blurringly fast at least initially. It has already been fast.

Who knows but in general I think we will head into the 900s, they will solve the initial Europe problems, we will get a bounce for a few weeks to a few months, and than bam. Down we will go on the United Kingdom, California, maybe Japan. There are massive debt and housing bubbles everywhere.

I have been waiting for this for a long time but in alot of ways I sure hope I am wrong. What I see is not pretty and will cause alot of suffering for alot of people.

Wednesday, February 3, 2010

New Troubles for Big Banks

Some interesting developments in the mega banking world as the game has gone from trying to save the likes of BoA and Wells Fargo to punishing them from their bad bad deads. Now you have the big finance giants, Fannie and Freddie, set to release the hounds on the mortgage originators. Remember Wachovia (bought out by Wells) and Countrywide (bought out by Bank of America)? Well they originated alot of questionable loans. According to cbsmarketwatch, there may be many billions at stake. Thanks goes to Pete.

Just when they thought the worst of the mortgage crisis was behind them, billions of dollars in bad loans from the debacle may be rising from the dead and creeping back on the balance sheets of the largest U.S. banks.

Well that is not a good start. You mean you just can't forget they ever existed? Ummm, nope. Someone has to take the losses.

Big lenders including Bank of America, J.P. Morgan Chase and Wells Fargo may be forced to repurchase troubled home loans from insurers and mortgage-finance giants like Freddie Mac that had agreed to take on risks associated with those assets during the real estate boom.

How much are we talking about?

Mortgage insurers such as MGIC Investment have rescinded, or refused to pay, roughly $6 billion in claims from delinquent home loans since January 2008, rating agency Moody's Investors Service estimated in a December report. That could leave banks that originated the loans on the hook for losses.

Bond insurers are expecting to recover more than $4 billion from banks for breaches of representations and warranties on residential mortgage-backed securities they guaranteed, Moody's also noted.

That isn't all that big of numbers but wait, if Fannie and Freddie get involved, you could be talking BIG numbers.

Bank of America and Wells Fargo may be particularly exposed on this front, according to Institutional Risk's Whalen.

Fannie and Freddie "are going to tear 50-100 basis points easy out of the flesh of the banking industry in the form of loan returns," he wrote.

Wells Fargo said last month that $1.2 billion in fourth-quarter income from mortgage loan originations and sales included a $316 million increase in reserves to cover loan repurchases. The bank disclosed no such reserves in its third-quarter earnings release.

Once again not that big of numbers but according to some other stuff I read, it could be around $15 billion to Wells Fargo before it is all said and done. Now, that is a big number even for Wells. Stock market would not like that.

Tuesday, February 2, 2010

Greece and Markets

I was shorting into the close today though I think the odds are we have a little bit more to go. That of course assuming the high is in for the year. The buying interest actually picked up into the close which is probably short term bullish. It was interesting that Greece spreads started blowing wider again and very quietly Dubai is getting close to its highs. These two won't topple the markets but I am comparing them to New Century Financial / Bear Stearns. As systemic risk worldwide increases, the pressure cotinues to build in the markets.

Interesting article in the UK Guarian which can be read here:

Greece Prime Minister was on tv appealing to the nation to make "brave decisions." Anytime CEOs of companies start doing televised interviews saying everything is okay, some changes just need to be made, you need know your close to the end. AKA - Bear Stearns CEO, Lehman CEO, Washington Mutual CEO, etc.

Greece's embattled prime minister, George Papandreou, tonight appealed to the patriotism of his compatriots by pleading for "national consensus" in pulling the country out of its worst fiscal crisis in decades.

In a rare televised address, the socialist leader said it was the duty of Greeks to help extract their homeland from an economic morass that has seen its debt balloon to a staggering €300bn (£262bn), with potentially disastrous effects for the eurozone. "The time has come to take brave decisions here in Greece just as other countries in Europe have also taken," he said. "We all have a debt and duty towards our homeland to work together at this difficult time to protect our economy."

This is hilarious:

The socialists have pledged to cut the budget deficit from 12.7% of GDP to the EU's permitted level of 3% by 2012.

and the problem and why the previous pledge is hilarious

Although many Greeks appear to have accepted the severity of the situation and the need for sacrifices to be made, after weeks of being bombarded by bad news, a backlash is already brewing among leftwingers and trade unions.

Monday, February 1, 2010

Bouncy Bouncy

Nice bounce today though it was on really low volume. We are in no man's land now. The bounce I was looking for last week may be instead occurring this week. The Volcker testimony which I had so much hope for to change our financial system towards something sustainable is apparently all smoke and mirrors (at least that is the Wall St. rumor now). So Wall St. is ignoring his testimony tomorrow, at least for now.

I don't really think 1130 is in the cards anymore but would not be surprised to see 1100 to 1115 still. Last Friday the market bears got geeked up on the supposed break of resistance. It may be premature. Financials held in there very strong on Friday and the Wilshire 5000, one of the most comprehensive of the indexes, did not break its July trendline and did not break the S&P equivalent of 1180 (1134 if your a Wilshire tracker). It bounced on resistance about perfectly. So a very natural market bounce that probably has some legs in it. A good thing for me is that I sold some early in the week last week but never shorted. Still have alot of dry powder that I will use in that 1100 to 1110 area making a bet that we are indeed done making new highs for the year.

On the fundamental front the ISM index was smoking. Really have to be impressed with the manufacturing space. We shall see if that continues. The jobs number this week has a potential to be positive because of the census hiring. Another smoke and mirrors number especially considering the jobless claims have been trending higher. That also has the potential to mark the end of this rally. Buy the rumor sell the news type of thing. We shall see.