An Old Quarter Ends and a New Begins - Even More Questions

The end of a ridiculous quarter (I think many would agree with this even if bullish). Market has been on a non stop move higher for over a month. Dominating quarter for assets especially for junk. No slow down on the upside even once they passed the moon. Incredibly, there are even more questions for the market than when January 1st started. You had no resolution of the Greek issue. The Greek bonds continue to sell off and the loaded gun on the table looks more like a pea shooter. You have more questions with the Euro and the viability of the continent over the next decade. Now you have major potential problems with U.S government interest rates. A large rise in rates would kill any hope (there really isn't any currently anyway) for a housing recovery and send everything lower. This chart I saw earlier today is really interesting. It is from a technical perspective.



From a fundamental perspective I think you could see rates rise and scare the living daylights out of investors but it seems hard for me to believe in the short term (next 6 to 12 months) the 10 year is headed above 5 or even 7%. Longer term, watch out. Increase risk is being added to the system and the U.S. has backstopped it. In the last few days J&J, Lowes, and P&G debt traded tighter than U.S. government debt!!!! That is incredible and unheard of until recently. The swap spread going negative may be technical and noise or truly warning of financial apocalypse.

That is at the federal level. At the state level it is even more mind boggling. Schools going to 4 days a week, getting shut down, sheriff cars getting reposed (you read that right), prisons refusing prisoners because they are not getting paid by the state.

You have new records for Fannie Mae and Freddie Mac delinquencies. New records in CMBS delinquencies. The numbers are really staggering. Fannie Mae serious delinquencies are now at 5.52% in January. That is borrowers over 90 days behind!! Think about that. That is the best of the best mortgage paper. Extrapolate that to the banks. And somehow someone like Zions bank is up 70% year to date?? TREPP estimates that 7.61% of CMBS is 30 days delinquent. 7.61% and commercial real estate is trailing and just now really starting to move higher. This is already a record. Estimates by Real Point is this number will hit 11 to 12% by the end of the year.

We are setting up for true financial Armageddon, it is just a matter of when not if.

To the trading world not sure what is going to happen with the new quarter. You could easily see new money coming to the market driving up the market to a new high tomorrow. The payroll number is going to be reported on Friday when the market is closed. New high today or Monday and than roll over? Definitely possible. April promises to bring more questions and more tests. The inventory build should be coming to an end.

For those bulls out there who want to point to "good" economic numbers, several points. 1) They are not really that good. If the world was perfect they are pointing to a slow U shape recovery and are just slogging along. 2) As anemic as these number are they still only possible because of the government continues to transfer money into the system. 3) They really don't matter because what I have described above dwarfs any good news these numbers may be perceived to carry. Maybe not today but tomorrow. And that is the problem. The market doesn't care about tomorrow. It only cares about today and where the next drink will come from.

The second quarter may be another great quarter or there may be a crash. Just like one misplaced snowflake eventually causes the avalanche it is going to be one data point that on its own won't really matter, but combined with the pressure built over months and months is going to start the topple of the entire system.

Greece Bailout Lacking

Pretty bullish day on Friday. If the market doesn't start selling off decently tomorrow I think you can expect new highs by the end of the week. End of the quarter and the March payroll print that Wall St. is salivating. If the market doesn't roll tomorrow/Tuesday I really think that could be a sell the news event.

Good op-ed out of the UK. Telegraph by Ambrose Evans-Pritchard titled Europe has left Greece hanging in the wind. Can be found here.

The Frankfurter Allgemeine summed up the deal succinctly: "No member of Europe's monetary union should be liable for the debts of another state. Bilateral credit from Berlin for Athens is not the same as German acceptance of responsibility for Greek debt."

This shatters the assumption since Maastricht that monetary union leads inexorably to fiscal union. By drawing the IMF into Euroland's affairs, Germany has broken the spell and reduced EMU to a fixed-exchange system with knobs on, like the 1930s Gold Standard that it so resembles. No wonder Jean-Claude Trichet at the European Central Bank is cross.

It goes on to explain some of the consquences and the small amount of money that has been committed to the problem. The thing is like like the "stress" test, it may put the pressure off currency markets for awhile. In the long term it means nothing and probably an additional reason to sell.

Even More Interesting

If yesterday was interestng, today was even more interesting. A few more loud cracks in the ice could be heard. As mentioned yesterday, I didn't feel like the market was all the bearish and was not surprised it moved up early. The reversal though was something to behold and raises questions if we make it to the end of the quarter without the market selling off. Massive 1.5% reversal today causing the indexs to finish down. That is usually very bearish in the short term to see that sort of a reversal.

The 7 year auction like the 5 year auction the day before was abysmall. Yields shot up on the 10yr and the 30yr straining against the very top of the trading range over the last two years. If the 10 year breaks 4% at the same time the S&P is breaking 1150 on the downside watch out.

More fission of disunity in Europe. Comments from European leaders made headlines this afternoon. Euro making new lows.

All in all, the ice is straining. 1150 is a good bogey to watch. The market is straining and regardless if it is next week or next year the entire system is looking shakier and shakier. The things that are occuring are the things I have been talking about for months.

Crackling Ice

Fascinating day today. The markets only sold off a little bit but the last few days have been good for my overall confidence as things I thought would happen are starting to transpire.

The last few days it has been like if you were standing on a frozen pond when all of a sudden you hear a crack that sounds like a gunshot. Doesn't mean the whole ice sheet is about to collapse and there may be alot more crackling but you know the thing is in danger zone.

Europe continues to look like a wreck. The Euro hit a new low as Portugal was downgraded and more disarray out of European leaders on what to do with Greece. The 5 year bond auction was UGLY!!!! Some are saying it is the health care aftershock. Either way the bond market did not like it!! Interest rates surged and this was in the face of horrific new home sales and very anemic durable good orders.

The stock market hung in there, surprise surprise but I think even that may be getting close to an end. The odds of another spike next week I think are fairly high. You have the end of the quarter and the jobs number which will be very good because of census hiring that all of Wall St. is salivating over. There is an old saying that bull markets die on good news. The odds of some type of top (possibly a major one as the ice is showing strains of holding) is growing larger by the day and may happen with the jobs number.

Economic data has definitely stalled, the bond buyers look like they may have started calling the bluff of the government from continuing its free spending ways, and Europe is a freaking mess. Watch out if the Japanasse Yen breaks higher against the dollar. Another sign that the soverign risk trade has started.

Germans Pass Bailout To Americans

Market melt up continues. This is what you call a panic to the upside. Just like you would see a panic to the downside. All kinds of really bad stuff going on in Europe that is just getting ignored by the market.

Today it was supposedly agreed (the story seems to change hourly) between Germany and France that Greece should be bailed out by the IMF. That means what the Germans refused to do (and probably snickering at us Americans for being so willing to do) will now be an IMF problem which is of course mostly financed by the United States and your favorite yahoos Tim "I am not bailing out Greece because I don't pay taxes since I a am tax cheat" Geithner and Ben "shh, I have already secretly bought Greek bonds and you don't know because you can't audit the Fed" Bernanke. Yes, AS AMERICANS I WILL BE BAILING OUT GREECE. Lovely. Next up, California, Spain, Portugal, Indiana, Illinois, etc. etc.

The housing report today was truly awful. I even saw a piece (and I don't pay attention to him often) where even the ever optimistic Larry Kudlow thought it didn't look good. Sales down again and inventory surged. So you don't think that this was a snow event, existing home sales were actually up in the Northeast.

Anyway, more news being ignored. Fundamentally it was a good day for the bears. Someday that will matter.

Clear Skies and 70 Degrees

Hey all. Sorry, been working on things with the fund and been on the road. Busy times.

Really doesn't matter though does it? Commenting on the stock market is like commenting on the San Diego weather. In San Diego today we had clear skies lows in the upper 50s and highs in the upper 70s. In the stock market today the market moved higher on lite volume while volatility moved lower.

That broke Friday but even that was an impressive performance by the bulls who pulled the markets back up going into the close.

The healthcare bill could have an interesting affect on the market. Also have existing home sales on Tuesday which should continue to show that housing is once again double dipping but the snow excuse will probably be given. The number will probably be weak regardless. Southern California is showing weak year over year and month over month sales and don't think there is any snow there?

Anyway, the bulls first mission is to hold 1050 and than after that 1020. That have some room to work in a market that is really overbought.

Brown Shoots

Friday's retail sales report had something for everyone, the bears and the bulls though you wouldn't know it from listening to the media who acted like it was a sign of unbelievable strength. First it should be an incredible month considering the tax rebates hitting the mail unlike last year in February and a special tax credit to middle to lower income Americans that is adding an additional $30 billion to consumer pockets from the taxpayers I was not aware of.

If your looking month to month ten of the 13 major categories showed gains. For instance electronics was up 3.7%. BUT, electronics was down 1.6% year over year. Remember what February 2009 was like? Talk about the easiest softball comparison. Also, January was revised down massively. This set an easy low base for the headline numbers to look amazing. If you adjust for the revision downward retail sales were actually down .1%.

Looking at the raw data (not seasonally adjusted), this February was the third worst February going back to 1998.

Anyway, the bulls will claim victory and the bears will say wait a minute. In general it looked pretty weak to me especially considering the consumer is getting tons of money through various tax avenues. This is alreayd ebbing.

S&P has just squeaked over 1050 before pulling back. The DJIA still hasn't confirmed the Dow Transports which has to be very nerve wracking for bulls. Finally, the really cyclical stock markets are not confirming the recent rally in the U.S. markets. Those would include China, South Korea, Japan etc.

Maybe they will but I still contend the economic numbers have turned over. To use the popular 2009 phrase, there are brown shoots everywhere.

The Markets And Where We Stand

Market is in full stampede mode. It seems nothing can slow it down. Today jobless claims missed estimates and the four week moving average moved up again. Can't blame this week's on the report on the snow but no one cared.

We are at a critical junction but it sure seems it is full speed ahead for the markets. Retail sales come out tomorrow for February and between what we have seen from the retailers and what I know about the tax refunds being front loaded in February, I think the number will be really good. Essentially all the indexes are hitting 52 week highs except the Dow. It is a little over 100 points from a new 52 week closing high and a 150 points from an intraday high. If that hits, the odds go up we will have a burst to 1200. The bigger number tomorrow may be the Michigan Sentiment number. The retail sales number comes out before the bell opens and the sentiment number comes out around 9 central. The last hope for the bears in the short term I think is the retail number comes out, the market is moving up like ti normally does, the sentiment number comes out really bad and the market gets slammed down with the Dow not confirming the dow transports.

Is that what I think is going to happen? Not really, just giving you the bear hope. As it stands right now the bears don't have much going for them. Greed mania is back in style.

Hugh Hendry - A Truth Teller

A must read Oped at the UK Telegraph by one of my favorite hedge fund managers, Hugh Hendry. The entire thing is below, bolded stuff is mine. Run, don't walk to read this. So much common sense.

You don't know me; we've never met. But I fear you are being encouraged to dislike me. Let me explain: I'm a speculator. I manage a hedge fund. Apparently I profit from your misery. Accordingly, our political leaders are keen to see the back of me.

Only yesterday, Germany and France were calling for the "fastest possible" adoption of new rules to put an end to financial speculation. But before you write me off I ask that you listen to my side of the story.

First, and much like the bogeyman of folklore, the size and significance of the hedge-fund industry is vastly over-stated. The best estimate is that people like me control just 2.5 per cent of total global financial assets under management. The ability to move prices and markets resides more with the managers of pension funds, unit trusts and our banking contemporaries; fortunately, for them, they are on much better terms with our political masters.

Second, and much to my regret, I have to correct another misconception. I am not guaranteed success; far from it. I have no certainty or monopoly on making money; that's the nature of risk taking, there is no free lunch. And believe me, I am subject to the harshest possible critic: the market.

Unlike my political adversaries I can't spin this out. If I am wrong in my deliberations, I have to record a loss immediately. So it should come as no surprise that I give great consideration to what I do.

But what about this short-selling business and the allegation that hedge funds seek to profit from the misery of others; are we simply a scourge on society?

I believe not. Let me explain. In short selling, investors borrow shares and sell them, hoping that the price will fall and they can buy the shares later at a lower price, replace them and thereby turn a profit.

Hedge funds are not seeking to dictate economic affairs. Rather we are preoccupied by price. A market-based economy like ours requires a pricing mechanism to allocate resources and ensure that we all prosper. Get it wrong and we endure the calamity of the technology bubble and the sleazy debacle of the American mortgage crisis.

It's not that hedge fund managers are bitter and seek to wreak havoc. It's just that we believe that recurring and periodic recessions reveal the economy's winners and losers. And through our endeavours, hedge funds attempt to discover the identity and inadequacies of the poor businesses. During hard times, such businesses typically go bust, allowing us to make an investment profit by betting on that eventuality, and ensuring that successful and prudently managed businesses prosper.

Or rather that was how it was supposed to work. But our political leaders have gone to considerable cost to avert this normal business cycle.

Fearing that the huge scale of reckless bets within the banking system threatened another depression, our politicians have used public funds to bail out the economy's losers. And in doing so they run the danger of creating a plutocracy: a society ruled by the wealthy. Consider that fact that in Latvia school teachers have had to take a 35 per cent pay cut so that the Swedish banks who funded the real-estate bubble are repaid their imprudent mortgages.

We need to stop this socialisation of risk taking: heads I win, tails you lose. Consider the American government's enormous bail out of the failed insurer, AIG. According to the world's largest bond fund manager, Bill Gross, it is perfectly acceptable for the taxpayer to subsidise his returns. As he explained it to the investment magazine Barons: "All I'm saying is the government would lose almost $50 billion if it decides AIG no longer is worth supporting. It is a game of chicken. You either call the government's bluff or you don't."

I would recommend a different course of action. It is the same one recommended in 1930 by then US Treasury Secretary Andrew Mellon. I would call the bankers' bluff and seek to purge the rottenness out of the system. All of us will work harder, prices will adjust, and enterprising people will flourish. Of course, this is a minority view. Instead, those in power would rather use the subterfuge of inflation to hide the enormous public subsidy.

The politicians' problem is that free and independent capital markets tend to be anti-inflationary. As we have seen, attempts at quantitative easing immediately depress the value of existing government bonds in addition to the value of sterling. And then you have the problem presented by my little industry. But we are intelligent, well-funded and willing to vociferously challenge public decisions. Most importantly, we are on your side.

Hugh Hendry manages the Eclectica hedge fund

Economic Problems Continuing to Grow

The economic problems continue to grow, though don't tell the stock market. They wouldn't listen anyway. Last night it was reported German exports fell hard in January 6.3% verses the consensus which expected an increase of .5%. In the UK manufacturing production for the month of January lost .9% month over month. Also output also contracted .4% versus and expected .3% gain. It is being blamed on the weather but France had equally bad weather and met expectations with a 1.6% gain in production.

In Asia Japan machine orders fell 3.7% in January which is actually down year over year (remember this is comparing to February 2008) which is a good proxy for business investment.

The China headlines appear good with huge increases year over year but exports are now down two months in a row. This means the trade surplus is the smallest in a year. Considering that China needs exports it is hard to see how the Yuan will be appreciating much anytime soon though they may throw a political bone to Obama and tweak it a little.

The weekly ABC Consumer Comfort Index continues to scratch the bottom of all time lows and the NFIB small company optimism index is back to its lowest levels since April of last year plunging from January.

Tomorrow is the jobless claims numbers. Should be interesting considering how it has been all over the place the last few weeks with the four week average generally trending up. In the grand scheme it really doesn't mean much but a bad number the bulls can ignore and a good number the bulls can cheer.

Illinois Budget Problems

To follow up on the previous post, Illinois could be the poster child (Yes Obama's home state).

From the Chicago Tribune

Gov. Pat Quinn on Tuesday unveiled a caustic budget plan that would borrow billions of dollars to stay afloat and push even more debt down the road, hoping to persuade leery lawmakers to instead raise taxes in an election year.

Quinn aides warned the plan would cost some 13,000 teachers and staff their jobs, cut off poor seniors from help in paying for costly prescriptions and shut down some health care programs for the indigent. But even after about $2 billion in cuts, the state would still be $11 billion in the hole.

After $2 billion in cuts they are still $11 billion in the hole???

Isn't this typical:

The administration's warnings served as the precursor for the Democratic governor's Wednesday budget address before a joint session of lawmakers who want to wrap up their business in two months so they can focus on their re-election.

This is typical also:

Similar cries about slashing services last year ended up being papered over by increased borrowing. Many lawmakers privately expect that fears among rank-and-file lawmakers about a voter revolt will lead to a repeat of last spring's session.

Intrade needs a place to bet on which state goes bust first.

Higher Taxes

The tax guy is just starting to ramp up his collections. He has to if he wants to fund all the bailouts and budget deficits. States are starting to go after sales taxes.

From yahoo finance originally printed in Forbes.

While President Obama's push to raise federal income taxes for the wealthy gets lots of attention, the continuing upward creep in the sales tax rates imposed by state and local governments has gotten less notice.

But Vertex Inc., which calculates sales tax for Internet sellers, reports that the average general sales tax rate nationwide reached 8.629% at the end of 2009, the highest since the Berwyn, Pa., company started tracking data in 1982. That was up a nickel on a taxable $100 purchase from a year earlier and up nearly 40 cents for the decade. The highest sales tax rate in the country now stands at 12%.

During 2009 seven states and the District of Columbia raised sales tax rates, with one jurisdiction -- North Carolina -- actually doing it twice. Only four states hiked rates in 2008 and only one in 2007. Given state budget problems, the 2009 state sales tax increases aren't surprising.

Possibly by the end of 2010 and for sure 2011 state insolvencies will be making front page news. There will either be state defaults or government bailouts of the states. Munis would rank at the top of investments I would avoid. Unfortunately everyone who got burned in stocks is not moving all their money to munis and bonds.

In general I wish they would really hike the sales tax and eliminate the income tax. In a sense make only consumption taxable. Our country would be alot better off.

Off Balance Sheet Transactions

A really good video of Frank Partnoy from the Roosevelt Institute on off balance sheet transactions. Only about 10 minutes long. It is why we are eventually screwed.

Frank Partnoy on Off-Balance Sheet Transactions (MMBM) from Roosevelt Institute on Vimeo.

Looking at Only the Good

Hey, sorry been traveling some and working on something related to the fund. I have been tied up. The debate went okay. Unfortunately it ended up like I thought it would. It degenerated into more of an argument where either side attempts just to snowball the otherside with meaningless data than a true debate but hopefully the students learned something.

The market is back to being without a rudder which generally means moving up with no volume. Slowest day of the year for the NYSE in volume terms. Economic data last week was praised as awesome even though questions should have been asked. It is the psychology of the market at this point. Ignore the bad, praise the good. Retail chain stores were praised and loved but one has to remember that this was compared to February 2009, essentially the worst of the worst. Not only that but the month of February in 2010 saw 3% higher tax refunds as individuals rushed to file tax returns creating a boost in temporary income. It does appear that Americans are starting to not care as much about repairing their balance sheets so maybe a spending revivial is afoot.

Than the payroll number was loved but the snow affect meant that no matter what number was released it was going to be loved. What was really liked was the household survey which showed an increase of 308,000 jobs but this is highly questionable. 198,000 of those jobs were attributed to agriculture and related employment. Are you kidding me? The month we had the horrific snowstorms, during the month when agriculture is at its slowest point in the northern hemisphere the U.S. had the fourth largest increase in agriculture jobs in 25 years?? Cmon. If you adjust for government jobs also than the number would become -89,000.

Doesn't really matter though doesn't. The market is only in up mode. The market probably rests 1120 at some point. If we hold, it is off to new highs.

College Station Debate

Tomorrow and Thursday are key if the markets don't head to new highs. At this point it doesn't seem like much is holding them back (some indexs have made them) but it also may just be an all in by the market. A buying exhaustion if you will. I don't know. Despite decidedly weaker numbers in January, the February numbers coming in are all being explained away by snow as they are weaker still. Somehow even areas of the country where snow was not a factor where supposedly weak because of snow hundreds of miles away. Go figure. Market are very overbought but have been for over a week now so that doesn't mean anything. I mentioned weeks ago the biggest danger for the bears was this was like September of 2007 when the banks started crumbling but caught themselves and set new highs in November of 2007. How the market is able to do that when evidence is glaring to the contrary is beyond me. At the time I put that at a pretty low probability. Either that probability was hit or my probabilities were wrong and it was more likely than I gave it credit for.

Tonight I will be in College Station debating with a good friend of mine who works at another investing firm. We will be doing a formal debate for the Aggie Investment Club at the business school with the resolution as follows:

"Due to systemic forces in the system, bottom up stock analysis has become essentially meaningless to generate alpha for the foreseeable future outside of select special situations. A bleak economic outlook driven by systemic forces will ensure equity returns will be negative over the next 12 to 24 months."

It should be really interesting. Look forward to seeing some of you there.