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.

Murry - Buy Farmland and Gold

Well I said if you wanted to be bearish you need problems in Europe. Euro down big today, German factory orders much weaker than expected, and Ireland spreads blowing out. The real question is if you take off exposure around 1080/1085 or not?

An interesting article from Bloomberg with some thoughts from Michael Burry. Remember he was the head of Scion Capital who made a fortune betting against the mortgage market. His story was told in Michael Lewis book The Big Short. What is he doing now?

Michael Burry, the former hedge-fund manager who predicted the housing market’s plunge, said he is investing in farmable land, small technology companies and gold as he hunts original ideas and braces for a weaker dollar.

When investors talk about a weaker dollar the question should always be against what? Against other currencies or against precious metals or all commodities?

This is what I have been complaining about for awhile.

Burry, who now manages his own money after shuttering the fund in 2008, said finding original investments is difficult because many trades are crowded and asset classes often move together.

“I’m interested in finding investments that aren’t just simply going to float up and down with the market,” he said. “The incredible correlation that we’re experiencing -- we’ve been experiencing for a number of years -- is problematic.”

There is also a couple of video interviews one of which can be found here.

Monday, September 6, 2010

Musings Gathered from Connecticut

Back in Texas and hopefully will be in Texas for at least a month!! I love to travel but the last 45 days have been ridiculous. For Labor Day I was up in Connecticut for a wedding. Hung out with alot of Wall St types and heard alot of different thoughts about the market.

Last week was just brutal for the bears. A 5 to 6% move in a matter of hours over three trading days. Definitely many body bags being carried out. Right now I really have no idea where the market is going. I have a sickening feeling that last week may have started a March / April move seen earlier this year where the market just went up and up and up. There are many similarities between now and than.

One of the things that worry me the most is how bearish everyone is. Besides many of the sentiment surveys that are pointing to very high bearish levels, my conversations over the weekend confirmed as such. I am usually one of the few who are really bearish. Not so much anymore and it makes me really nervous. Unless the bearishness turns into a panic move down, it is very hard for the market to grind down with this many people bearish.

I also feel to some degree that the huge move down in equities I was looking for already happened, it just happened in the treasury market, not the equity market. The 10 year yielded around 2.45% towards its lows. It fell from 4% to 2.5% in a few months. That is A MASSIVE MOVE. That is telling you recession, deflation, and more rough economic waters ahead. The last time the bond market was yielding so little, the equity markets were around 750 to 800. The problem is the equity markets this time followed it down only a little bit. We didn't get anywhere close to 800. If the bond market starts selling off (and it already has, with 10 years now yielding 2.7% now) that seems to be bullish for stocks. You have many newsletters and market commentators (the real bears among us) talking about the equity markets collapsing and the bond market collapsing. That very well may happen but the correlation of how bonds move with stocks that has dictated market action over the last decade won't break down overnight. If the 10 year move back above 3% the likelihood is the stock market won't collapse to 800. The end game, probably a couple of years away if it occurs, sees the 10 year go above 5% and equity markets sell off hard. That is when the system collapses. This won't happen anytime soon and leads me back to sentiment. The sentiment really has gotten extreme with bonds. 98% of traders were bullish on bonds making it very very unlikely in my mind that the bond market is going much below 2.5% in the very near term. Now the equity market can lag. The top in bonds occurred January 2009. The bottom in equities didn't occur until March 2009. However, I feel like the circumstances are somewhat different.

Another problem for the bears is the elections coming up. Talked to a couple of investors this weekend who do not lean towards conspiracy theory type thinking but openly admitted that chatter is that the democrats are going to massage the economic numbers between now and the election. I did a couple of posts on why the ISM number on Wednesday made little sense and Friday's NFP number didn't much either. That could make it difficult for stocks to go down at least until earnings season. Then your betting companies will start warning about earnings.

There is still a story for the bears in the short term and that is Europe. European bond spreads have once again been inching higher and several stories over the weekend with how Greece is still likely to default. The Financial Times ran an article yesterday talking about how the European debt crises is about to enter a critical phase as the amount of debt needed to be raised in September is double the amount in August. Spain needs to raise 7 billion in Euros compared to 3.5 billion in August. So if your bearish and want a bearish catalyst I really feel like you have to be focused on Europe looking for something occurring across the pond. The problem with that is it the timing is always almost impossible to predict as it there are very few "leading indicators" for such events to occur and it should be once again U.S. Treasury bullish. The U.S. Treasury market could easily have another spike, but once again, it seems like the bond market needs to go sideways and consolidate for awhile at the very least.

Anyway, alot of things on my mind over the weekend. I am an extremely nervous bear right now. After such a violent move higher I am not sure there is much to do but the real question is if we retrace back to 1070 or 1080. Is that a chance to get out of some short positions or should one hold strong? One thing that came out loud and clear in my conversations over the weekend is that everyone hates this market. Nothing makes much sense. Stock pickers everywhere are pulling their hair out. So your really just forced to be right and remain solvent long enough to benefit. The big macro funds have left (lowered) their exposure to the equity market and increased in the foreign currency market. It is a brutal game and one that isn't typically long term accretive.

Thursday, September 2, 2010

David Rosenburg's Take on the ISM "Number"

AS I wrote immediately yesterday the ISM number was just BS. The bigger question is even if you know that you know that you know this, what do you do with that knowledge? My biggest problem right now is how bearish the sentiment indicators seem to be. When your that bearish you start looking for a big turn because it usually has legs. The sentiment was this bearish several days ago but there was no wash out and I figured we would at least test 1010. The fact that we bounced so hard could we possibly go down again and break 1040 with sentiment this bearish? Seems to be a very difficult proposition which makes me think we go up or chop higher for a couple of weeks. Yesterday's rally was just miserable for bears or for those looking for clarity because it leaves everyone in no man's land.

From Rosenburg:


Here’s why:

1.Most of the regional reports were very poor in August. Either they collectively all wrong or the ISM is.

2.The share of respondents saying the experienced "growth" was 61%, the exact same as a year ago when the ISM was sitting at 52.8.

3. The ISM gain was led by employment (58.6 to 60.4 - best since December 1983) in the same month that ADP manufacturing fell 6,000 (second decline in a row - it was -11k in July when ISM employment was 58.6, so clearly the latter is proving to be, at least for now, an unreliable labour market barometer). Production also ticked up to 59.9 from 57.0 and inventories rose to 51.4 from 50.2. These are all coincident indicators, as an aside (but an important aside).

4. According to the ISM, 76% of the manufacturers surveyed said that their customer inventory levels were either “too high” or “about right". At the turn of the year, just ahead of the big inventory swing that bolstered the GDP data, this metric was sitting at 60%. As a result, it would be folly to assume that the inventory and production categories will contribute to further ISM increases in the near- and intermediate-term. Norbert Ore, who presides over the ISM survey, had this to say about inventories: “If the inventory build isn't voluntary then we have a huge issue on our hands.”

5. Meanwhile, the more forward-looking components dropped, though were hardly a disaster. But orders slipped for the third month in a row, to 53.1 from 53.5 in July, 58.5 in June and 65.7 in both April and May. That is still a sharp squeeze in the growth rate of capital goods-related order books. At 53.1, ISM orders index is down to levels last seen in June 2009 (but when they were rising in “green shooty” fashion).

6.Backlogs were down as well, to 51.5 from 54.5 in July, 57.0 in June and 59.5 in May (and peaked in February at 61.0). At 51.5, order backlogs stand at their low-water mark of the year.

7. Supplier deliveries (measure of production bottlenecks) eased for the fifth month in a row — to 56.6 from 58.3 in July and well off the March peak of 64.9.

8. Looking at five decades worth of data, the share of the time in which we see orders, backlogs and vendor deliveries all decline in tandem, and the headline ISM index rise, is the grand total of 1%. No wonder equities rallied so much — we just witnessed a 1-in-100 event! Bring your camera.

9. Export orders dipped to 55.5 from 56.5 — the lowest they have been since last December. If the overseas economy is rocking and rolling, then why onearth would this component be declining? Not only that, but it looks as though yet again, a good part of the inventory boost we still seem to be getting is being filled by imports — that sub-index jumped four points in August and does not bode well for the trade deficit, which subtracted 3.4 percentage points from headline GDP growth in Q2.

In a nutshell, ISM did smash consensus expectations in August but the composition left much to be desired. The coincident indicators firmed but the categories that actually lead manufacturing activity softened across the board.

As we said at the outset, the ISM index was at complete odds with the regional surveys. Philadelphia, New York, Milwaukee, Richmond and Kansas City were all down. Dallas and Cincinnati were up. In the past, when we had a 5-to-2 ratio to the downside, the share of the time ISM managed to eke out an advance was 4%.

It would be wise to lean against the market's initial dramatic reaction to this data. The ISM orders/inventories ratio is a decent leading indicator and it sank to 1.033x from 1.065 in July. 1.278x in Julne and 1.441x in May. The hidden nugget in today's report is that this ratio has decline to levels not seen since February 2009. And the last time it fell this fast to this type of level was in the September to December 2007 period (1.03x from 1.30x) when once again, there was tremendous confusion and intense debate over whether it was a recession/soft patch in the economy and the bear market/corrective phase in equities.

Suffice it to say that in the past 30 years, with eleven observations, ISM dropped to 47x in the three months after such a decline in the orders/inventory ratio to such a low level as is the case today. That is the average, the median, and the mode. The highest ISM reading three months hence was 51.9, so if past is prescient, today's data was likely a huge headfake.

Wednesday, September 1, 2010

Complete BS Number

ISM just came out at 56.3. There is no way. Completely BS number. I don't care if you think the bears are on crack or if you think the world is full of tooth fairies and santa clauses, the ISM numbers do not come anywhere close to reality. Either the ISM number is wrong or about 10 other numbers are wrong.

A - the ISM is made up of regional manufacturing reports. Most of these regional subindex get reported. The Philly Fed, Kansas City, Dallas, NY Empire, etc. etc. These indexes all showed dramatic slowing if not downright contraction. The strongest sector for various reason has been autos. That gets caught up in the Chicago PMI. Even that slowed down in August as portrayed yesterday.

B - the ISM number is also split up into various components. One of those components is employment. The regional reports were showing contracting employment pretty much across the board. The ADP employment report that came out today showed contraction for the month of August. You had a large spike in jobless claims. How in the world does ISM employment go to 60.4 from 58.6??????? Makes no sense.

Some of the important components didn't look so hot. New orders went down. As did backlog of orders. And inventory up.

For today the bears get blown out of the water. The bulls get to romp and play. And a jacked up world remains jacked up. The conspiracy individuals can have some fun today also. Did somebody known yesterday what the ISM number was going to do? Remember that last MASSIVE surge in volume and futures the last 120 seconds of the trading day yesterday? And how did this ISM number come in so far from any sense of reality?

How does this play out going forward? I don't know. The rest of the day and the way the market trades will be interesting. Definitely puts 1100 back on the table as a possibility. Like I said, the big boys put high emphasis on the ISM number. We could have a few good weeks. Or this is a spasm. I guarantee you it sure killed several bears.