Wall St - Main St Disconnect

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

Away From Wall St Live the 99ers

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

See video below:

Emergency Alert on Home Prices

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

Flip Flop - The Inverse Matrix

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

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

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

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

What Color is That - Red???

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

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

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

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

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

Kye Bass Notes from the Vaue Investing Congress

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

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

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

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

New York City - Value Investing Congress

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

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

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

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

It was a very interesting presentation.

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

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

Sentiment Off the Charts

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

All from the daily sentiment index:

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

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

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

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

Knock Out Punch

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

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

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

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

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

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

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

Basically all you have to look at is this:

New Orders June Through September:

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

Inventory June Through September

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

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