12/31/08 - (Happy New Year? How did we get here?)

Traders,

It’s New Year’s Eve – and I am sure many will want to say good-bye to 2008 and look forward to a promising 2009. Certainly – these are unprecedented times, what is even more difficult is trying to fore see the future. Traditionally – when the market hits a bump or the economy slows it is rather easy to point a finger at a certain sector that is creating the problem and how or what other sectors might absorb those losses. However, the credit crisis seems to affect every sector – and it is not just domestic – but also international.
Many blame capitalism or the free markets or the lack of regulations. It is easier to point at something to blame, than really trying to understand the problem or even accept liability for being part of the problem. I have spent many hours thinking about how we got here and where we are going – my conclusion is fairly simple and I am sure many of you will not agree with my assessment, but that’s ok. However, I only ask if you disagree and decide to tell me so in an email (which I seem to get more than my fair share) – please explain WHY, instead of just saying I am wrong. It’s easy to complain or tell people they are wrong, but I suggest you hold your tongue unless you want to offer your own solution or idea. I have a saying, “Don’t complain, unless you are willing to offer a solution (regardless of how crazy it sounds.)”
So let me take a stab at it… (from my very humble observation and reasoning).

1. Leverage – we (collectively – business and individuals) have been allowed to take too much leverage. Leverage comes in all forums – credit cards, auto loans, home loans, margin accounts, carry trade, etc. If we look at the balance sheet of a typical bank – they are anywhere between 4:1 to 20:1 leverage (debt). The bank’s loan money for people to buy things, money they might not have – so they too borrow. If we look at the average consumer in this country, they have a more debt on their credit cards vs. savings, in fact savings has gone negative. Who are we to blame for all this? Well – on some levels – we have to take accountability for our own debt (credit cards, home loans, auto loans, etc.) – No one forced us to borrow money, we did for whatever reason (keeping up with the Jones, greed, need, etc.). Sure some people have emailed (and others will) that people needed to borrow to buy food and medical needs. Sure that is true – but nothing to the extent to explain the trillions in consumer debt. No doubt there are families struggling to put food on the table and have gone into debt doing so – but I would wager that percentage is insignificant as to the net consumer debt as a whole. Companies as well (not just banks) continue to do the same – it can be easily seen in corporate bonds and over-night lending. Expanding to fast, booking future sales, etc. Those companies (and the CFOs) again have to take responsibility and accountability – not blame market conditions for their lot in life. They took on massive debt and didn’t plan for a slow down – that is just a failure in risk management. That covers consumers and business, but what about our government? They are the worst of all – as leaders of this country they have lead us down the path through policy and their own practices – increase debt and continue to deficit spend. Sure if you are a Republican or Democrat you are probably able to justify spending based on whatever your platform is – support our troops, need for social services, etc. Any Republican or Democrat can find an excuse to spend money – however neither of them have found a reason to CUT spending, to save, or even TRY and pay off the debt. Pork barrel and ear marks are added right under our nose (with the TARP bailout) and no one – NO ONE cries foul! Even our new President, when pressed on the issue in the debate stated, “It is only 1% of the budget deficit!” – note it was budget DEFICIT – guess what we DON’T HAVE the money to spend on PORK! It’s like a CFO of the company saying – “it’s OK to buy that $10 million private jet because it is only 1% of the corporate debt”, or for that wife to say, “It’s ok – the shoes only cost $200!” – while the family has $50,000 of debt. It’s not ok! When does the debt get paid. I recently sent a paper about the US Dollar and the economy by Morgan Stanley – one of the factors why we should be OK going forward was titled: ““Unlike individuals, large countries like the US need not ever fully pay down their debt.” – are you kidding me. They went on to justify this by saying, “Debt service is considered sustainable as long as the real growth rate of the economy (g) is above the real interest rate (r) paid on the debt, i.e., as long as g > r over time, the public debt should be considered sustainable.” – Need I point out the economy (GDP) grows because 2/3rds of the growth is measured by consumer spending, thus in order for it to grow consumers need to continue to spend at accelerated rates, which means the debt needs to grow. The formula in my book is unsustainable and THAT is what is happening. The leverage (DEBT) is being called in and NO ONE has any money to pay it! It is that simple! The government is printing money to keep companies and the lenders in business – to continue to lend. The government must of read Morgan Stanley’s paper – because they are justifying the system of massive leverage. It’s not capitalism, it’s leveraged debt!

2. Regulation – we don’t necessarily need MORE regulation, we need ENFORCEMENT of existing regulation. As those had started predicting the economic storm coming and we even became well aware of it by mid 2007 – Congress did NOTHING. Barney Frank (head of Finance) – continued to blame people, however he failed to lead. He didn’t want to change anything – because he didn’t know what to change. He sat there and let things unfold. It wasn’t until January 2008 that Barney (along with his supporters) came up with the brilliant idea that Freddie and Fannie could BUY down all the toxic sub-prime paper if he allowed Freddie and Fannie to INCREASE their leverage (which was the exact problem that got us here). They increased it to 60:1 and even more. He was warned that shifting risk from one bank over to Freddie and Fannie doesn’t eliminate the rsik – but he was under the belief like others that Freddie and Fannie were actually BACKED by Congress – they are not – but that assumption became a self fore filling prophecy – they both went under and were taken over. Chris Dodd (head of Banking) was on the same finger pointing streak. As the leader of the Banking committee – he didn’t enforce anything and continue to let things slide. Again – what to do? – How about leading, but leading also means taking sometimes an unpopular decision and pissing off the very companies that helped put a politician in office. Too many politicians (on both sides of the aisle) are afraid to stand up to companies or lobbyist that promise re-elections and money for their community. It wasn’t that we didn’t have regulation – it was regulation was not enforced, not even at other government agencies. FDIC continued to maintain the very bare minimums on their balance sheet – the ratio of capital vs. insured was ridiculous and in the private sector would never be allowed to happen. Again – no enforcement – and too much back scratching. It’s not Bush to blame, and will not be Obama to blame in the future – but it is our Congress (both Republicans and Democrats) that draft legislation, add pork, deal daily with lobbyist, and continue to manage this country. In my opinion we spent too much time hating Bush and loving Obama – thus taking our collective eye off the ball as to our Senate and Congress – which have run amok!


3. Policy – the enforcement or lack of enforcement of our regulations is based on policies. Under both Clinton and Bush (note this is not a Republican or Democrat thing – but rather a big government thing) – the belief that home ownership should be a right for all Americans – became the agenda. Freddie and Fannie – lending standards continued to drop – thus this policy was encouraged by other mortgage companies (who sell them back to Freddie and Fannie). The government didn’t care about what people could afford or what they couldn’t – it wasn’t about affordability it was about making home ownership a RIGHT (regardless of the ability to pay). I constantly heard from others who blamed Greenspan for the housing problem. While I might not like all of Greenspan’s policies – I am certainly not going to blame him for the housing problem. Usually the argument goes like this – Greenspan lowered rates to 1% which spurred the housing boom. I then usually counter with the question – what were mortgage rates before he lowered interest rates from 6 to 1%? They usually don’t know. I decided to do some research – what is interesting to note is that the fixed (traditional) mortgage rates remained between 6-8% from the time he lowered rates from 6 to 1% and guess what when he raised them back up to 6% they stayed the same. The data clearly shows that the target rate and mortgage rates have almost no correlation. I then ask – what about Bernanke he just lowered rates from 6% to 0% - where are mortgages? They (until recently – which they came down to 5%) remained at 6% for more than a year – in fact when he was cutting them they actually went higher. Again – no correlation. Please feel free to disagree with Greenspan’s monetary policy (I have no issue with that) – but to blame him for the housing boom and bust is silly. So what did happen, the lenders realized people could NOT afford traditional mortgages (since the rates didn’t really come down) – we started to see all kinds of fancy mortgage systems, like no money down, interest only, option arms, inverted mortgages, etc. You name it – someone came up with it. People wanted to buy a home and by god - we will find away to sell it to them. It was stupidity and greed on both parts – the lender and the buyer. The government stood right behind it and encouraged the policy – especially via Freddie and Fannie (the two largest holders of these crazy mortgages). Now as the bottom falls out – it is everyone’s fault but their own. It was bad policy, which disregarded traditional methods and regulation became slack. It is important to note that Freddie and Fannie (both Congress mandated and now owned by our government) were also some of the biggest lobbyist in DC. The money they gave to our politicians is massive – our politicians got paid to slack the regulations, lower the lending standards, and encourage stupidity – because everyone was spending and we could point to the GDP and consumer spending that the economy was great - who cared if it was based of deficit spending.


So that’s it – deleveraging, the lack of enforced regulation, and a policy that encouraged the whole thing. We are ALL responsible, accountable, and SHOLD be liable for it. But our government has NOT learned that lesson – they don’t want anyone to fail – so instead they will assume all the debt and risk – simply because they can – because they own the printing presses – and they believe (like the Morgan quote) = “Unlike individuals, large countries like the US need not ever fully pay down their debt.” = so when our taxes hit 40%, 50%, 70% (like during the New Deal Depression era) and/or we see excise taxes or a collapse in the dollar. You can explain to your kids and grandkids why THEY are paying for our screw up.

That is, again in my humble opinion, the nutshell of this fine mess we are in.

What does 2009 bring – the only answer I can give is more volatility and uncertainty. For until I can see the fundamental bottom (without government intervention) – I can’t openly justify getting “naked” long equities. For any long position in the coming days MUST BE HEDGED – at all costs.


Go out tonight – enjoy the New Year.

We have a lot of road bumps ahead and lots of uncertainty. Stay hedged!

12/30/08 (Retail Fails, Gaza!, Nothing is wrong?)

Traders,

We did see some volatility intra-day yesterday, the market pulled off – but at the close moved back up. It was interesting to note that the RUT stayed off and closed in on that pivot point of the 450 line, while the other narrower based indices rallied into the close. I would concluded that the broader market didn’t get the strong drive at the close that some individual stocks did, that may have been over weighted in the narrower based indices.

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Retail Sales

As expected the retail sales numbers from the holiday shopping are down. As I had reported – my limited local observation was that the shops had placed fairly steep discounts (compared to previous years) to hopefully bring in buyers. I even did the “mall walk” the last Sunday before X-mass and it did seem rather slow. Granted – Sarasota makes for a very small statistical sample – but combine that with what has been reported on CNBC and Bloomberg – it wasn’t very hard to make a general observation – sales are going to fall across the board.
International Council of Shopping Centers and Goldman Sachs reported today that sales at stores (opened at least one year) fell 1.8% in the seven days through Dec. 27th. They had projected a 1% fall – thus it came in lower than expected. The reports says that consumers spent 20% less on women’s clothing, electronics and jewelry in Nov and Dec – which pressured the larger chains to mark down items heading into X-mass and even more (up to 70%) post X-mass sales. Expectations are for even lower 4th quarter profits.
Additionally, Bloomberg is reporting pressure between the retailers and vendors. Liz Claiborne and others are putting pressure on Macy’s, Saks, and others for offering such steep discounts and are asking the retailers for concessions. This could create fall-out in the 4th quarter not just from the retailers – but trickling down to the vendors themselves.

Bloomberg story: http://www.bloomberg.com/apps/news?pid=20601087&sid=aOtsFfDOlY6k&refer=home

It’s not time to seek value in retailers or vendors!

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GAZA heats up

While GAZA is not in an oil rich area – it is surrounded by oil rich countries that are sympathetic to the Palestinians plight. This preview is not even going to attempt a discourse in the political arena of who’s right or wrong (I certainly am not that well informed) – however what I can tell you is that this has been a traditional hot bed of conflict and both oil exports as well as other industries in the region have seen fallout from the conflict.
What does this mean for market conditions? Well we saw oil make a solid two day run up to $40 – it did pull off again in the early session it’s back down to the $39 level. News is coming out that the defense minister of Israel that a ground campaign maybe in order. There is a big difference between flying air sorties and making a ground commitment. Once tanks roll – the conflict is not only escalated but it also unfortunately it is prolonged.
Expect to see more volatility enter into the energy sector (oil) – we could start to see a run of oil futures (further out) – as the energy consumption industries continue to buy in the cheaper spot market, but hedge themselves in farther out oil contracts in case things do fall out. Additionally – Middle East policy is up in the air right now as we await President Obama to take the stage and bring forth his agenda. Expect volatility.

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Futures Pre-market

The futures are up in the pre-market – enough to create a slight arb. Expect a small pop in the cash basket at the opening.

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Support / Resistance

We continue to be stuck at the pivot points – awaiting something to drive us higher or lower. Expect nothing and everything!

INDU 8000 (8500) 9000

NDX 1100 / 1200-1250

SPX 800 (850) 900

RUT 400 (450) 500

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Conclusion

We seem to sit in a holding pattern, holiday sales are looking worse than expected (even though all the data has not come out yet) – there also seems to be some trickle down to the vendor level (as inventory at the retail side remains high – additional new inventory demand will fall off, at least through the 1st quarter). The same is happening across the board in the auto industry.
GMAC got their wish, became a bank, and yeah – got $6 billion. Not only did GMAC become a bank, but also GM is on the bailout train. It makes me want to puke – our government on this bailout train not letting ANYONE fail, what does that mean for our future, our children’s future? What about the nation debt, deficit spending – which I think as this continues the fall out to the dollar is just building up. That is the next bubble.
What makes me even more ill, is that smarter people than me don’t see any problem with this. As per a statement from Morgan Stanley – “…we believe that US fiscal sustainability has not been significantly compromised by the recent operations…” - they must know something I don’t – I just can’t swallow that idea.

12/29/08 (Gaza awakes, China money, waiting.)

Traders,

Friday – the light volume day – was pretty flat across the board, which help lead to a relax weekend – for once it seemed. Maybe that was Santa’s gift (no surprises). The economy seemed to have paused over the holidays – absorb the impacts from the weeks of negative broadsides – we wait – and dare I say, hope.
For those following the new entrance on the political seen in the coming months, the new improved stimulus package seems to be getting all the media attention – up to over $800 billion now and new programs are in the early planning stages. I have heard the term “shovel ready” – all too many times. Which leads me more than a little concerned. Now doubt, Obama has serious challenges ahead – he is a very smart guy and seems to be aligning himself and taking meetings with several people that have a keen insight – however he is also being seriously tugged by his party members who rule the roost over at Congress. Only time will tell – if he is able to beat to his own drum or if party politics play a bigger part in his agenda.

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Gaza – never sleeps

If Obama didn’t have enough to deal with coming into office next month, add on an increase conflict in the Gaza strip which has the Israelis mustering their tank divisions into the neighborhood – well it is sure injecting some instability into both the political scene and the oil scene. While Gaza is not a center for petroleum production it is close enough by – enough so – to inject a second day of shocks to oil prices which had seen some serious lows.
From an interesting discussion I had a few weeks ago – major companies that have held larger than normal oil futures (for delivery) will start coming due by the end of next quarter (1st quarter). Depending on the “risk assessment” of these firms – we could see the major oil consumption companies begin hedging with future contracts again come late 1st quarter of 2009.
If this conflict is any indication of the level of concern vs. current future holdings – well – we may see early and more hedging – instead of hoping the spot market remains low. It would stand to reason that the major players are not totally reliant on spot prices – as the future contracts further out have still been trading with a rather steeper premium than normal.
Maybe the philosophy is “buy what we need in the spot as it is cheap, but keep future inventories higher than normal.”

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China – our prime lender

As Obama is planning his $800 billion plus stimulus package and New New Deal “Shovel Ready” plans – the debt it will create is enormous and the current trade balance (and other sources of income will not make up for it) – the need for China’s money to buy our Treasuries (the current largest buyer) is a need we can’t dismiss. However – China is getting a short changed deal. Why would anyone want to buy treasuries as interest rates are lower and the risk of the currency exchange rates and increase debt behind the currency sky rockets? China is also not happy with the number one consumer nation not buying as many tube socks and Elmo’s as they once did. With trade revenue down and now the world’s reserve currency seriously on the rocks – the relationship between China and the US is about to seriously heat up.
Our current Congress agenda is not showing any signs of favors and will no doubt do some serious finger pointing at China (as many of the existing members have done in recent years). They had pressured China to not PEG their currency (YUAN) to the dollar (claiming unfair price competition – we call it protectionism) – since then it has climbed 21% against the dollar. While some may say cheer to that notion - as those companies that export do better and imports suffer – the double edge sword is that it hurts the national debt, which for some strange reason our government doesn’t seem to care too much about.
Congress is looking to push forward a very HARD line trade approach with China – as protectionist policies come to the surface as the economy suffers. China which already feels they have been getting bullied by the Bush Administration – is about to seriously face a big stand-off with the next administration. How much will Congress push? Will Obama follow party lines or play good cop? We could be facing some serious economic policy shifts with China. The problem is that when looking at the math – you don’t really want to piss off the largest credit line this country has ever seen. Additionally – they may be the only credit line to continue to float this country as we print more paper and create more debt. I hope Congress wakes up to that fact before they put too big of a foot in their mouth – which could cause an economic storm that would make the housing and credit crisis look like a cloudy day.
Keep your eyes on this ECONOMIC relationship – it’s very important. Whether you like China or not – they are the one that is floating the government’s credit line right now and we hope they do in the future.

More on this at Bloomberg: http://www.bloomberg.com/apps/news?pid=20601109&sid=ai3pbN.JY7tY&refer=home
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Futures Pre-market

The futures were down, then up, and then backed off to even again. Expect some volatility and light volume – this is still a holiday week for the most part.

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Support / Resistance

Seems like the pivot points are ruling the day as we try to determine which way is up going forward.

INDU 8000 (8500) 9000

NDX 1100 / 1200-1250

SPX 800 (850) 900

RUT 400 (450) 500

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Conclusion

2009 will be interesting – economic storm, oil price uncertainty, a serious change in government policy and agendas, dollar risk, China, debt, and a long list of new reforms. It’s time we need some of it – certainly not all of it. We will get through it – for sure – that is not the question. We should be asking ourselves how long and how bumpy.

Keep your chin up.

12/26/08 (After X-mass ???)

Traders,

No time for long winded reports or rants today.

X-mass sales were reported this morning on Bloomberg down 20-30% depending on sector (the biggest drop in several decades). After X-mass sales seem to be a little better. Good news – is that oil prices coming off from their highs means about 300-400 billion more capital in this country – the drop at the gas pumps is like a massive tax cut or stimulus check (more money in the wallet and less in the gas tank – means more to save, or unfortunately spend)

GMAC – is now a bank – I am surprised they made the cut. This will give them access to both the TARP and the Discount Window. They have no excuse now to clean up their books and dump bad debt on the government (I really can’t believe I just said that).

While the brick-n-mortar stores saw some serious draw downs – AMAZON performed favorable well. Their sales had been up with last minute buying. The ease of Amazon become more and more a staple method for shopping during the holidays (they handle gift wrapping and gift card, shipping, and the prices are hard to beat.) the question is are they actually increasing holiday sales (as net growth in consumer spending) or really just stealing customers from the traditional stores? This year the answer is clear – they are acquiring more customers from traditional stores, since net sales have been down.

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Futures Premarket

Futures are slightly up on this very low volume day – I heard some people had a hard time getting into the trading floors – because of weather conditions.

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Support / Resistance

INDU sitting at 8500 pivot level
NDX between the 1100 – 1200 level
SPX sitting at the 850 pivot level
RUT just above the 450 pivot level, below 500 resistance

I don’t expect really anything today.

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Conclusion

Looks like a difficult road ahead – the oil prices coming off have probably done the most to HELP holiday sales than anything else. Imagine gas was still at $4 a gallon – I think the holiday sales would of looked incredible worst. It is questionable if they will manage to keep oil spot prices this low – the future prices are still relatively high in comparison. Oil could hit the $30 mark, even if OPEC decides to cut. The problem – OPEC members might rebel because their own nations are hurting and they may continue to sell to keep much needed cash flow pouring in – regardless of what the cartel says.

Enjoy the shopping day – I am sure there are some fantastic deals out there.

12/24/08 (X-mass Eve and Tenacity)

Traders,

A negative, light volume, and low volatility. The VIX is well below 50 level – something I was slightly surprised to see after recent events and thought it would of remained above it – but we are seeing some consolidation around those pivot levels and nothing is really jolting us out of this band.

The news yesterday of Belgium’s government effectively giving up – and now the Monarchy is working with a “team” to draft the next government – is very shocking indeed. Two small, yet prominent countries have failed – Iceland and now Belgium. However – pay them no mind – we are not them (or many like to believe those are isolated incidents). Remember we only had one mortgage company fail (oh wait – there were 100s), we only had one investment bank fail (oh wait – there were others), etc. I think you get the point. It’s best that we pay attention – regardless if you have ever visited Belgium or had an account with Lehman. These are our times – to ignore them is folly. Just like my saying about math, “You can ignore math, you just can’t avoid math.” – what was it my history teacher always said – “History is doomed to repeat itself.” Maybe not exactly – but we are seeing signs of the boom of the 1920s turn into the depression of the 1930s. We are seeing a new administration push out an old guard Hover type administration and welcome New Deal or should I say “Shovel Ready” plans. Even our Fed chairman is a great study of the Depression – already walking in histories footsteps – yet has he forgotten what he has studied, is it really different?

I think it time we all crack open our history books to see what had happen, what might happen, what to expect, and what to plan for. Sure – it is very true we may dodge a bullet – I am not wise enough to fore see that we can or cannot. However – shouldn’t it be best to be prepared, to know, even to want to know, and what to plan for? Or should we – like most – just bury our head in the sand?

I am criticized for calling the masses asses or using the term sheeple all too often (by several people – not just friends, but strangers alike) – but I ask them not to look to far and see the results of where we have come, our next generation, our knowledge, our wisdom in a collective fashion. I certainly not calling YOU a sheeple – at least if you are reading this you find something of interest in what I have to say – maybe even if you don’t agree with me – I have inspired you to take interest in the events (economy) of our time to learn about it. Sometimes my heavy sarcasm, wit, or rant (if you will) come off hard – why – well I want to piss you off, shake you, wake you up, smack you in the face. I don’t want you to blanketly agree with me – I want you to get mad with my words and challenge yourself to look around, take notice, investigate, become engaged! To “nod” in agreement with me – is nothing more that to “nod” in agreement with what the NYT, FOX, CNN, or any other person has to say – please START asking yourself, others, anyone – questions. What happen to the question WHY? Or HOW? – and WHERE are we going?

To long have we accepted government data and talking heads as gospel. What happened to investigative journalism? FOX, CNN, MSNBC have turned into Left and Right mirrors of each other – very silly flashy editorials and not journalism. The only difference between Colbert, O’Reilly, and Obermann is that Colbert is actually funny – while the other two are rather sad. No Spin – please, Countdown – I am surprised he can even count. Even Mathews – has started playing Softball as to not bruise anyone. It’s not healthy debate of the Right and left, rather it is puff and fluff. Healthy debate is good – but these folks wouldn’t know a debate if it slapped them on the face. Where was investigative journalism with the Administration, Congress, Banks, Mortgages, or any news that has been reported? It’s like the news agencies wait for something to unfold and then in glitzy style – turn it into a show. From court cases to reality TV.

We have become the masses of assess – probably not by choice – but because that is what we are feed. Deep Throat told Woodward in that parking garage 30 years ago “Follow the money!” – that statement was the major and only lead he would give that cracked the Watergate story. However, I would argue that statement is true for anything. Reality TV – follow the money. Cell phones – follow the money. Face Book – follow the money. Why anything move – follow the money. It’s about money – what will the consumer consume and then when we find that juicy morsel of addiction we are going to ram it down their throats in all direction and when we really want to increase our foot print we will smatter the airwaves with more sexy ads for the consumer to consume more.

This wake-up call (or rant) comes full circle. We consume – we are breed by society to consume – our GDP is 2/3rd measure by consumption – the wheels turn because of consumption. But to feed that consumption we must create more than just EARNED INCOME – we must create debt and lots of it to keep the consumption growing. For if we can’t not continue to increase consumption the society will die (or flat-line) – or so we are told and lead to believe.

Even our government, not only leading by example, but through policies and encouragement – expanded the debt. They are continuing to do so. For they do NOT see the system as broken but just deflated and they now want to pump it back up and kept that debt spending alive. Bailout this, bailout that, stimulus this, stimulus that. New Deal this, New Deal that. The government’s role has turned from governing the people to managing business and intervention. However – they do NOT see the business model broken – the proof is their bailout plan – they just want to keep the train going and shovel the debt onto the next generation – who has NO CLUE what is coming.

So I end with this on this X-mass eve. I am not trying to be pessimistic, but rather a realist. Only you know what is best for you and your future – not the government or someone else. X-mass has been turned into a CONSUMER HOLIDAY. Have we forgotten about the MEANING of X-mass? These are NOT the times about gifts, but the time to celebrate health, family, friends. Whether you are a Christian or not – this eve should be a celebration regardless of the state of the economy – for we should not gauge a man or women but what they have, but who they are. Cast a side materialistic wealth this evening – embrace life and the experience of life and the ability to share it with friends and family.

And I believe – with all our faults – that human nature is tenacious and we will survive and move forward – regardless if we learn from it or not.

I will leave you with a quote, which I use to hang on my door when I worked several jobs just to make the rent. It was this quote I read as I left my apartment every day, that pushed me on those days when I didn’t want to move forward. And it is this quote that confirms to me that we will move through this tough time for a better tomorrow.

“Nothing in this world can take the place of persistence. Talent will not; nothing is more common than unsuccessful people with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. The slogan "press on" has solved and always will solve the problems of the human race”

-Calvin Coolidge


Merry Christmas and Happy Holidays.

12/23/08 (GM - the future?)

Traders,


Well – light volume and a little uncertainty has kept the Santa Claus rally from coming (so far). We moved backed slightly to those pivot levels and continue to see mixed action in the market. Remember – these are very light volume times – so we may or may not see anything from happening. With liquidity on the light side in uncertain times – it only takes a big chip stack to push a stock up or down very quickly (thus injecting some serious volatility)>


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GM - the future and the value.

There are several ways to tell if a company is doing well – and guess what (none of them are the stock price). That may shock you that I say that, but in my very humble opinion – the stock price provides only two things, the “perceived value” and method to participate in the profit/loss of a company. We buy/sell (or short) stocks based on OUR best assessment of the company vs. the value of the stock price. Remember, just because a stock price is very low – doesn’t mean it is cheap. Value and stock price are two different things. When you purchase a stock you believe the stock price is UNDER value compared to the current (and future) assessed value of the actual company.

So how to tell the actual value of a company? Well – look at the books (10k/10q filings) – this will tell you the revenue, debt, margins, tax, etc. That is what the analyst do – they review this stuff in detail and compare that information to the value of the stock – thus they draw a conclusion – the stock price is undervalued, in-line, or overvalued compared to how the company is actually doing. The Greenlight Capital Hedge fund’s model does this – in fact David Enihorn wrote a very interesting book about the process and how things can go wrong (I suggest reading it) – it is called “Fooling Some of the People All of the Time.”

The second method is not as direct, but it gives us an indication to the actual credit worthiness of the stock. It is the debt that is traded on the company. Many companies issue out all sort of bonds (from convertible – being paid back in stock, to ones that actually pay out cash) – there are all different types of bonds – but they do have one thing in common, the rate of return (interest rate). The function of interest rate traditionally (I say traditionally – because these days interest rates, if measured by what the government is doing makes little sense) – goes up when there is more risk to the underlying or default and come down when the underlying is stable. Just like you and me when we apply for a loan, credit card, etc. The better our credit score the lower the interest rate. Well the same holds true for companies, can they pay it back, do they have default risk, how is the company doing, will they be able to pay in the future, etc? Suffice to say we can make a judgment about the future of the company based on how it’s debt is trading – the higher the interest rates – the more risk of not getting paid back. As you can see the interest rate (in this case) is directly proportional to the risk of the debtor paying it back. (Unlike the target and the discount rate set by the Fed – so try not to make a comparison).

So how does this all affect GM? Well the stock is trading in the mid-low $3 range, it would SEEM cheap if we only value the company’s stock price vs. brand name. We also know from analyst that reviewed the 10k/10q filings the company’s books show lots of debt, shrinking (even negative) margins, and some serious problems. We actually don’t need the analyst to tell us that – the companies are telling us that by asking for bailout money. But now something interesting has happened, the government is injecting large sums of money. That makes analyzing the books and the business model difficult – very difficult. On several fronts – do they have enough to pay off the debts, are they fixing problems with the business plan, can they get back to break-even or profitability. It starts becoming very subjective. So the next place we can look is the debt itself and the interest rates (as to if they are expanding, contracting, or remaining the same)

The company got the money, but the credit-default swaps (the bet that they will fail to pay back their debt) started to increase. They jumped 2 percentage points. That clearly shows that the debt holder either thinks the government’s loan is not enough, it was too late, or that the business plan is still doomed to failure. The credit rating agency – looks at the books and the bonds (since it is part of the balance sheet) – they certainly can’t help but notice the increase in the credit-default swaps. That is always an age old question in the financial markets – does the ratings cut come first or the credit-default swaps increase first? I would say on any given day it depends – those more in tuned with what the company’s balance sheet and risk look like my trade the credit-default swaps first, the company that is not being scrutinized by the traders might react to the rate cut.

In this case – GM is under the microscope – I would say the credit-default swaps increase is not JUST predicated on a rating – but on the convoluted ability to pay back their debt and government debt. Add in another dark horse in this race – a change in the administration – we really don’t know what is in store for GM.

The Credit-default swaps rose 2% to 81% , in addition to the 5% a year. Bloomberg spells it out clearly – it costs $8.1 million initially and $500,000 a year to protect $10 million of GM bonds for 5 years. Tell me how that works out? The insurance costs MORE than the actual debt – if that doesn’t explain the assume risk of the debt – I don’t know what does. Pretty much the insurance (the credit-default swaps) are saying there is a very good chance that GM is going to file bankruptcy and not only wipe out the shareholders but also the debt holders.

Should you buy GM – I certainly wouldn’t. These are very questionable times – sure the government could continue to dump money into them, but how much and for how long? Could they become another AIG, Freddie, or Fannie – certainly – but how does the investor benefit?

Bloomberg http://www.bloomberg.com/apps/news?pid=20601087&sid=aX0LE04twYco&refer=home
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Futures Pre-market

The futures are a little mixed at the opening – the contraction of the economic news – what is going on in GM – and the light trading session is contributing to a little volatility in the morning – for the most part they are all below fair value.

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Support / Resistance

What can I say – it seems that pivot points are the magnet – FOR NOW – until they are not.

INDU 8000 (8500) 9000 (Right there – where too – who knows)

NDX 1100 / 1200-1250 (We fell just below the 1200 upper resistance band – are we heading towards the 1100 level?)

SPX 800 (850) 900 (Falling towards that 850 pivot level)

RUT 400 (450) 500 (Falling towards that 450 pivot level)

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Conclusion

Was at the Mall on Sunday – (again my small sampling and observation reflected the following) – the Sunday before X-mass, VERY LOW TRAFFIC. Also I walked into EVERY big store and by every store to take note. Sears had 50% RED tags and Yellow Clearance signs everywhere, Macy’s the same (but very low key – there marketing is different). It would stand to reason those same sales are in every mall in the US (especially if Sarasota is in one of the highest tax bracket areas) – additionally I asked myself – what would After X-mass sales look like? I have also been keeping track of 3 LCD TV prices at Wal-mart. They came down 20% at Thanksgiving – breaking the $1,000 barrier. Last weekend they came off another 10% - all of them are below or right at the $900 mark. Those are pretty steep cuts compared to last year.

Of course my sampling is very small, and thus I accept my error rate is fairly high. However – it would stand to reason that if the cuts at my mall and Wal-mart TVs in a higher tax bracket city are very real – that same thing is very likely to be happening across the entire country. Granted some areas are better or worse than others. That being said – I think the stores are feeling the consumers are pinched for credit – I don’t think we are going to see very good X-mass sales – I personally would be surprised if we did. Now is not a time to get long retail - in my very humble opinion.

12/22/08 (Observe and Reason)

Traders,

Well last Friday seem like a non-event for the most part. The volatility has additionally started to pull off as implied volatilities begin to move towards statistical. This is not to say that implied are wrong, certainly we can see an increase as any jolt of news could come and send us up or down, however we are in the middle of the Holiday Season and volume has started to drop off. The talk on the airwaves – is about a possible Santa Claus rally, it still could happen – but it not something I would personally place much stock in – in so far as it would be based on light volume and limited perception.
I did get some feedback last week on my observations about what is going on – as per the “man in the street”. One email was very interesting in that they had been measuring the foreclosure sales vs. the amount of 2nd mortgage and equity loan failures. What they noticed was an increase in the percentage amount of the 2nd failure as to the net amount of the loan. Here is a couple of interesting notes, 2nd mortgages (or secondary debt) returned less than 5%, with the vast majority failing. Another email I received was tracking retail rental space vacancy, vs. taxes, vs. avg mortgages, vs. avg. rent per square foot. The conclusion was also fairly negative. Of course these are more local instances in respected areas of the country – but it stands to reason that the events are happening likewise throughout the country to different degrees. The point is that we are all scientist, whether we know it or not. We shop for better price, we observe our neighbors, we adjust travel times, etc. We make informed (or ill-informed) decisions because of our experiences. While some may argue the results – the method has been around with us since man started understanding cause and effect. Those that became famous put it to paper and reasoned the world around us.
I recently received a great book (just finished) called Freakenomics – I highly recommend reading it. The conclusions would seem obvious in several cases – if we just open our eyes. The problem is that instead of seeing, we have become reliant on other peoples data to tell us what is going on, like PPI or CPI, the problem with that data is that it’s methods have changed from administration to administration – so that any year-over-year measurement becomes difficult to analyze. Additionally – the majority of the people that rely on that data, have not even done the math themselves and blindly trust it is correct. The man on the street may feel something completely different – than what the government data is reporting. I would argue that making a detailed observation of the world around you will give better resolution as to the current and future economic landscape than relying on government data, who’s data is historical and methods are consistently evolving. Even the Nobel Prize for Economics, Dr. Granger (after reading my rudimentary essay) said: “What is certainly true, as you point out, is that it is not very helpful if the definition keeps changing. By all means let there be an official value but what the value would have been under previous definitions should always be made available. It is the decision not to do this were political manipulation occurs.” – It doesn’t take an Nobel Prize winner to figure that out – but it sure does help to know if you on the right track if he confirms it.

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China cutting rates fast.

China is cutting interest rates again, 5th time in 3 months, to 5.31%. Most of it stems from the growth slowdown of exports as both the U.S. and Japan are hit by a recession. They additionally are adding a rather large surplus to spur growth domestically as foreign trade declines. However, China has more room to play than others (especially Japan). They are still in a growth rate – regardless of the contraction – as many move from rural areas to manufacturing and service urban areas – thus needing to purchase necessities. However – the larger manufactures which rely on net export sales rather than domestic are seriously hurting some areas – were layoffs are occurring. China is a perplexing problem, since they are going through several different expansions at the same time – tack on that population size and it makes it very difficult to get detailed resolution as to what is succeeding and what is failing.
Certainly export sales are going to hurt, but what of domestic sales? I think we are going to see a mixed economy in China – depending – it will certainly be sector driven. China’s government however is expecting a worst case scenario and tend to be more pessimistic in nature.

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Futures Pre-market

Futures are a little mixed in the pre-market, they were up and then came back off. This is a light volume week, so unless there is a significant spread to fair value – don’t expect much action from the Arb traders – spread is as important as liquidity – never forget that!

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Support / Resistance

We are at or near pivot levels – it’s anyone’s guess as to the move – since price will be driven by light volume.

INDU 8000 (8500) 9000 (We are just above the pivot point and can move higher – if Santa is coming to town.)

NDX 1100 / 1200-1250 (We are still in the resistance band – near the lower range.)

SPX 800 (850) 900 (Again at the pivot point)

RUT 400 (450) 500 (This managed to hold a little better compared to the narrower indices – could it pull the rest higher? Who’s to say)

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Conclusion

These are the times to sit tight, hedge those deltas, and not take a big stance going into the New Year – you may miss out on a Santa Clause rally – if you’re an investor – but so what. 2008 has been about principal protection – not trying to hit one out of the park. Spend some time with family and friends over the holiday. The economy (good, bad, and indifferent) will be here – if your hedged, plan on making this an easy week. Keep it simple.

12/19/08 (GM get's a X-mass present?)

Traders,

Sell off back to those pivot levels is more proof that regardless of what our government officials do the reality is that leverage (and the unwinding of that leverage) is what is really driving the economy. Additionally we have seen huge volatility in the currency markets – enough so that Japan (being the KING of the CARRY TRADE) – is very VERY concern – as the dollar continues its move. The concern about volatility in the currency markets (something we should all pay attention too) is that it brings volatility to the entire economic system – since we now live in the global market – trade, exporters, importers, commodities, debt, interest, etc. is all greatly affected by currencies and thus the more volatility in currencies the more difficult it is to stabilize our own economy.
I have received more FDR (NEW DEAL) emails – from supporters of such an endeavor. Regardless if you support New Deal programs or not – there is a piece of the puzzle that has SERIOUSLY changed since FDR’s time. Again – this is not to debate politics or TRY to convince you that NEW DEAL programs are good or bad (by now you know my stance). The big piece of the puzzle that has changed from FDR to Obama – is the economic strings (or relationships). During the FDR administration we were a net EXPORT nation – additionally we had our OWN food and natural resources we relied on. You could say (compared to today) we were a isolated island that was to some extent self reliant. This made it easier for FDR – because he didn’t have to rely on the SPR (strategic petroleum reserve) as it’s back up source of energy, or food from overseas, or the commodities in which to build all the New Deal projects – it was a serious advantage to FDR because it was an easier math problem for him to solve because that variable was quantifiable and very measureable. Additionally the currencies were not wrapped up in leveraged in LIBOR and foreign markets. Today Obama faces (granted) similar situations that FDR faced – however we are a net IMPORTER – a consumer of goods, both durable and raw material. Additionally our currency is no longer backed by any intrinsic value but rather a surrogate for barter, in which faith is paramount. That leaves the question – whether you support FDR New Deal policies or not – the outcome may be drastically different and the equation is definitely more vague as to the outcome. I sure don’t envy Obama (or any politician) in today’s economy. Just food for thought.

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GM and Chrysler (it’s midnight)!

The CEO’s as if eager children await Bush (Santa) to float them their money. Bush plans to announce his plan at 9am today in Washington. He has hinted that he will be giving them the money they have asked for – if we are to interpret his statements correctly. The question are what and if there are strings attached. The problem with our government (all parties) is that they make an agreement (legislation) – they all vote for it and then – they don’t honor it. What is the point - it’s as if they are just shooting from the hip and hope to hit something. The TARP has turned into everything it wasn’t supposed to be and now we have set a standard that money is money and we can and will bailout who we decide on any given day to bailout. Certainly the situation is not getting better, but worse. If GM and Chrysler (note a private company) get money – who’s next , Wall-mart? The same argument could be made for Wall-mart – they are the world’s largest employee – if they fall on tough times do we give them money too. What about farmers, oh wait they already get subsidies.
Expect to see a pop in these companies as the euphoric lemmings run to companies with failed business models that have become semi-nationalized. If the current business model is not working, what makes the Federal Government think they can run it any better? They have done a hell of a job with Freddie and Fannie – now the printing press is smoking red hot to pump cash into the system. They need to turbo charged those printing presses – because if this is the road we are taking they need to print trillions more.

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LIBOR coming down – good news ???

The LIBOR has needed to close the gap to reflect banks borrowing from each other, rather than getting in the long line at the Discount Window. LIBOR came in at 1.5% today – still higher – but at least it is coming in. Additionally that was helped by pumping MORE emergency cash into the system. Of course Japan is going nuts and the Carry Trade (technically the entire business model for the banking system as during their lost decade) is unraveling and is spiraling out of control. Bank of Japan cut it’s benchmark to .1% and introduced the New and Improved way of injecting MORE money into the system – it reminds me of Sherman’s march and laying waste to anything and everything. It will take another decade to get out from under that hole – at least.
So while LIBOR is coming down – would seem good news – the clarity of the model remains completely foggy – is it coming in because banks are actually lending to each other or is it because of the massive injections of capital. I would say the later has more of an impact. Also – the LIBOR number is one thing – but based on what amount of capital. It’s like saying mortgage rates have come down, but if no one can get a mortgage (or if they have to put up 50% equity) – what’s the point? I think the big risk is the spread exploding again and I can see that happening in the 1st quarter of 09 – if that happens we could see more pressure on the dollar and thus more printing and injection of the dollar and the ugly cycle continues.

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Futures Pre-market

The futures are seeing some pressure after yesterday’s sell off, it’s before 9am so we don’t know what impact yet Bush’s speech of the injection of capital to GM is going to take, but that could send some volatility into the futures prior to the opening. Right now we are looking at a lower opening but that could change quickly.


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Support / Resistance

Back to the Pivot Points – now where?

INDU 8000 (8500) 9000 (We headed off the resistance and back down – being expiration we could also get a jolt of volatility today as hedging in thinner markets can move deltas quickly.)

NDX 1100 / 1200-1250 (We are still in that upper band of resistance between the 1200-1250, we stopped right at 1200 yesterday – do we stay in the upper band?)

SPX 800 (850) 900 (Well 900, even though we were slightly above yesterday was nothing more than a over-extended resistance and we retraced back down.)

RUT 400 (450) 500 (Again we never really got up to 500 and lagged behind the others – now a pull off.)

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Conclusion

I wanted to tell a story the other day, which I think will be a more common sight. I currently live in Sarasota – a nice and well kept city on the Gulf of Mexico. I was driving to work the other day and on the corner was a man in a very nice suite, well groomed, looked to be in his 40s holding a sign – EXCELLENT HARD WORKING EMPLOYEE LOOKING FOR WORK! – I was shocked, I had lived in San Francisco for over 15 years and did see Vets and others holding signs written on card-board, but this sign looked like it was made at Kinko’s and he was very well groomed. As I sat at the light I looked at him – I saw not embarrassment, but rather pride. He got up in the morning, probably has been on many interviews (I thought) and now he is standing on the corner. I wrote down his number – and I thought – is he the first of many, is this going to be a sight we will be accustomed too? Remember – this is a very nice town – with the one local homeless guy that everyone knows his name – it’s not New York, Chicago, or San Francisco. No doubt – the sight is burned into my head and I wonder if it is only an anomaly or the first of many? The story is important because I learned something when on the trading floor. Several years ago, I was working for a market making firm and our head trader asked me to leave the floor and walk down to look at a couple of particular retail stores during the holiday season (downtown San Francisco) – I was to get as much information on sales and traffic as possible and report back. I went back and told him what I found, the data I had collected. He was the market marker in those issues – he knew the same store sales were coming out and he wanted to gauge how holiday sales were going. He looked at me and said by observing the man on the street you can learn more about the economy than from any economic data. Who was I to argue – he was a very successful market maker that ran his own firm. He was also fairly right about contraction and expansion of volatility in his stock based on the data I provided him. So – getting back to the story – is the economy that bad – I’d say look around, go to Wall-mart, Macy’s, the Mall, and observe. You’ll probably get a better idea than trying to make heads or tails out of any government data.

Today is expiration – so expect to see some action, watch pin risk, after market trading, and run post ex-deltas. You don’t want to come in long or short hard deltas on Monday and caught with your pants down.

Side story – I read that a Saudi had bought a lot of Gold futures and he expects to take PHYSICAL delivery – I am trying to follow-up on the story – it would be interesting if he takes physical delivery or not. I have been in this business almost 20 years and I have yet to meet any trader that has PHYSICALLY taking delivery of Silver or Gold. I guess I never really thought about it before.

12/18/08 (Second Wave Coming - When and Where?)

Traders,

Yesterday showed some pull back after the hyper-euphoric rally the previous day from Bernanke taking rates (effectively) to zero. On the other side of the coin, the dollar started to slide fast and hard (against foreign currencies and metals) – not a show of strength. Additionally the yields across the board on treasuries are falling fast and will continue to fall even faster, as Bernanke pointed out that HE TOO will be buying treasuries (as he borrows from Hank) – go figure and it sure really doesn’t make a whole lot of sense.
Some have called this a bottom – for no other reason than Bernanke had made the most dramatic move since he has taken office – but heading down this road is similar to heading down the road that is a culmination of Japanese Economic Policies and FDR’s New Deal – both have proven disastrous to their respective economy – Japan has lost a decade (as they say) – and FDR raised TAXES from 20% to over 70%, issued an excise tax, and unemployment actually got worse – a lot worse (up to 19% by 1938) – it wasn’t until WWII that they started pulling back on a lot of the New Deal programs – realizing that too much government intervention had stalled the economy and prolonged the problem. This is NOT to say that the Japanese leaders or FDR were not great leaders – this is only to address the economic situations of their time. For I don’t want to get into a political debate (which I have already received many email responses) – I am just pointing out the economic facts that occurred in both those situations. Sometimes too much help – is worse than letting the economy find it’s natural bottom to recover. I for one believe that with too much intervention we are unable to find real value (since those values are being propped up by the government) – what is or was the REAL value of Bear Stearns, AIG, Freddie, Fannie – and now GM or the entire banking system. It becomes harder and harder as the books become blended with much government aid – additionally that puts undue stress on the government’s books as well.
History – has and will always be doomed to repeat itself. Humans and society is greedy – that will never change – what does change is the enablement of that greed and the ability to shed or skirt the accountability and responsibility, both of which equal liability.

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Second wave in credit crisis

CNBC reported this morning that a second wave of mortgage failures are coming – the prime and commercial paper. One of their guest mentioned that as late as mid-2007 Lehman had issued $1 billion in mortgage-wrapped paper (none sub-prime) of which 43% has already defaulted. The problem, is simple, even if the government DOES help home owners (with resets and lowered rates) – if you are 40-50% underwater in equity – who really cares. It will take years, if not decades, to recoup those equity losses and some home owners would rather walk (in fact run) than continuing to pay. Ross pointed out that the “big collision” is that many mortgage products accrue interest – so the actual paper gets bigger as the home equity get lower. Both moving away from each other – that is a serious problem.
Additionally – auto-loans are seeing a ramping in defaults. As you know GMAC is doing everything they can to get access to that Discount Window (trying to become a bank) – if they don’t they are pretty much done – as private money is avoiding them like the plague.
On the relatively new end of the credit crisis spectrum is Credit Cards. I had reported that several credit card companies are cutting limits and sending letter to have client pay (as low as $.60 on the dollar) to pay down the balance. Banks just don’t have money to lend and no longer can they float customers that can barely make the interest payments. Additionally – new fees, increase interest rates, and other nickel-dime fees are being added left and right to make up for short-falls.
It would seem that across the board that liquidity is still a big issue and that leverage is still unwinding. Additionally – mortgages seem to be coming down – but no one is lending and they sure are not coming down as quickly as the interest rates. The sad truth is that there is NO MONEY to lend.
Expect credit to continue to tighten.

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Jobless Claims fell to 554,000

The first-time claims remain close to decades long highs –and it doesn’t look to recover soon. The slow-down will continue well into 2009, and the report on the second wave in the credit crisis could push out the recession to 2010 or 11.

I think Mr. Levy, (economist at Bank of America) put it best as reported in Bloomberg this morning, “This is exactly the stage of the recession where businesses are aggressively cutting employment” – we are already seeing that with more layoff announcements –and with more announcements we will see a shrinkage in the GDP – which traditionally remains 2/3rd derived from consumer spending.

No doubt companies are hording cash and cutting expenses – jobs not vital to business revenue is cut to keep margins in the black. The slow down continues.

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Futures Pre-market

The futures are seeing a little volatility – above and below fair value- the spreads are NOT in and ARB traders are sidelined. This is also expiration week which is adding to the hedging and rolling issue – in a very fragile market.

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Support / Resistance

Questionable – at best – this is expiration week too – so we could see a stalled market with more pin risk or a volatile move away – who’s to say.

INDU 8000 (8500) 9000 (We visited 9k on the hyper run up and pulled off some yesterday . Still above the pivot point and that is anyone’s game.)

NDX 1100 / 1200-1250 (We are in the middle of the upper band of the 1200-1250 – again a little pull back yesterday after the run – but it’s anyone’s game.)

SPX 800 (850) 900 (We continue to ride right at, in fact above the resistance – but volume is mixed.)

RUT 400 (450) 500 (Is the SPX pulling up the RUT – it was the only index up yesterday – moving TOWARDS resistance. Is this is a good sign? If the other indices can stay towards their resistance and we see the RUT move higher it could be sign of a short-term move higher.)

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Conclusion

We still could get a follow through move to the upside and continue higher – Santa is coming to town? However – the economic numbers, jobless, second wave of credit crunch, and Bernanke’s action spell a long-term problem. Any rally at these points is really based on hope and not solid fundamentals. I really don’t want to get to long in here – unless you hedge yourself.
These are difficult times and it is important to do your best to plan for future events, instead of reacting to the daily news. A short-term move up or down today – is more market jostling – and not any sign of a top or bottom – remember that.

Tomorrow is Expiration – be ready and prepared.

12/17/08 (Bernanke Jumps the Shark!)

Traders,

Wow….really all I can say is WOW. I mean that was it – The Bernanke Show hit its climax, for those internet counter-culture fans we would say, Bernanke Jumped the Shark http://en.wikipedia.org/wiki/Jump_the_shark . What is there left to do, you may be asking yourself – plenty, I would answer. We have now moved to a fully SELF funded government economy. You could say (for those extremist) we just stepped into the nationalization of our collective debt. Bernanke hinted that his next move (and let me simplify this) – borrowing money from Hank to buy Hank’s Treasuries. Yeah – it sounds that absurd and it is. Those that live (or have lived) in the halls of academia (and not the real world) would argue that “provisional liquidity” is a legitimate way to finance the economy. Let me simplify this even more – in this little story for you….

Hank and Ben own a small store that make homemade wooden coat hangers, but no one is buying anything. Here is a little conversation they might be having.

"Hey Ben, why don't you buy some stuff in the
store?"

"I am your partner, I OWN the store with you - why
would I buy it?"

"Well we need to sell something - if you buy it we
can book it as revenue!"

"Let me get this straight, Hank! You want me to buy stuff
that we already own and make in our store? Are you a nut?"

"Ben, we NEED money and we NEED a loan to stay in business
- the only way we can prove that selling homemade wooden coat hangers is
profitable is to show that we have sales. So start buying some wooden coat
hanger and shut up!"

"Hank, I would - but I don't have any money!"

"Hold on, I've got a 10 spot - that buys 4 hangers -
here you go! Wait - where you going?"

"You just gave me 10 bucks - you think I am going to spend
it on our crappy wooden coat hangers that I already make and get for free? I am
going across the street and get a drink!"

"But what about the loan? We need to show
sales!"

"Just burn the place down and claim insurance - at
least we can get out of this mess! - see you at the bar!"

===============================
The above story might seem silly if it were not so true. Ben has loaned 100s of billions of dollars via the Discount Window, (very questionable loans – note: Bloomberg wants transparency, but the Fed won’t give it) – now he has taken interest rates to ZERO (for the most part). However – they need to continue to SELF FUND the economy – so what to do? Borrow money from Hank and buy the very Treasuries Hank is trying to sell to fund the debt and budget deficit. It’s like one guy is printing money to loan to the other guy to buy back the loan – it’s a circle you idiots!!! It’s an act we could see Abbot and Costello perform – except it is done by (supposed) bright men in power and the TV knuckleheads just nod their head in agreement. And our watchdogs and oversight committee – you’ve got to be kidding - you REALLY think Barney Frank (head of Finance), Chris Dodd (head of Banking), and Nancy Pelosi (majority leader) KNOW how to make heads or tails out of the books, finance, and economics? Of course not and the hole system has run AMOK.

I think the Crazy Train has left the station – all on board, whether you like it or not!

Sorry – but this just makes me sick.

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Morgan Stanley follows Goldman – the lemmings jump!

Morgan just reported a wider loss than expected ($2.2 billion) – right in line with Goldman. The question we have to ask ourselves is do they NOW have enough to write-down these positions to a REALISTIC (not illiquid mark-to-myth). That is the REAL question that only time will tell. The stock is getting a little beat-up in the premarket – but after yesterday’s run - go figure.

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Damn those lemmings!!!

10-year treasury falls to below 2.15% - did you mark my words or not. I said if he cut by 50bps or more we would see the dollar fall – guess what the dollar is sinking fast. The only morons buying treasuries are those that can’t do math and REALLY believe IN the government. These are the times that socialism begins to breed. I had a talk with someone about the New Deal and FDR – they had NO IDEA that FDR raised taxes to over 70% and issued and excise tax on a majority of goods. He also set the wage barrier so that companies could not hire people for below that wage barrier (very high) – thus keeping unemployment HIGH. Unemployment stayed in the double digits for almost his entire term in office – until WWII. He got people work – no doubt – but working for the state and taxed into the stone age. I seriously hope we don’t head down that path – but getting back to it – Bernanke’s NEW policy and the current treasury yield heading into the toilet – leaves me to believe we are on our way.

Stop buying treasuries – tell your neighbor or friend – “Don’t be patriotic with your money!”, “Don’t be a fool!”, “Your money is safer in your own PHYSICAL hands – not LOCKED UP in a non-performing treasury whose credit rating is now coming into question!”

Fools –

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Futures Pre-market

The futures are coming off after yesterday’s euphoric rally as if taking interest rates to zero (when they effectively are trading zero) was really going to do ANYTHING. The spread is in so expect ARB traders to buy futures and short the basket.

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Support / Resistance

Well we got to resistance or just above it – one thing you can bet on is volatility.

INDU 8000 (8500) 9000 (We are just shy of the 9000 resistance level – futures are showing a decline in the premarket – do we head back down to reality at 8500?)

NDX 1100 / 1200-1250 (We are back to that upper band of resistance – again do we head back to the 1200 barrier and lower?)

SPX 800 (850) 900 (Just above the resistance – but looking at the pre-market futures it looks like we will be back right at or below it…interesting)

RUT 400 (450) 500 (Unlike the SPX or the INDU we didn’t get up to the 500 resistance level – the boarder market didn’t perform up to that and that leave me with a feeling that it’s a weaker knee jerk rally than anything else – again I could be wrong.)

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Conclusion

Sorry for the rant – but I mean when are the Sheeple going to wake up – the more I hear the more I believe the masses are asses, sorry but please think about it. We are on a dangerous road no doubt and the government is taking serious liberties with our economy and currency, enough so that we should be concerned. This isn’t against the Democrats, Republicans, Bush Hating, or Obama Hating – I seriously believe that we have pseudo-Republic, either that they are completely ignorant and have run AMOK (but there are some Democrats and Republicans that are very smart – so that can’t be the case – can it?) or we do not have a Republic, but a plutocracy – which if we were to follow the money being printed and loaned out seems more likely.
As for getting back to the market – I am skeptical at these resistance levels, I would lock in any gains – keep gamma on the sheets and look for more volatility. The news yesterday of a rate cut to ZERO (even with a market rally) is NOT good news! Don’t be a knee jerk economist – look at the big picture.

I have a couple other stories to share – but I will wait till tomorrow.

12/16/08 (Sayonara Interest Rates, OPEC cuts?)

Traders,

Yesterday looked as if the negative news was again trying to drive down the market as investors left for “greener” pastures – unfortunately all the pastures out there are brown. The end of the day saw some strength with a close day rally up to those pivot levels – which seem to be a magnet for now.

Today we could see some big jolts to the market – or at least the economy, Bernanke’s (very probable) rate cut, Goldman’s earnings, comments out of the ECB, OPEC and more. So – we could see some protracted moves – expect some volatility.

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OPEC and oil prices

I received an interesting email yesterday that showed the increase reliance (and expansive) budget of oil producing nations and their serious short fall in revenue will seriously curtail their spending and expand their debt. The problem is a double edge sword – oil is priced in dollars. A weak dollar means higher oil prices, but lower currency conversions. A strong dollar means lower oil prices, and higher currency conversions. It is a love hate relationship for many people – from companies that rely on trade, to those that spend on imports. Oil is also in that game. The one thing is on the mind of the oil producers – “How do they continue to maintain revenue to meet budget parity!” – they sure don’t want to look like the U.S. (deficit spending and massive debt.)

Here is a clip from the email I received – you might find it interesting – it does point to the need of raising prices (but cutting production)

Deutsche Bank and a private consulting firm called PFC, based in Washington,
have determined that Venezuela needs the price of oil to average $97 a barrel to
balance its accounts, while in 2000 that South American country only required
the price to be $34. Look at this chart, courtesy of Dennis Gartman. It shows
the price of oil that various countries need to balance their budgets

.

Russia will need $70 oil. These countries are going to need to produce and sell
what they can, which is in conflict with the need to control production and move
prices higher

.

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GOLDMAN reports wider losses

Goldman reported a $2.1 billion loss ($4.97 loss per share). The lost was greater than expected, however some analyst have argued that Goldman is starting to see the light at the end of the tunnel and have mark-to-market their assets well below fair value based on current credit levels. Meaning – there could be a significant discount to the loss.

It’s an interesting theory – and I would – if I were the CEO – probably lend toward that policy as well, for two reasons. First – marking down illiquid positions aggressively (below their collective credit rating) means that if they continue lower you have already priced it in. Second – if you are pricing to where you HONESTLY believe these assets are worth (even if it is below the credit level) – if you are wrong you could be looking at a better quarter going forward. Of course we are not sure – simply because we really don’t know the liquidity and value of these assets. If any firm were to do it – I think Goldman could and probably should be more conservative. It would be interesting as to what insight Buffet (who made a $5 billion investment) has into this.

The stock was off – but is now up a couple bucks above yesterday’s close. If this is the bottom or close to it for Goldman – we could see them as the corner stone survivor of this banking / credit crisis. Now doubt the economy and the market is going to be difficult going forward – but if they can get to REAL market values as close as they can take them down – then it could be a great decision going forward.

Remember (simply) – these firms can only taking these asset losses SO FAR because of their capital levels. For instance if they have $10 billion in capital and have a 20:1 leverage (200 billion in positions), if those losses are mark-to-market at $12 billion (of the $200 billion) they don’t have enough capital to remain solvent. Meaning they have to raise money to carry the losses. Many firms have been marking them as LOW as they can go and remain solvent, they raise some money, and mark down again next quarter. There was and IS no way for them to fully mark them down and stay in business.

Interesting point – Goldman received $10 billion from TARP, $5 billion from Buffet – that gives them a LOT more room to report losses. The question – is that enough? Probably not – but close.


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Sayonara, interest rates

Bernanke is about to do – what no other FED chairman has done – cut interest rates IN HALF! Of course that sounds bigger than it really is – since interest rates are already a 1%, cutting in half is 50bps to 50bps. That leaves almost no powder left – but don’t count him out – he could take it to ZERO.

Economist are predicting a cut of 50 bps – but will that really make a difference. Rick Santelli (CNBC) made an interesting point – pretty much he said the spreads do NOT really matter anymore because of government intervention. Whether you agreed with government intervention or not – the one thing we could count on in the interest rate markets was the ability to see the expansion and contractions of spreads which dictated rates and money flow. He’s right! Now that system has all but broken and Treasuries yields are in the toilet – not because they reflect market conditions, but rather a full intervention by government intervention and lemmings chasing safety.

Yesterday – I mentioned that Bloomberg has requested (TWICE) transparency to the $2 trillion lent (to WHOM and with WHAT collateral) – which the Fed has refused to reveal – their excuse was lame.

Bernanke’s creditability hangs in the balance – and that is a serious problem for the entire economy and the USD. He has bailed out companies, lowered the lending standards, gave access to none members to the Discount Window, and extended the loan period. And he is taking rates down fast and hard. What can he do? After today (if he cuts – as expected) he has almost no room left – 50bps is nothing. When he makes that final cut – we will be at ZERO.

After he cuts to zero – his next course of action is “provision liquidity” - - - which is really purchasing treasuries to inject cash into the system. By the way – THAT IS INSANE!!!

Think about this for one second.

The government SELLS treasuries to RAISE money. They PAY BACK that money (with interest) for BORROWING it from YOU and Foreigners. Now remember – the government also PRINTS money. So does it make sense that THEY buy their OWN treasuries? It’s completely idiotic – on paper and in the theoretical world it LOOKS like it works – but come on – we live in the real world. It’s like I own a store (and buy goods to sell), but I have no customers so I use my own money to buy my own goods. How long do you really think my store will last. All we have to look at is the lost decade in Japan to see how well that worked.

The one thing we can count on – if they start down this path – how much FAITH do you really think will be maintained in the dollar. I say – LITTLE. Remember – our currency is based on FAITH (because it’s not backed by anything).

Read more here: http://www.bloomberg.com/apps/news?pid=20601087&sid=aJOGrevCE.M4&refer=home

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Futures Pre-Market

The futures were up fairly strong and have started coming off. They are still well above fair value – giving the ARB traders the action to sell the futures and buy the basket. If the spread remains – expect pop at the opening.

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Support / Resistance

Back at the pivot levels - higher or lower? It’s questionable.

INDU 8000 (8500) 9000 (We close just above pivot after being down. The futures are showing a pop in the morning – but it will be about the close. Expect some volatility.)

NDX 1100 / 1200 – 1250 (We came off from the 1200 level – but stayed above the upper 1100 support range. Futures looking higher at the opening.)

SPX 800 (850) 900 (Again – close to the pivots this morning – looking higher.)

RUT 400 (450) 500 (Again – close to the pivots this morning – looking higher.)

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Conclusion

Is Goldman the first to reach the bottom – I personally think they are pretty close. Now that doesn’t mean that they are going to start rallying and we are going to see the market of old, but it DOES mean that they are possibly a survivor – which is saying a lot in this market. They did suck down some serious money – prior to the reported losses. Let’s see what they do next quarter – I don’t expect growth – but maybe not the kind of losses we have seen of late.

X-mass is around the corner and the numbers coming in are looking pretty weak. It’s going to be interesting to see the final numbers – but I don’t expect them to be good. Enjoy some cookies and company – and keep more of that money in the wallet.

We also saw the dollar fall pretty rapidly against the EURO, Pound, Frank – and also Gold and Silver making a good run. If Bernanke hints at buying a ton of treasuries – I am really not sure how long the dollar can tread water. We could become the new carry trade nation and steal that title from Japan. Firms should get boned up for that business model – which looks like it is well on its way.

12/15/08 (FED - SHOW ME THE MONEY?)

Traders,

Despite the negative news the market reacted rather strongly on Friday – who’s to know why or even question it. These are the days when order flow can easily move the market up or down. The volatility across the board and the skew have been major players in TRYING to determine the outcome of the market, while at the same time trying to anticipate big shocks to the system.
These can be very trying times and I know – some days are more trying than others (for all of us). The uncertainty abounds – and with that also comes frayed nerves. But this is also about focusing your energy to trade, hedge, and invest wisely. Avoid the temptation to leverage your positions too much – or taking additional hard delta risks for any reason. Principal protection is worth MORE than any POSSIBLE gains.

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TARP available to the Big 3?

Arm twisting abounds – if the Democrat controlled Congress had it their way – Paulson would of cut a check from the Tarp for the auto-makers and the bailout vote would have been sidelined. However – he stock to his guns and didn’t even open the check book. Now (lame duck) President Bush is bringing (what if any) powers to bare on the situation. He has indicated that part of the TARP would be available and would not be a long process – but he has reserved any more information until he is ready to announce HIS rescue plan. Is he planning his Swan Song – Bailing out the Big 3? Who knows – the infighting between the GOP and Dems and Administration remains – it’s nice they can all get along.

GM is looking a little (very little) higher in the pre-market – “hoping” that they will get that much needed check before the week is out. The skew in the puts is insane – price expectations are a serious chance of a bust.

Don’t buy GM or Ford – HOPING that a bailout is the answer or that they have a future – they don’t and any long bet on them is foolish and needs to be monitored closely – You very well could get a decent POP in the stock – but that could be intra-day short-term, so you need to play the position tight. Most definitely NOT a long-term buy.

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FED – where has the money gone?

The FED has REFUSED a Bloomberg News request to disclose the recipient of more than 2 TRILLION of emergency loans and the assets that are posted as collateral. Not long ago – Bernanke told Congress that the FED (Discount Window) was only a short-term loan and they have always been paid back. Shortly thereafter he extended the loan period from 30 to 90 days, lowered the collateral standards to include (ANY rated paper – including defaulted junk), and also opened the window to NONE Fed members (Freddie, Fannie, Investment Banks – remember Lehman?).
Unlike the TARP – the FED (while it does report to Congress) does NOT have inform Congress as to WHO or WHAT it has loaned – only that it HAS loaned and the amount. The lending by the FED has increased by 138% in 12 weeks. Bloomberg has filed TWO requests for information – but the Fed’s only response has been “… an unprecedented crisis” in which “loss in confidence in and between financial institutions can occur with lightning speed and devastating effects.” – Great!

So long and thanks for all the fish!

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Interest Rates – going to ZERO

We should expect to see interest rates get cut again – the reason – to spur lending – yeah right. Expectations are for another cut and we could start to see trouble on the treasury side – sure the lemmings are diving in for negative yield – believing it to be safe (the safety is that $2 trillion of unknown loans that they will not talk about) – yet the fools continue to rush in.
Expect that bubble to burst – and when it does – I really don’t know what to expect – except MORE VOLATILITY!

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Futures Pre-market

The futures have been mixed – go figure – we don’t know what is happening with the Big 3, who the FED has lent money too, and how much Ben will cut rates. Expect a mixed opening.

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Support / Resistance

INDU 8000 (8500) 9000 (Where too? Play it safe)

NDX 1100 / 1200-1250 (Upper band still?)

SPX 800 (850) 900 (Above the pivot)

RUT 400 (450) 500 (Again – above the pivot)

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Conclusion

We should have more news coming out this week – know the fate of the Big 3, interest rates, and a better idea if money is actually making it through the system. We have a long way to go and the numbers are not looking like we will recover any time soon. I am putting 2009 in the recession bucket for sure – it’s not like all of a sudden companies are going to go on a hiring spree next year – with what money and who is going to buy what? This might be the last big credit spending X-mass in a long time. So a rough ride is plan – just be ready. Don’t also look for any big rallies in the market – unless we have a late December rally (which would be covering only – not a market turn around – that would be a big Dead Cat bounce in my book.)

Keep on truck’n.

12/12/08 (GM turns into a Pumkin? The Ponz is back!)

Traders,

We slipped back down to those pivot points yesterday as hope that the Senate would pass the Auto Bailout began to fade. The market still has a rough road ahead and so too does the economy. The Auto Bailout has over-shadowed job’s data, treasuries trading at or below zero, and many other economic news – as if the Bailout alone will save us all.
Then after the close, as excepted, the Senate voted DOWN the Auto Bailout – just like they did the TARP. However, I am sure they will revisit the drawing board and they will pile on their “pork” and “ear-marks” so all the members can carve out a piece of the pie, I am sure the American Samoans will become enlightened, that old NASCAR track will get repaved, Bow and Arrow manufactures will receive tax relief, and that poor Indian Casino will get a new entrance. All thanks to their representatives piggy backing onto a bill a little money for this and a little money for that. No doubt it will pass – just after everyone gets their fair share.

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GM turns into a pumpkin?

The final hour for GM is upon us – do they get the last minute save (after the Senate adds in the much needed pork?) or do they turn into a pumpkin at mid-night. The reality that either way it is still bankruptcy – whether it is subsidized government funding or filing chapter 11 – the difference is well – nothing. Sure – I will concede the minutia – but money loss is money loss – government bailout in one form or another is government bailout.
I am of the belief that we will see a last minute save – of course with more strings attached. One thing is for sure the world markets and the futures after hours sure didn’t like it. Those damn Senators – why can’t they just pass it? It’s a double edge sword – you want to help, but with who’s money and at what risk to whom?

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Ponzi is alive and well

If you thought chain letters were the only thing left of the never ending promises of riches – well Ponzi just pulled a big one. Madoff (former head of NASD) had some massive investment fund that was just a massive hole. At least he admitted it, “There is no innocent explanation.” He just traded and lost the money and paid them with money that wasn’t there. He even expected to go to jail – hmmmm – crazy?!?
It seems odd – because there was many parts to his business – from NASD market making to traditional investment strategies. I think there is more to this story than meets the eye. It is a massive operation – and losses are losses. However it seemed that the firm, from my initial reading, was WAY WAY WAY over leveraged. I mean incredibly over leverage. I think that was the big screw-up. If he had his leverage close to anything reasonable – he could report losses and gains – but with anything – leveraging up has seemed to be the game that almost everyone has played.
While shocking – it seems no different than what AIG, Freddie, Fannie, GM, and several other companies are doing – using charge offs and tax forwards to show profits today to avoid losses and then borrowing more based on AAA credit, which they paid Moody’s for. Of course these companies do it under the guise of accounting trickery and instead of getting punished they get a bailout. Give me a break!
Let me ask you this – if a Company sells a widget for $1000, but they buyer only puts down $100 and finances $900. Should the company be able to book $1000 of revenue? Of course they do. That game is going on for years and now they get bailed out. I am not defending Madoff AT ALL – but I think some of these companies are no better than his stupid game. Maybe he too could apply for a bailout. Sad… very sad….
Lesson – don’t exceed your capital and if you want to use leverage – make sure you are HEDGE against net principal. Greed breeds stupidity.

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Dollar and inflation

Of course smarter people than me are talking about deflation – because in my humble opinion – they are focused on the present small picture. US Producer Prices fall 2.2% - which would seem that inflation is not a concern – but is it. No doubt prices have come off for materials, however is that more indicative of the current dollar strength (which started to weaken this week). Producer Prices are a 1 month lag – which is note worthy. Thus – the talking heads are saying that inflation concerns are diminished – I would add for now!
Now doubt the problem is a recession (I am sure there are still a few kooks that don’t think we are in one) – but there are fools that think we can’t have a recession AND inflation at the same time. Why not, I ask? Of course there answers are all academical and I have news – we live in the real world not a theoretical vacuum.
Inflation can be caused by many things – from debt to a loss of faith. Remember – keep it simple – we can’t keep injecting 100s of billions (if not trillions) into the system. While Treasuries are reflecting the lemmings are chasing safety and even PAYING for it (via the cost of money – but in some cases even negative yield) – that is just a short-term rush for the exits. The problem is that is domestic money chasing safe haven – financing our own debt. It’s like a circle of lending – and what SEEMS to work today – the big picture is a lot more ugly.
However –what does this mean – Bernanke can again finger point to some government data to explain away another rate cut.

Folks – we are going to ZERO interest rates – hang on it’s going to be a bumpy ride.

For those that don’t speak Japanese – you better start boning up – because we have some serious learning to do from their failed economic plan – which we seem to be following.

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Futures Pre-market

The futures got a good whack over-night as the Auto Bailout got the “No Go” vote from the Senate. The additional government data that has been hiding under the Auto Shadow – was also not looking to hot. The futures are coming off their lows and the spreads are big. Expect ARB traders to buy futures and short the cash basket. Thus we WILL see some pressure at the opening.

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Support / Resistance

At Pivot points from yesterday’s drop and looking to head down to supports – for now.

INDU 8000 (8500) 9000 (Just above 8500 yesterday – but the futures are pointing to a 8400 range at the opening. Do we get sticky at the pivot or head to support?)

NDX 1000-1100 / 1200-1250 (We are just below that 1200 resistance gap and looking to test the upper 1100 band of support. The futures are getting a slight bounce off the lows this morning.)

SPX 800 (850) 900 (We are above the pivot- but a visit to it is in the cards – watch the close)

RUT 400 (450) 500 (At the pivot)

This day could be some serious intraday volatility – no doubt the opening will send us lower – but if there is hints in the Senate of a Auto Bailout re-vote that COULD pass – then we could get a pop again. Watch the close – as they relate to the support/pivot/resistance levels.

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Conclusion

This economy has a long LONG way to go. Layoffs are being announced and more are coming. These are the days about EARNING your money and not just showing up for a pay check. Don’t be offended by that statement – but the reality is that we (as a nation) have become FAT, DUMB, and HAPPY living beyond our means. The Piper is coming to town for a serious SMACK DOWN to reality. No longer are Biz Dev, Middle Management, and Store Greeters going to be a value role in any company. These are the times when those Blue Collar workers with skills prove they have more worth than just that low wage they get. We can’t live without those that can throw a hammer or turn a wrench. Fat is being trimmed – and that’s just reality. There are going to be causalities of those less deserving – but remember – at the end of the day – it is NOT how much money you have – it is about family, friends, and health.