6/25/08 (Bernanke Bluff?, Barclay needs $, Durable's unchanged!)

Traders,


Ok….didn’t mean to come down so hard on Hillary, Pelosi, or Barney – I agree something needs to be done, just disagree on what. Giving two government mandated companies that have massive accounting problems, billions in losses, and billions more in liabilities a blank government check backed by debt (tax payer) and “HOPING” they will do the right thing is not what I call the best idea. But let’s just move on.

The really bad news from a money flow technical issues is seeing the broader index (RUT) get the axe and break down 720, I guess remaining above 700 is something. Toss in the very low Consumer Confidence numbers and it almost makes you want to puke. It did nothing for signaling any health for the economy.

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The River Card – Bernanke Bluffing?

To day we come to the River Card. We will see if Bernanke drew out that inflation flush and will raise rates. I think he is just drawing dead and bluffing. His raise talk was to give confidence to the dollar to keep it from sliding. Bernanke can NOT raise rates. The river card will reveal his dead hand and again he will talk tough about inflation and talk about raising the NEXT hand.

Most economist surveyed predict rates unchanged. Bernanke really can’t do anything – he is getting the squeeze, on one side inflation, weak dollar, higher commodity prices and on the other side credit remains tight, more write downs to come, and the need to keep special deals at the discount window open. What can he do?

Yesterday I came up with an interesting idea. He leaves the leaves the Discount unchanged (or even lowers it) and raises the Target 25 bps. It’s an ugly hand to play for sure – however he keeps the money flowing OUT of the Discount Window and at the same time the target raise may give strength to the dollar. It’s really kind of a fools game because smart money will see that it for what it is – a bail out at the discount and injecting a false bottom to the dollar. However – I really don’t know what option he does have.

I think (too) that he will keep rates unchanged till probably after the election in November. Even then I am not sure what he does at the Discount Window. He has to do something by Sept. with the special lending deals to the investment banks. Congress may step in at some point and put MORE pressure on him if he decides to finagle some method to keep that window open, against the Fed mandates.

Today will be about the talking heads dissecting what Bernanke said and they will all begin to read the Tea Leaves as to what the future holds. The problem is that I don’t even think Bernanke knows what the future is.

I my short history and experience in the market (about 20 years) – usually we are able to see a bottom, a solution, a HOW or WHAT will get the market to turn around. However, even the smartest and wisest people I know don’t (this time) see that HOW or WHAT, let alone WHEN. And that is not something that sits well with me. I think Bernanke’s ship is in “Irons” and until he figures out a Halyard from a Sheet, we will continue to flop around.

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Another Bank with their hand out!

This time Barclays (UK’s 4th largest bank) is looking for some coin. Selling about $8.9 billion in shares to Middle East investors (for the most part) should allow them to ride things out, for a while at least. Of course the spin (again) is the “Worst is behind us!” and the money raised gave the perception boost and the stock saw a big rally in London trading. Confused? Yeah, so am I. Like moths to a flame – I just don’t get it.

No doubt that all these banks will see a bottom and one day the “Worst WILL be behind them!”, but I think that will be predicated on their debt to capital on deposit ratio. I agree with Buffet, the continual use of Mark-to-Myth of illiquid assets and other liabilities so far has clearly shown they have NO CLUE as to the bottom. We are running out of CEOs to fire, now CFOs are getting the axe. Maybe it’s time to SELL those assets and write down the REAL losses. However, I feel for them – they CAN NOT sell them. There is NO ONE to buy them, or at least for the Mark-to-Myth values they believe them to be worth.

Citi is trying to unload almost $400 billion of this paper over the next 3 years. Good luck, it is like trying to sell Confederate dollars for face value – yeah right! I am surprised that we have not seen more Bear Stearns, however if the Fed had NOT opened the Discount Window to Investment Banks we might have seen MORE than one, possibly several.

Here is the rub, as I see it. A bank has $1 trillion on deposit (measureable by one of several M numbers), however they leverage that capital (via the carry, swaps, and other methods) to $10 trillion in OTC paper (not really measureable by M numbers). What happens when the bank takes losses of $1 trillion? Do they really have any money on deposit left, or are these based on Mark-to-Myth write-downs? Why do you think the EU and the FED has dumped $100s of billions into the market and opened the Discount Window to Investment banks? There is NOT enough money (even at the M3 level) to come even close to covering the leveraged positions. They need to hold these MASSIVE positions and can’t as they losses mount. They mark-to-market these paper losses to keep ANY capital on deposit. As long as we play this game we really do NOT know where the bottom is. It is a very serious problem.

Looking back, I believe Bernanke didn’t bailout Bear for the sake of Bear, he saw “behind the curtain” at the trillions of counter party trades on these massive leverage positions that would send a ripple across the entire global banking sector that COULD of collapsed the dollar! He had to do something. Now the FED is in the game and PUMPING massive amounts of money into the system to allow these banks to carry these massive positions, and these banks are “HOPING” to find a bottom in these illiquid positions and looking to unload them to SOME ONE. So far there is no one left to buy this junk.

Just like the housing market (and the JP Morgan story – when he went to the exchange and the shoe shine boy gave him a stock tip, he decided to sell everything before the crash, because if the shoe shine boy is giving you a stock tip there is no one left to buy), in the housing market when the guy working at Star Bucks is giving you real estate advice, who is left to buy? When my local hospital CFO is getting involved in the credit derivative market (because he thinks he understands arbitrage) there who is left to buy? I think CEO Pandit is finding this out - there are no more idiots left to buy that garbage mark-to-myth paper he is trying to sell. Except one – Bernanke!

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Durable Goods Orders Unchanged

Orders for durable goods remain unchanged in May – showing that companies are tightening up and battening down the hatches – expecting MORE slowdowns. The revised numbers showed a drop of 1$ in April, larger than previously estimated.

We are in a holding pattern, companies are holding on to capital and reducing liabilities, they are NOT buying and are trimming jobs. They too are not able to see the “How” or “What” will signal a bottom. I don’t think (as many analyst predict) that we can set a celestial date on when the economy turns around, something needs to change. This is not a cyclical thing!

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Futures Pre-Open

The futures are getting a pre-opening pop – expectations for a rates to remain the same? Who knows. At this point they are front running cash – expect a small pop at the opening if this remains.

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Support / Resistance

Ug – We are slopping around the bottoms right now. Some are calling it a bottom and looking for a rally. We may pop out of here, but that (in my book) is just a dead-cat bounce. I can’t get seriously behind anything without a good hard delta hedge.

INDU 11750 / 12250 (We are still above those ugly early year bottoms – and while we may bounce in the summer, I think we will not only revisit the 11750 area but we will break DOWN through it and find some new lows. Don’t ask me when, but it IS coming – I think this year.)

NDX 1900 / 1950 (Again hanging on by our nails. Where is that AAPL $10 euphoric rally when you need it? Oh, it already rallied 80 points in a couple of months. We can’t ask AAPL and Jobs to continue to hold up the entire market.)

SPX 1300 / 1350 (Yuck – we may yet hold 1300 and get a rally – but these are not the time for long (and wrong) investors to come stampeding in.)

RUT 700 / 720 (This was the WORST indication of a further drop. I could almost hear the SUCKING sound of money leave the market yesterday as the RUT was down 1.65% and broke down through 720. Will 700 hold, don’t bet the farm!)

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Conclusion

The dollar is seeing volatility in these levels – Bernanke has been playing the Bluff card and now he has been called. He is NOT going to raise rates (I would be shocked). If you didn’t buy gold, silver, Euros, Franks, etc. do it before he opens his mouth! I think the dollar confidence on a global stage is not seeing ANY signs of strengthening. Talk is cheap and it can give you a short-term rebound. I am SURE he will talk tough AGAIN after NOT raising rates – but I am not one to listen to the boy who cried wolf. If he talks TOUGH and the dollar rallies – time to start backing into inflation hedges AGAIN. Reload! Yeah – true – he may raise the target in Nov – but if the banks can NOT get a handle on their problems that is NOT going to happen.

Didn’t Kudlow tell us in January that the Fed SHOULD cut rates and that would SPUR the economy? That didn’t do any good. Now he is calling for the FED to raise rates and that should SPUR the economy? Kudlow needs to go back to Econ 101 and Cramer needs to revisit the loony farm.

Today should be fun for Traders and a nightmare whipsaw for investors – expect some volatility!