9/30/08 (Bailout Plan Part Deux)

Traders,

Bailout Plan Part Deux (sorry no time for pictures again today)

Yesterday they voted down the Bailout Plan - and of course the blame game started, as much as they want this to be bi-partisan it's not going to happen - this is an election year and not just for Obama and McCain - but many members of the house are concerned about their future. Pelosi (house leader) spoke last Friday about working in a bi-partisan way to pass this very unpopular bill, but when the floor open to vote - she lead with a very partisan-blame-game speech, why she decided to provoke anyone that was already on the fence before this important vote - well let's just chalk that up to bi-partisan stupidity.

There are three groups against this plan, the socialist Democrats that want to include a home-owner bailout and more reforms that didn't get it (so they voted against it), the conservative Republicans that don't want to spend more government money on a plan which also includes tighter regulations, and those Democrats and Republicans that are voting for the will of the people (who have flooded their congressional representatives with emails, letters, and phone calls to vote this down.)

The Paulson Plan was initially a single page document, but Frank (chairman of the finance committee) help re-draft the plan with his members to create something that they could all come to terms with. Frank told the press on Friday the Plan will PASS - he was sure of it. But Frank has a very bad habit of not listening to anyone - remember he was told that the Freddie/Fannie Plan to bailout the mortgages would lead to their demise - but he didn't listen.

When the vote FAILED - the blame game started. Frank and Pelosi held a press conference and started blaming the Republicans. But let's look at the vote, only 60% of the Democrats voted for it, even 12 members of Franks OWN Finance committee voted AGAINST it. It wasn't just Republicans that didn't vote for it, it was also Democrats. It is clearly an unpopular bill - not only among the members of Congress - but also the citizens of this country. I would argue that even McCain would not vote for it if he was not running for President, I am sure no matter what you are NOT going to get Ron Paul to vote for such a bill. But Pelosi WANTS a bi-partisan vote, WHY? Because she doesn't want HER party to take the blame if they pass it on a party line vote and it fails. It's about not taking accountability or responsibility - if she can get the Republicans to also get on board and pass it she can clearly pass the buck if (when) it DOES FAIL. For if they really believed it - they could pass it - they control the house! Even though Bush supports it (ironic he is on the side of Frank and Pelosi) the Republicans are voting against the President - he is a lame duck and they sure do NOT want his endorsement when they run for re-election. They are voting either because the plan sucks or their constituency doesn't want it. You want to know how your representative voted? Visit: http://www.opencongress.org/roll_call/all (of course it hasn't been updated YET - because I am sure Congress doesn't want to take any more heat from their constituency)

But the Plan WILL fail the expectations of what they believe it to solve. It will work to buy down $700 billion of toxic paper, but that will not solve the economic crisis we are in - other than maybe give a little bump to the markets and keep a few companies from failing. The housing market is not going to turn around, jobs will not be created, inflation will not be put at bay, it does not guarantee that credit will open - it simply is to give relief to a handful of selected companies that are holding tons of toxic paper.

The plan is really no different than the SIV Superfund Plan that Paulson purposed, or the Freddie/Fannie Plan where they would bailout the mortgage companies (that too failed - we bailed them out). The Discount Window that has lent 100s of billions to Banks (including Lehman, Freddie, Fannie, WaMu, and Wachovia - wonder if it will get repaid on those loans?) The Fed and Treasury have already spent over $300 billion on AIG, Bear Stearns, Freddie, and Fannie - that doesn't even include the Wachovia guarantees. So what makes them THINK that $700 billion will be enough? It certainly will not be and it will NOT stop the deleveraging.

Of course I am against the plan in any form. I just don't have faith that the government can manage risk, understand credit or debt, or even balance their own budget or pay down debt. It has proven that it cannot - just look at Freddie and Fannie. The market sold off yesterday pretty hard, and guess what there is NO SHORTING in over 850 stocks. The government is doing everything to keep the market from falling - but those are just prolonging the reality - deleveraging.

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Credit Markets Tighten Further!

The Bailout Political Joke fails and of course LIBOR took off like a rocket over 433 basis points to 6.88%, Euribor (one month loans) followed close behind and ripped to over 5% - there is NO MONEY any where and when you do find it expect to spend TOP DOLLAR for it. Pimco's Bill Gross reported yesterday that short-term credit totally seized yesterday - it just halted. That will lead to more failures and now $700 billion might not even be enough to get us through the next month. The seize of the credit markets pushed more banks to the breaking point - Wachovia and several other banks either failed or are on the cliff of failing. LIBOR is used to price over $350 TRILLION worth of debt World Wide from home loans to car loans. You can quickly see that $700 billion will not even grease the wheels.

The TED spread (the difference between what the banks and the US treasury pay to borrow money) broke through 3.50 for the first time yesterday - it is currently 3.38. The spread was on 1% a month ago. Clearly showing the only door for money is the Discount Window which is beyond tapped out. Bernanke even lowered the collateral to post to include even failed junk paper. The Discount Window will never fully be paid back - you can write a big chunk of that money off.

We are probably going to see this continue even WITH the $700 billion - we are talking about a worldwide credit crunch now. This seriously puts other countries into some introspective realizations - and that is a decoupling of the dollar as a reserve.

We thought the Sub-Prime was a problem if paled in comparison to the Credit Problem. I would argue the Credit Problem is going to make the Dollar problem pale in comparison.

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Future Pre-Market

The futures are rallying (again) thinking the next vote will pass and we should get a power bump in the market. The spreads are fairly decent going into the opening. We should see a good pop at the opening.

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Support / Resistance

We have moved to new areas - it is now uncertainty that will drive this up or down.

INDU ???? / 10,500 (We broke down through 10,500 we could get back above it today if there is optimism that the Plan will pass again. But we are now in critical areas - any bounce in my book is a dead-cat.)

NDX ???? / 1600 (We are now in a area to BUILD a support level - there really is not a support level we need to create one.)

SPX 1100 ??? / 1150 (Again 1100 is not really anything more than a psychological support.)

RUT 660 / 680 (The only index to hold previous lows is the RUT - if it can NOT get above 660 then we could see this at 640 - then below that is unknown like the rest of the market.)

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Conclusion

Any analyst or talking head that says we are NOT heading into a recession is not just a fool - they have been drinking too much of the Kook-aid. We are facing challenging times and we are looking for SHORT-TERM solutions and failing to look at long-term repercussions. It is better to have the market crash, companies to fail, and find a BOTTOM fast and quickly - no matter how PAINFUL it could be - because the sooner we do that the faster we will unfreeze the credit markets and the faster we are on the road to recovery.

In 1987 the market crashed and then without a massive government bailout we rallied back and the market was stronger for it, but back in the 1927 crash it was years before and after of MORE government man-handling intervention that some blame the Depression on. Bernanke's claim to fame is being a great study of the Depression, he doesn't want to fall victim for following in those footsteps. He also doesn't want to be blamed for a market crash. But casting his feelings aside - getting a solid correction in the market and washing out the losers - the strong will survive and we WILL find a bottom.

Right now the government is shifting losses to their books - relying on foreign money to pick up the tab - and squarely placing the risk on the Tax Payers of tomorrow. It has changed the rules, banned short selling, and continues to try to keep this market from failing - when the forces of capitalism says some NEED to fail for REAL price discovery. Buffet calls it mark-to-myth and the government is contributing to this mess - they are certainly not solving it.

The government, Frank, Pelosi, Dodd, Bernanke, Paulson, and all those that are for more government intervention are making the problem bigger to include not only government and tax payer debt - but are creating a bigger problem - they are creating a HUGE CRACK in the Dollar. If the Dollar fails (and it will if we continue to print money) then the system WILL fail -and there is NOTHING they can do to save that.


These are VERY scary times - tell your Republican or Democrat representatives NOT to support this very stupid, quickly put together, very unguided, and not forward thinking plan!

BTW - Oct 2nd the Shorts are coming back to town - unless that too is pushed out.

9/29/08 (No Bailout Plan Yet - WHACKovia bites the dust!)

Traders,


Sorry no funny pictures the last couple of posts, haven't had the time and none today, maybe when things slow down a little I'll make the time.

The market was mixed, but was up for the most part on Friday, on "Hope" that the Bailout - sorry I mean - Rescue Package was going to be passed. However, it didn't happen on Friday - instead we waited - it had to be done before Sunday night when the Asian markets opened, but that didn't happened either. Instead it was a weekend of making an already complex unprecedented plan, even more complex and convoluted. They haven't voted on it because they are "SEEING" if they have the votes FOR it. They are really unsure if it would pass (even with all the changes) - but they are scheduled to vote as early as today.

What Main Street (the man on the street) will NOT understand is that this plan does NOT change the economic landscape, it will not keep companies from going under, it will not create jobs, it will not make the housing market rally, it will not reduce the price of gas. The plan is just to BUY toxic waste (bad loans) from the banks and transfer it to the government - the HOPE of this plan is that it will FREE up credit lines. Banks are not lending to each other, companies, or customers - because the toxic paper has SEIZED up credit lines. That is what the man on the street will not fully understand.

Here is the rub, Main Street has been frightened (rightly so) that it is the tax payer that is bailing out Wall Street, but when more banks fail, no new jobs are created, and the housing market continues to go down - Main Street will say "I thought we gave them $700 billion (of tax payer money) how come the market is still going down, how come banks are still failing, how come the job market is getting worse?" The big problem with the PLAN as it has been sold as a ANSWER to a problem that it can NOT solve! Main Street was sold a lemon!

So, even when they vote FOR this plan, don't expect it to SOLVE the problem - but rather create a bigger problem down the road (weakening the dollar). It will also take WEEKS before any money actually makes it way to these troubled companies and of course it will be argued over and over again about what paper to buy, what company to help, etc.

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WHACKovia - done?!

Rumors on Friday were that Wachovia was going to be the next to fail and go into receivership as early as Friday after the close. The stock saw pressure all day (down from $15 to $10) and then after the close was hit again (down another $2). Rumors of failure quickly change to rumors of a Citi or Wells Fargo takeover - but those were also just rumors. Sure they maybe in talks with Citi, but Citi has its own balance sheet problems. Nothing was resolve over the weekend - neither Citi or Wells came forward to confirm they would be taking over. Can Wachovia wait for the Plan to come to the rescue, probably not - (either they have too MUCH toxic waste or it will be too long before they can get the money). Will Citi or Wells take them over, probably not - the rumors are that Wachovia's balance sheet is REALLY that bad (remember the CEO sent out that forum letter to their employees - not sure what the future will hold.) The question right now is WHEN, when will they have to be bailed out or taken over before the FDIC chains the doors? Rumors were this weekend, but I think while those rumors "should of been" true - if it were not for the Fed and Treasury (also rumored) to be involved in the talks with Citi and Wells with Wachovia. They have been given the weekend (it seems) to find a solution, however, Sunday night came and went - no deal. It now seems like a TAKE-UNDER, Citi and/or Wells will probably buy the deposits (like IndyMac, WAMU, etc.) and the balance goes into receivership. Another bank bites the dust.

The stock is getting hit HARD - trading less than a $1 - that would confirm that Wachovia is done! FDIC is in their cars as we speak heading over to WHACKovia! You can't blame THAT on short-sellers - that is LONG SELLERS selling it!

UPDATE: It's done, Citi is buying the banking operations and absorb $42 billion of losses (of the $312 billion loan pool - depending on how that is Marked?!?!) the FDIC will absorb the losses beyond that (some believe it will be another $50-$100 billion in losses). The question is where does the FDIC come up with more money? They only have $40 billion left in their coffers. I guess the bailouter's (FDIC) will also need a bailout!

Needless to say it's a take-UNDER and yeah this IS a bailout, without the FDIC (backed by the Treasury) taking on a massive part of the risk - there would be NO deal. Remember - WHACKovia is the world's largest holder of Option Arms!


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Credit Tightens

You would think with a $700 billion dollar slush fund about to be approved that credit would loosen a bit, well that was the hopes of the Paulson Plan, but so far the exact opposite is happening. Lending rates, including LIBOR (London Interbank Offer Rate) started ramping fast (currently 3.88%) as more are concerned that the bailout plan is not enough - seeing WAMU fail and now this morning WHACKovia - is not giving the resounding feeling that this bailout plan is going to work. First the bankers ALL KNOW that $700 billion is a drop in the bucket compared to the $20 TRILLION in debt paper (mortgages, credit cards, car loans, etc) - the failure rate so far has exceeded $500 billion and the government has already FLUSH $300 billion down the toilet. Some say the $700 billion will be used up in 4-8 weeks and Paulson will be back with his handout for more. If you look just at Wachovia, GMAC those two are close to needing about 20-25% of the bailout package as it is (Actually it will be Citi that will need the money). What's funny about Citi agreeing to the take under of Wachovia, is that they KNOW they will have the back-stop to unload the bad paper ($42 billion worth) back on the government's Bailout Plan.

It's called deleveraging and we are nowhere CLOSE to seeing $700 billion flush enough into the system to free it up.

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Future Pre-market

The futures are getting a good smack down in the pre-market. WAMU last week, WHACKovia this morning, no bailout plan yet - and now credit seizing up worldwide. The futures are down! The stocks in the premarket are down as well - and that's on NO SHORT SELLING in over 800 issues - that is LONG SELLERS!

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Support / Resistance

We got a pop in the INDU on Friday and the other markets were mixed. However it's looking like we are going to test those supports again today.

INDU 10,500 (11,000) 11,500 (we closed above 11,000 on Friday - but it looks like we will open below it this morning. The list of ban short-selling has been increasing - but that is not keeping the market from falling. 11,000 is a pivot point - this afternoon is the vote. It COULD bring some optimistic buying into the market, but without the short-sellers it would also be hard to get a short-covering rally. Who knows - expect MORE volatility.)

NDX 1650 / 1700 (We are going to open below support - heading down to 1600 - could be.)

SPX 1150 (1200) 1250 (1200 is a pivot point - we closed above it on Friday this morning we will be back down below it. Unless the VOTE can spur optimism (abet short-term) it will be hard to get a solid rally out of this.)

RUT 680 (700) 720 (The RUT was flat on Friday and did not rally with the INDU or SPX and is looking very weak in the pre-market. 700 looks to be busted at the opening.)

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Conclusion

The global markets lost faith in the US getting their shit together. It's an election year and political games trump sound policy and decision making. The Democrats blame the Republicans, the Republicans blame the Democrats. Obama is talking blaming McCain about supporting Wall Street that got us into this mess, but Obama is SUPPORTING the Plan? McCain, who supposedly supports Wall Street is begrudgingly supporting the plan - but doesn't want to. Even the finger pointing is getting complicated - you need to be double-jointed to even point fingers anymore.

The Citi take (UNDER) of Wachovia is nothing more than a FDIC bailout in disguise. Citi will be able to dump that toxic paper back on Treasuries bailout plan after it passes. So at the end of the day, Citi gets the deposits and none of the Debt - that all goes to the FDIC (which doesn't have enough) so it really falls back on the Treasury again. They are bailing out companies even with OUT a plan.

Freddie and Fannie - now controlled by the Congress are back in business and yeah buying MORE toxic paper. You got to be kidding me.

It just seems that the government is leading the charge into the toilet!


Expect more volatility!

9/26/08 (Looking over the edge!)

Traders,


We face an edge of a cliff and I believe with or without the bailout package we are going over - why? The bailout package may keep us falling for now, but it does not solve the unwind of leverage and it will spur stress of the dollar. This is not a tax payer story, a wall street story, a housing bubble story - this is a Dollar Story - which no one is talking about. That IS the real problem.

The bailout plan needs to be paid by someone, we here Congress say this is a Tax Payer issue. They are right, but NOT today - that's WAY down the road. The Fed needs money TODAY for this bailout plan - so WHERE is that going to come from? It is going to come from selling treasuries, but WHO buys the treasuries? It's foreign money. Our government, our corporations, our citizens all spend on a credit line which has been granted to us by China, South Korea, UK, Saudi Arabia, etc. These and many other countries buy treasuries for several reasons. It is THESE countries we are going to for money, but will they come to buy MORE treasuries?

Let's look at this from THEIR eyes as a sound investment. The yield (return on investment) in treasuries is between .5% - 3% (depending on maturity date) we will uses 2.25% - target rate. However, the inflation rate measured by the government (CPI - which you know I already think is too low - but we will use it in this exercise because it is the "Official" number) is 5.4% (unadjusted). That means if you buy a treasury at 2.25% and CPI is saying inflation is 5.4% you are actually losing money (buying power) of 3%. Remember, buying treasuries is lending money to the government, who are paying you back with interest. Now let’s look at the second factor these foreign investors are concerned about and that is the exchange rate of the dollar (back to their currency). That measures the strength of the currency vs. domestic currency, now the dollar has been sliding (abet we did get a slight rebound) against foreign currency. Let's say they expect the dollar to slide another 2% against their currency. When their treasury investment matures and they repatriate from USD back to their local currency they lose more money. Now there are some NEW concerns - if this bailout plan is passed the government is just increased their debt (lowered its credit rating). These foreign investors are wondering who else is going to buy this increase in treasuries? Why, because with an increase of a $1 trillion in debt (700 billion from the plan and 300 billion from the other bailouts) - they don't want to be the FIRST large investor or the last large investor. They KNOW if the treasury auctions FAIL (even a little bit) that inflation will ramp. Inflation comes in all forms (price stability, printing more than is coming in, leverage, etc.) = in this case it's direct inflation, meaning they are "printing" more than they are taking in (treasuries). And lastly - looking at the Fed Fund future prices - they are indicating a 92% chance of another rate cut by Oct's FOMC meeting. In conclusion - it is a very BAD investment for foreign nations to purchase USD treasuries. It is a losing trade. At this point they either do it (toss money away) because they believe they NEED to help - or they stand on the sidelines not wanting to be first. Our nation is begging for money - and that is the sad truth.

At the end of day - we are putting are HOPE and FAITH in governments like China that will come to the rescue to extend us a massive line of credit. Do they, and that leads me to my first story.

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China Closes the Door

Last night a Reuters Wire reported from the South China Morning Post, that stated that the Chinese Banking Regulatory Commission (CBRC) had told banks to STOP lending to the U.S. Banks. Shortly after, they came out with a story DENYING that story, but in my humble opinion only to defused a true story because they didn't want to cause any MORE market panic. Remember, this is a communist controlled paper - you know they would not print anything without heavy editing and approval of the government. Or are we REALLY seeing Free Press in China? Take it for what you will. The ONE fact in this story is that Chinese Banks (regardless if told by the government) have shut the door to lending.

NANNING, China, Sept 25 (Reuters) - China's banking regulator sought to
reassure jittery financial markets on Thursday, denying a report it had told
local banks to stop lending to U.S. banks and stressing that foreign bank
operations in China were healthy.

"The CBRC has never, through any channel, issued a statement or told domestic commercial banks not to lend to or borrow from U.S. financial institutions," the China Banking Regulatory Commission said in a statement on its website. CBRC Vice Chairman Wang Zhaoxing told Reuters that a report in the South China Morning Post, which said the agency had told Chinese banks to stop lending to U.S. banks in the interbank market, was not correct.

"If they are not willing to lend, this is the normal practice of risk control," said Wang, speaking on the sidelines of a major banking conference. The CBRC later said the SCMP report was irresponsible.

Dealers at some Chinese and foreign institutions, who declined to be identified because of the sensitivity of the issue, said U.S. and some other foreign banks were finding it harder to borrow from the market.

Some Chinese banks have temporarily stopped offering new lending to U.S. banks, in yuan and other currencies, because of uncertainty about risk, three traders said. Similar caution in lending has been seen in markets around the world.

http://www.reuters.com/article/asiaIpoNews/idUSSHA17536520080925

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WAMU implodes - now FDIC has a problem

As Washington is playing Hot Potato with the bailout plan - another bank FAILS. This time it's a WHOPPER - not some local regional bank but a massive one. FDIC went in a lock the doors and JP Morgan is "buying" deposits. WAMU was a long time coming as I had been reporting their odds of failure were mounting fast. WAMU faced $19 billion in losses, not to mention a massive book of failing mortgages.

FDIC is already trying to curb panic and are opening their doors to allow (INSURED) depositors access to their money. They are quickly doing the best they can, but the FDIC is running into its own problems. First, they kept VERY low balances against insurance (1.19% as of July 2008). That is VERY poor risk management - heading into this credit crisis - they should of boned up their balance sheets getting it up to 5-10%, yeah that's a lot more - but probably still not enough. Their stupid assumption that only 1.19% of all insured deposits will fail - means the FDIC will SOON be visiting the treasury - along with everyone else - for handouts. That's right the FDIC could also be out of money very soon.

Their mandate states they need to maintain 1.15% capital on balance, they were running very close to that. Several small banks failed brining them right to that threshold. If they fall below it they HAVE to actively raise money. They generate capital by charging a premium for insurance, just like any insurance company. Then INDYMAC failed and took them below that 1.15% threshold - they now had to raise money (either borrow money from the Treasury OR raise premiums) - they announced they would be raising premiums, but (IMHO) that is too little too late. WAMU is going to suck out a big part of that remaining balance, which is only about $40 billion now.

I constantly hear people say - this isn't as bad as SnL Crisis which saw 1000 banks fail. True, a 1000 banks failed - but NONE of them were a INDYMAC or WAMU, they were all small savings and loans. That net crisis cost $150 billion, guess what we spent TWICE that much already on Freddie, Fannie, AIG, and Bear Stearns - and they are just the early birds. I am just miffed that FDIC, knowing last year (because they have inside view to the bank’s balance sheets) KNEW there was increased risk did NOT bone up their balances and start charging HIGHER premiums a year or two ago. Coming into a crisis that continues to unfold and carrying balances at lows not seen for over decade just above their minimum threshold is just another example of Government sleeping at the wheel.

Expectations - after WAMU - FDIC is now in serious trouble, they don't have enough money to insure many more failures. They will be going to the Treasury (the Bailout Plan will now have to cover the FDIC as well).

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Bailout Plan - a Political Blow Out!

Now it's a government cluster f###. The Democrats are blaming the Republicans for not coming on board, but that is just Horse Shit - if they want to pass it they control BOTH houses and they could pass it. What they are REALLY saying is that we don't even have all our Democrats on board and don't want to take heat from the voters that we "DEMOCRATS" just blew $700 billion of tax payers money. You could say the Republicans put the Democrats in the Dog House, the Democrats have BLAMED the Republicans for this - but it is THEM that control both houses. This is now a political vote going into the election. If the Democrats past this in a party-line vote and it fails (which it WILL) then the Republicans can point their finger at the Democrats and they will take the blame.

This is beyond silly and stupid - they are playing political games. Dems could pass it without the Republicans, even Bush has sided with the Dems, but I don't think the Dems are ALL on board with it. This is just a total cluster f###.

The 3 page document turned into 6 page and is now over 40 pages. However, they are trying to pass legislation on the FLY - which is difficult to begin with. Doing it going into an election, economic crisis, and energy crisis. Whatever the plan is - I DON'T HAVE FAITH.

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Credit Lines being tapped - last ditch run

JP Morgan (that just bought Bear Stearns and now WAMU's deposits) is seeing massive strain, along with Citigroup and Bank of America. Several large companies are tapping their credit lines in a last ditch run to get capital on the books as capital becomes harder to come by. Goodyear, GM, and others are drawing on their (revolving loans) - banks had over $1.4 trillion in untapped loan commitments and now these companies want to borrow the money - NOW!

This is putting unbelievable stress on the already stressed out credit lines. Several of these companies tapping money already have stressed credit ratings and now borrowing this money puts them further behind the eight-ball. The problem is that many of these banks do NOT have the money to lend and will have to go to out to borrow it and those spreads are widening as NO ONE wants to lend.

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Futures Pre-market

The bailout plan has turned into a mudslinging event and WAMU goes bust, so don't expect the futures to rally in the opening. They are getting hit pretty hard. The ARB spread is very wide, but since Arb traders can NOT short stocks - we are not going to see them rush in to BUY futures into the opening - since they can't short the basket. Expect a lower opening.

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Support / Resistance

We are very close to the YTD support levels - if these don't hold we could have a vacuum to the downside. I don't think many firms will want to go home today holding any paper - unless something changes.

INDU 10,500 (11,000) 11,500 (We are at that MASSIVE pivot point and looking lower going into the opening. 10,500 is in the cards, but we could also get a shocker and the Bailout plan COULD be announced sending us into an upward spike. Smart money is going home with no delta positions - that is something you CAN bet on.)

NDX 1650 (1700) 1750 (1700 is the pivot point, we are right below that - if 1650 doesn't hold we can see a suck out and head lower fast.)

SPX 1150 (1200) 1250 (1200 is the pivot point - we are headed lower at the opening.)

RUT 680 (700) 720 (700 is the pivot point)


The last time I saw a intra-day halt in trading was in 97 during the Asia Flu credit crisis - it is NOT impossible to see that today - if panic sets in. We could also see a last minute vote and a bailout package which could inject a huge rally (but that would be a knee jerk) - today is ANYTHING goes. Smart money does NOT want to go home naked long (without hedges) - so expect longs to unload into the close unless something changes. Could Monday be a revisit of Black Monday in 1987. Back then Friday was a big down day, followed by Monday which was a down 22% day. That will probably NOT happen because of trading curbs (which we didn't have then) - also we have all these PROPS to keep the market from crashing. But we could continue to head lower.

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Conclusion

I have little faith in this government and have lost confidence, even if they manage to put a bailout package together. The problem is not Democrats or Republicans - it’s there lost of focus. I keep saying this is a Dollar problem, but everyone is focused on Wall Street, Main Street, and the Tax Payer. But it doesn't matter if you are Wealthy, Middle Class, Poor, if you are a Corporation or Small Business - commerce works because we have FAITH in the Dollar and we RELY on FAITH in the Dollar from other countries. Once the dollar starts to devalue - nothing else really matters. Bailouts, credit lines, etc - it is all based on the Dollar, which is a FIAT currency and not backed by ANYTHING. It simply works because we have FAITH that our Treasury, Federal Reserve, and Government is competent to maintain a strong dollar by keeping inflation in check, budget deficits in check, and paying down any debt.

We, domestically, have lost faith in our Government - but more importantly the WORLD is losing faith very quickly. That means the bigger problem - the Dollar!


You may get sick of hearing this quote, but I am going to repeat it until it sticks in your head!

"Paper money eventually returns to its intrinsic value --- zero."Voltaire (1694-1778)

Two MUST reads if you WANT to UNDERSTAND what is going on and how this all works (or fails). Not reading these books means that you wish to remain IGNORANT. Sorry for hammering on it - but we need to take an active role in UNDERSTANDING what is going on and not HOPE that our Politician’s know better.

Tug of War (by Paul Erdman) - little dry - but fast read on how the currency crisis happened in the past and how the whole thing works.

Vandal's Crown (by Millman) - a fun read - the history of futures and currency.

Read these two and you will KNOW more than anyone in Congress and will help you understand why this is all happening. Vandal's is a better read, but Tug of War is textbook necessary.

9/25/08 (Dollar Risk! Buffet's Bet, GE Cuts!)

Traders,

    It seems that while Congress is talking tough they are all on same page about passing this plan, now it is all about details. You know what they say the devil is in the details. There is the Executive Pay, Helping Main Street, Protecting the Tax Payer, Regulations, and for me (while I am not really a supporter of any plan) that Section 8 (which gave Paulson no oversight, not even by any court in the land) - which needed to go.

   Last night I watched CNBC ASIA - they had two Asian Economist which both came to the same conclusion, it will be Asia and Europe that bails them out and takes the REAL risk, not the tax payer. This is an interesting observation - their view is simply the US will have to sell Treasuries and sell LOTS of Treasuries to fight off inflation as they pour 100s of billions more into this market from this bailout plan. The HOPE that the Treasury and Fed have - is that Foreign money will BUY Treasuries. However, at this point both these economist said there is NO DOUBT that there will be a severe recession in the US and on top of that the 700 billion is buying illiquid positions that NO ONE will buy because the losses are too great. They went as far as to say they were both SHOCKED that Congress believes Paulson and Bernanke that buying these LOSSES and that they could possibly make money. They pointed out that if they just did the math there is NO WAY these positions can make money, based on the prices (the models) in which they will purchase them. They are giving these companies huge premiums for these positions that have not just lost VALUE, but are not even seeing ANY revenue on them. They went even further to point out that if the government wishes to sell them back in the future - they would be taking huge losses because of the value difference. One made a funny statement, he said the: "Bailout plan is based on the same belief that got them in trouble - the belief that the housing market will always go up! They are making a 700 billion bet and paying a massive premium - betting on the housing market rallying!"

   They concluded, if the pass this plan there is a good chance that they will have trouble selling US treasuries to foreign countries, who WILL be the ones holding the risk. Congress says it the tax payer that has risk, that may only be true - but down the road. The risk on the front-end is any foreign nation (foolish) enough to buy MORE treasuries on this bet. If foreign investment funds have already passed on buying this paper, why would they want to do it by proxy - purchasing the dollar backed treasuries?

  I must say they have a point and I too am very concerned about how this will put huge pressure on the dollar, while we may get a knee-jerk rally in the market, the risk will be shifted to the government and there will be a question as to how much will foreign money pick up the tab. There is a REAL increase in pressure and with this plan a serious possibility to see the dollar devaluing - we have already debased our currency in the 1964 on coinage and in 1971 with paper money (gold standard) - the only thing now is devaluing.

 No nation in the history of civilization has devalued themselves to prosperity! 

 That is EXACTLY what we are doing in this nation.

_________________________________________________________________ 

GE Cuts Forecast

    On the eve of economic changing events, GE cuts their forecast and suspends the buyback they initially plan. Causing more concern in already a very fragile market. They lowered expectations to 43-48 cents from 50-54 cents (between 5-20% cut). GE is increasing capital in the GE Capital to reduce their leverage ratios (as I continue to say - this is about deleveraging) - they are doing this by cutting the dividend and suspending the buyback. The dividend will continue to pay the dividend through the end of 2009. They are also looking to reduce their commercial paper to 10-15%, which too will take time (finding a buyer).

   The concern really came down to keeping the coveted AAA credit rating - which after the news both S&P and Moody's affirmed the rating today.

 GE is getting hit in the pre-market. 

________________________________________________________________ 

Buffet's $5 billion BET on the Bailout Plan!

    Too much is being made of Buffet's $5 billion dollar purchase. Even CNBC is using it in an ad, as Bernanke said something along lines as "Buffet on CNBC said he purchase $5 billion in Goldman because he has confidence that Congress will do the right thing!"  I think he should of said that he HOPES that Congress votes for the bailout plan, because I just made a MASSIVE bet that they would. 

Also - you need to look at the DETAILS of Buffet's investment - it is more of a very cherry loan than an investment. Very cherry - how many people do you know are getting a 10% dividend when they purchase stock! Also - why do you think Buffet made this investment in Goldman? It certainly wasn't a value play - if it was why is he asking (and getting) a fat dividend? It's called a safe haven investment. 

See - Buffet like the rest of us is looking for safety. He sees the following - Treasury Sec. Paulson (who happens to be the Ex-CEO of Goldman) about to be granted super powers and a $700 billion check. You have to think that Goldman will continue to be FIRST IN LINE on any money. That plan in smart money eyes - is simply a massive put against bad paper. Goldman (and others) will be able to dump bad paper on the tax payer slush fund. So of course he is going to say it's a good plan and he has confidence that Congress will do the right thing. He just made a $5 billion bet that they would!

Look - I like Buffet - but no one EVERY questions him and thinks he is that nice guy. He is a shrewd businessman, a vulture, a very hard negotiator that has no problem bending people over to get the great trade on. He also does it with grace and style. He is very nice and accommodating - people probably just don't know they gave him their wallets - because he asked so nicely. I like him, have no problem with that, but please - don't think he actually believes this is just a good plan. This plan was a HUGE opportunity for him - he saw that it was a high probability of happening and rushed in to get a great trade on (with a 10% dividend). So of course he is going to say it's a great plan - and NO one will question his motives as to it. 

The talking heads actually BELIEVE that his investment in Goldman is to show confidence in the market. I have to say that was a brilliant piece of marketing for making a huge trade based on a bailout package. Obama and McCain should higher his spin doctors. I need a snow shovel listening to these talking heads.

It was simply a good bet - getting his money closer to those in charge that have a $700 billion check (Paulson) and getting a fat dividend in the process. He NEEDS the bailout plan to go through to secure his bet!

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GMAC Future uncertain

   It is clear that GMAC needs to be on the short-list of that bailout package. Their home lending unit lost $1.9 billion in the 2nd quarter and more losses are expected. GMAC and their Cerberus Capital Management LP has about $150 billion wrapped up in business and consumer loans (mortgages and car loans) at the end of the last quarter. They have already had losses exceed $5.4 billion over the last year - and more is expected. 

   GMAC is only one company, $150 billion is 20% of the entire $700 billion bailout package. I think it is going to take a lot more than $700 billion. Also, Paulson never worked for GMAC, so we KNOW that they will be behind Goldman.

  At this point they may not be able to afford leasing or making auto loans - the money is just that tight.

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Interest Rate Cuts?

     Fed Fund futures are expecting another cut. Clearing showing the risk to the credit markets is a lot greater than we are expected to believe. The need to shore up the money markets (with $50 billion) is a clear sign at how bad and tight credit is. The spreads in the lending market are widening and a rate cut could relieve pressure.

     Sure the bailout plan will inject money into the system, but that is just to free up the bad debt. A cut in the rates will ease lending. Fed Fund Futures are expecting a cut, but they did last time and it didn't happen. Maybe this time they'll be right.

______________________________________________________________ 

Futures Pre-Market

 The futures in the face of the bailout plan and GE's lowered forecast is seeing a "Hope" rally as Congress and the Administration try to work through this bailout deal. The ARB traders can participate - because it is a short future vs. long cash trade. Which if the spreads remain - expect a slight pop.

_____________________________________________________________ 

Support / Resistance

    Yesterday we sat the support levels in the holding pattern. We are right on the edge - it's now about selling the hope and faith. Bringing confidence to the market and "praying" for a rally.

INDU 10,500-10,750 / 11,000-11,500 (We are building up a charge for a move - don't expect that we will sit here.) 

NDX 1650 / 1700 (We are in the bottom area of support - this market wants to rally on Hope) 

SPX 1150 (1200) 1250 (We are right at the pivot point - waiting for Congress to save the day again - expect a move)

RUT 680-700 / 740-760 (This market has a wide band - we saw big losses yesterday in the broader market - not really a good sign)

___________________________________________________________ 

Conclusion

    You want faith, forget watching the religious channels just turn on C-SPAN / CNBC / Bloomberg - it's all about selling the Faith. If we want a bailout package, then $700 billion is not even CLOSE to being enough. If GMAC alone has $150 billion (20%) can you imagine what the rest of the market is like. We are talking in the 10s of trillions in debt obligations.

   The reason I do not support this bailout plan is simple - we will NOT find a bottom to the market and we put huge risk and pressure on the dollar. It is interesting if you listen to other nations economist and analyst - they have a VERY bleak picture of the US and shake their heads with long faces as to this bailout package. They are sick of hearing the tax payer concerns - because it will not be the tax payer that INITIALLY puts up the money for the bailout  - it will be MORE lending by foreign governments. The problem is twofold - if they DO lend more money it is on very low interest rates as it is (that maybe lowered further) on a dollar that by even CPI estimates has a negative ammo. If they look at the short-term paper it is already trading close to NEGATIVE face value. I get the feeling there hands are forced to do so - because of their trade relationship. But what is interesting is that on 10% of China's GDP is based on exports to the US, not as big as I would of thought. China as early as last year mentioned they would not be renewing a trillion in treasuries, they are openly purchasing the Euro paper and also gold. Can they decouple? Will they come to the rescue and buy more treasuries? That is really where the hope lies. 

   Listening to Jimmy Rogers - he says this is not going to be good and the dollar is going to get worse. Recession is coming and it is coming in a big wave - this bailout will NOT jump start the economy - but rather just toss a lifeline to companies so they don't sink today. The question remains the Dollar - something not a SINGLE Congressmen has brought up.

  Maybe they should start listening to Asian and European economist and analyst - since they are the ones we are REALLY going to for a hand out.

I will leave you with this famous and very true quote:

 

"Paper money eventually returns to its intrinsic value --- zero."

Voltaire (1694-1778)

9/24/08 (Paulson Plan! GS & Buffet, Red October!)

Traders,


Yesterday I listened to the Congressional Hearing, I had the original 3 page Legislation that Paulson purposed. Before the hearing started I reviewed this double spaced, 3 page, plan and I must say I was shocked. First, an average citizen in this country trying to get a loan for $100,000 needs to fill out a 50 page document in triplicate, yet this plan is 3 pages and gives one person a blank check, no oversight, and unbelievable powers. Too bad we can't submit our own loan docs to the bank - like Paulson submitting his.

The legislation had me concerned with a couple of issues, specially section 8. Here are a couple of items in the document that have me concerned:

Sec. 2. Purchases of Mortgage-Related Assets.

(a) Authority to Purchase.--The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

(b) Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;

(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and

(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.

Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.

(a) Exercise of Rights.--The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.

Sec. 8. Review. Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

This document, being discussed and question at the hearings, will give one person a huge amount of power. Probably more economic power than any single person in government and Sec. 8 - giving them a free pass without oversight, not even by ANY court of law, well is a little disconcerting.

Bernanke and Paulson were pushing for a quick decision - I don't think anyone expected that Congress would just blanket agree, well maybe Barney Frank.

For me, the Congressional Hearings, while historical and interesting, was nothing more than a parade for the public - so a few Congressional members could give a tongue lashing to Paulson and Bernanke as if they really do have concerns about the tax payer. Believe me when I tell you that it has already passed, sure there will be a few amendments and earmarks - but it WILL pass. I am sure that Paulson and/or Bernanke did not think it would pass in its current form, however I know that game - start HIGH and let them amended, rather than shoot low and then ask for more. I would be totally surprised if Congress didn't pass some form of this plan, very surprised.

As you know I am no fan of Krudlow, basically because he SAYS he is a Free-market guy - but on principal he doesn't really know what that means. He is like the O'Reilly of Economics - shouts people down and calls himself something that his actions and words are the direct opposite. Here is a quote to prove my point, "I am a Free Market Guy, but shorting the dollar is unpatriotic!" See what I mean. Well, Krudlow stuck his Socialist Foot in his mouth last night - enjoy:
http://www.cnbc.com/id/15840232?video=865507900&play=1

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Goldman has a new partner

Buffet is injecting $5 billion into the NEW BANK of Goldman. Goldman is now a bank, in my humble opinion they are now more powerful than before and in a better position. They have becomes members of the Fed and if the Bailout Plan is passed, their EX-CEO is going to be the single most powerful economic policy maker (with $700 billion or more at the ready). Imagine that, lots of ideas come to mind. Goldman can unload bad trades onto the new "Homeland Investments" - that gives them a free put on every trade. Why hedge your positions, if you can just dump them on into a tax payer slush fund. If Paulson gets his way - he will have no oversight and will pretty much get free reign to do with what he wants.

Buffet is no dummy, where would you put your money? The question we need to ask is did Buffet make this investment based on his belief that it is a value play or is this an investment of safe haven? I personally think it is the later. I too opened an account at Goldman - why not - free puts don't suck. Of course I may be taking this to the extreme, but we live in extreme times. Remember it was only a week ago that Lehman, AIG went under, Freddie and Fannie taken-over, Merrill sold in a fire sale to B of A. So NO - these are NOT ordinary times. Goldman having the mother of all hedges - is probably the safest thing.

However - this may still come back to bite us. The problem has really turned into a creditability of the dollar at this point. We really are "HOPING" at this point that Paulson and Bernanke can sell the Faith! So far it is still questionable if they can. I personally believe - if China was positioned well - they would have no problems slapping down the USD - however they still have too many strings attached. At what point is enough is enough? I don't know, but several countries have already shown their hand - Gold, Euro, and anything BUT USD.

Goldman is probably the safest house on the street - but I would still keep an eye on the USD and it's percentage as a world currency. Having an account at Goldman is a domestic hedge, but that doesn't mean you should avoid hedging the dollar.

_________________________________________________________
Red October?

I personally think that September's volatility is just giving us a taste of what October's action will be like. Here's why:

1. Homeland Investment, ok I am joking - but that is what I am calling this bailout package. The Congress will vote for it, it will probably do two things - create a knee jerk rally in the market place - but we don't know how long that will last. It will also put serious stress on the dollar and World's faith in the USD as a reserve currency will yet again fall another notch - how far and how much pressure - who knows.

2. Short-ban Lifted Oct 2nd? The Short-ban will be lifted, millions of shares were covered in two days that sent the market higher. All those convertible bond funds, neutral basket funds, pairs traders, and the list of other shorts will re-enter the market. How fast and how much is questionable - but no doubt it will bring volatility to the market.

3. Terrorist Attack? The Middle East story has been on the back burner the last couple of weeks with the current economic crisis taking front and center stage. However, our relationship with Pakistan is a little difficult, we are trying to get permission for combat troops to move into to borders areas to deal with Al Qaeda and Taliban - however a large attack in Pakistan's capital (supposedly by the Al Qaeda) has left 100s dead and has made negotiating with Pakistan (as far as combat troops) more difficult. There has also been "chatter" that a terrorist attack is in the works. Now I don't know if this is just our Administration doing a little "fear mongering" before the election, but the bombing of the hotel and the Al Qaeda/Taliban issue is still real - Both Obama and McCain recognize that and have promised to send MORE troops into Afghanistan. I would expect the Homeland Security Colored Light system move up to Yellow, Orange, Red (or whatever the scary color is) in October. That leads me into 4.

4. 3rd Infantry Division’s 1st Brigade Combat Team stationed on domestic shore? I can't remember, maybe during WWII that we had a full-time military unit serving on our shores. According to Army Times this is a full combat brigade in their "battle rattle". Here is a quote from Army Times:

"Beginning Oct. 1 for 12 months, the 1st BCT will be under the day-to-day control of U.S. Army North, the Army service component of Northern Command, as an on-call federal response force for natural or manmade emergencies and disasters, including terrorist attacks."

"This new mission marks the first time an active unit has been given a dedicated assignment to NorthCom, a joint command established in 2002 to provide command and control for federal homeland defense efforts and coordinate defense support of civil authorities"

"They may be called upon to help with civil unrest and crowd control or to deal with potentially horrific scenarios such as massive poisoning and chaos in response to a chemical, biological, radiological, nuclear or high-yield explosive, or CBRNE, attack."

I am not trying to scare anyone here, but why would we need a full brigade marching around our streets? I am not saying we will see them, as I don't expect armed Hummers to be driving around - but that would not be out of the question. I can only draw three conclusions:

1. The possible coming Terrorist Threat is real.
2. The possible coming Terrorist Threat is NOT real and this is just posturing before the election.
3. There is an expectation of civil unrest - either from market conditions or from the elections.

I hope it is number 2 - because the other options are not good ones. This is not paranoia or conspiracy - this is just volatility, unstable economy, unrest in the world, and going into a very heated election.
http://www.armytimes.com/news/2008/09/army_homeland_090708w/

5. Elections - are heating up! Factcheck.org http://www.factcheck.org/can not keep up with the lies coming out of Obama and McCain’s mouth. The mudslinging is in full swing - you really can't believe either one! It's just muck racking and the media is squarely in the center, FOX, CNN, NPR, NYT, LA TIMES, talk radio. I have never heard such bias reporting going into this election, not even NPR (which I listen too) gives McCain a fair shake and praises Obama. FOX, who didn't initially like McCain has now turned into his biggest supporter, while NBC toss softball questions to Obama. The papers, who OPENLY support one candidate or another have become openly slanted in reporting. I just wish I could get STRAIGHT talk from some media center - I guess I will stick with the FT, Economist, and foreign papers for now. One thing is for sure - October will be a volatile month on the political circuit. Maybe it's time we all enter Ron Paul's name as independent and vote for him http://www.ronpaulforpresident2008.com/news/


___________________________________________________________________
Futures Pre-market

Just like the other day, the futures are rallying. We are getting a little "confidence" rally thanks to the Buffet investment. However, certainly during the testimony and going into the close it would seem that Paulson and Bernanke could NOT sell the faith, the market did not respond well. Maybe the overnight/after-hour traders believe differently. The spreads are fairly decent, expect Arb traders to short the futures and buy the basket. With the short-ban, this is the only side of the trade they CAN take.

______________________________________________________________
Support / Resistance

The market started to slid again as the faith continues to falter.

INDU 10500-10750 (11,000) 11,500 (I really don't know what to think - 11,000 is a pivot point - we headed lower - the futures are up because people believe in Buffet's investment as confidence - which I think it is really more about safe haven. Expect volatility.)

NDX 1600 (1650) 1700 (We are at that pivot point, the futures are showing 10-15 points higher at the opening but that is a faith rally - nothing more.)

SPX 1150 (1200) 1250 (Again we are near a pivot point, futures looking higher - but who knows after the opening.)

RUT 680 (700) 740 (Again near a pivot point)

We wait - what does the new bailout plan bring us. Expect volatility through October.


____________________________________________________
Conclusion


A little rant - read if you dare: The SHEEPLE

Friends and partners sometimes state that I take things too far or that I am a little extreme. However, I have to ask myself why do they think that, maybe it is their blind faith and complacent arrogance in being American (something we all have)? I stated the housing market would collapse, the dollar would see pressure, inflation is on the rise, a few banks will fail, etc. I am NOT trying to be extreme, just a realist. I like to think of myself as someone that "Hopes" for the best, but is firmly grounded in reality. I do NOT buy into conspiracy theories - but at the same time remain skeptical and do NOT take things at face value. I do read foreign papers, including Al Jazzera to hear the other side of the story. As much as I am not a Democrat, I am certainly not a Republican - unfortunately in this country if you are not one, you are automatically the other (talk about division and bi-polar). If I would of said Lehman, AIG, Bear Stearns, IndyMac, Countrywide would of gone under this time last year - I would be called a crazy-whack-job. But think about this - look at where we are right now! So to my friends (and even partners) that think I may be taking things a little to the extreme - I say to you - take off the shrouds of faith in our system and it's time to start questioning not accepting things on blind faith.

I had an interesting conversation with a friend yesterday, it was about the 1st amendment, the Freedom of Speech and Right to Assemble. Think about this for a second - if the British allowed the colonist the freedom of speech and the right to protest, do you think we would of had a revolution? I think the 1st amendment is VERY important, one of the most important amendments. However, it is interesting that it does relieve the probability of rebellion and revolution. You could say it is the right to bitch! Protests allow the people to vent in a non violent way, but does it really make a difference.

It didn't create the civil rights movement, it was people like Rosa Parks that stood up and took a stand. She wasn't a protestor, she was a rebel! It's people that Rebel that make a difference, not the protestors or letter writing campaigns. We live in a Republic, we don't vote or draft legislation our representatives do. They voted for the IRAQ war, not the citizens. There is nothing wrong with that and we can protest, voice our opinions, and write letters - but that really doesn't change anything. Our power is VOTING and it is a shame that more people in this country do not vote. It is also a shame that we really only have TWO parties!

This country has become lazy and complacent - Obama is popular because he represents Change and Hope, but he doesn't really - he is just more of the same. (same being Democrats and Republicans - two sides of the same coin). Remember Democrats also voted for the War (Hillary and Bidden - Obama was not a Senator then), Democrats voted for NAFTA, Democrats just let the off-shore Oil Ban expire, Democrats voted against Partial Birth Abortion, Democrats (who control both houses and chair the banking and finance committees) voted to expand Fannie and Freddie's leverage which help induced their quick collapse, Democrats voted for and gave MORE power to the Fed and Treasury (Paulson Bazooka), etc. I am not trying to hammer on the Democrats, but rather show you they are really no different than Republicans. There really is not much difference between them. The reason they hate each other so much is that they are so much alike. They booth take money from big oil companies, they both have questionable people working for them, including lobbyist, etc. At the end of the day is their really much difference between Obama and McCain? They both want to send more troops to Afghanistan, both willing to send troops to Georgia. Sure there is the religious stuff, gay marriage, and abortion issues - all very important, but the President doesn't get to draft legislation or make court rulings. He has influence no doubt - but being President is a lot more (hell of a lot more) than just family values.

Even when the economy is concerned they are the same, remember BOTH the Democrats and Republicans have changed methodology in calculating the CPI, Job Numbers, and other government reporting data to make things look better than they really are. What I am getting at is simple - we can protest and complain all we want - that will change nothing. At the end of the day, Obama and McCain are two politicians from two parities that as much as they hate each other are more alike than different. This election is NOT about Hope or Change this election is about whether BOTH parties can seriously get their shit together and solve both the economic crisis, energy crisis, and foreign policy issues. It doesn't matter who wins, without the other party NOTHING can get done. We are talking about CHANGE for BOTH PARITIES. Standing up and doing what is RIGHT for this country. If not - expect more protesting - which leads to nothing.

I am just wondering - at what point do people say enough is enough? I really don't think that will happen. This election will mark the Zenith of the American Empire. So to those that think I am extreme sometimes - just stop and take off your binders and SERIOUSLY look at what is going on in the economy and foreign policy. If you don't you are just like the rest of complacent America - and you better have lots of HOPE and strong Faith - because that is all you have at the end of the day. The shift of power is taking place and we are not on the winning side.

WE THE SHEEPLE OF THE UNITED STATES OF AMERICA.....

9/23/08 (Credit Rating of the US in Question!)

Traders,

Let's review:

First, the Fed brokers a deal for Bear Stearns to be taken over (and personally backs the deal with Fed money) at the same time it opens the Discount Window (to include non-members) - there is a rush of borrowing ($100s of billions). Then, we needed to blame someone for all this mess, for it could NOT be their own balance sheets. They picked an easy patsy, those nasty "Naked" Short-sellers, it was THEM that forced the share prices down and these companies into bankruptcy. The SEC issued an Emergency Order to protect 19 stocks (financials) from these bad "Naked" short-sellers (by the way, NO one was prosecuted for "Naked" Short-selling). But after a one day rally, they started back down again. How could that be, we got rid of those bad "Naked" short-sellers? Why are the stocks going back down?

The Fed continued to pour money into the system and assured us it was something else and there was plenty of liquidity in the system. Congress earlier in the year, lead by Frank and Dodd, told us that Freddie and Fannie were well capitalized and will be used to help bailout these faulty mortgages. "Don't worry, the government is here, our mandated GSEs will save the day!" Of course they were warned by people that could do basic math - but they had something mightier than math - they had a Printing Press.

Of course the market continued to go down (because basic math trumps the printing press - but they still don't know that). Then Freddie, Fannie, Lehman, AIG, start falling like dominos. The Fed is granted "Bazooka" powers by Congress and pulls the trigger on Freddie and Fannie, but let Lehman fail (even though they lent Lehman lots of money at the Discount Window - didn't Bernanke tell us that they were loans at the Discount Window and not one has ever failed?). Then after they let Lehman fail, they draw a line in the sand and said "NO MORE!", within hours the line in the sand is erased and they bailout AIG.

This time instead of a "Bazooka", Paulson goes for the full-nuke option! First we need to blame someone for the market going down, no one really believed that horse shit about the "Naked" short selling, so let's just say it is ALL short-sellers. They are NOT patriotic selling shares on troubled companies, how could they do that!. We are going ban short-selling on 800 stocks, we will have the President of the United States state publicly they will prosecute to the full extent of the law if ANYONE sells a stock short! That will stop this market turmoil. Secondly, we are also going to create a new agency (Homeland Investments) and buy all the bad mortgage debts, $500 billion, no wait $700 billion and also not just mortgages, but ALL crappy debt, including credit cards and car loans. And we are going to let Goldman and Morgan become banks, that will give them free access to the Discount Window whenever they want.

Of course on Friday when Paulson pushed the Red Nuke Button and wind of the bailout hit the streets a massive rally ensues, but the idiot talking heads think it is because the "worst is behind us again" and Paulson is coming to the rescue. Of course they fail to mention that when you ban short-selling on 800 stocks you are going to have the world's biggest short-covering knee jerk rally.

Now we enter the market Monday - all is saved right? No more "Naked" short-selling, no more short-selling, $700 billion bailout package, nationalized GSEs, nationalized insurance, the last two investment banks and now banks. But wait - the market sells off another 300 points and all the indices are down. Gold is rallying, Oil is rallying, the dollar slides hard against the world currencies. Why is that happening? I thought Paulson saved us and the “Worst was behind us!”

They have blamed the "Naked" Short-sellers, they have blamed Short-sellers, they have fired all the CEOs, bailed out companies, injected money, let people borrow from the Discount Window, etc. He has pushed that "Red Nuke Button" - but it really is just delaying reality. We have to deleverage and the Fed getting in the middle of the deleveraging and that (in my humble opinion) is not a good thing. Why - because it shifts that risk from the companies that are failing to the government. Our treasuries could (and are starting) to befall the same credit problems of these companies. Several foreign countries are already treating our Treasuries as toxic waste - simply because the government has taken on massive amounts of debt.

Paulson, Bernanke, Frank, Dodd, and others may look like a Hero in some people's eyes - but reality clearly shows they have not stopped the losses and have clearly shifted the risk on to the backs of the government (and you the tax payers). Ron Paul has been shaking his head and stating - the government is a tool to lend money for emergencies, but emergencies are NOT buying toxic waste to justify failed business models.

We have a bigger problem now - the US Credit Rating, the dollar, and bringing more uncertainty to where the bottom is and how much debt we have added to our national debt.



______________________________________________________
New Legislation

Bernanke and Paulson are meeting with Congress to pass this new legislation.

"Action by the Congress is urgently required to stabilize the situation and avert what could otherwise be very serious consequences for our financial markets and for our economy, Global financial markets remain under extraordinary stress.'' Bernanke said.

However, all their new found powers have not kept the market from declining or has solved the problems. They are both pushing for a quick approval of the $700 billion plan to buy the illiquid assets (mortgages, car loans, credit card debt) from banks. However, many in Congress have backed off from rubber-stamping the proposal. Democrats want to expand the plan to include MORE bailouts of homeowners and limits on executive pay. Some Republicans question they ever expanding size of the bailout. While few, like Ron Paul, just shake their head and will vote NO. Clearly printing more money and tossing it into the fire so far has not resolved anything, but only delayed it.

Of course I expect Barney Frank to slip in an amendment to change the "S" in USA from "States" to "Socialist".

Bernanke has indicated if something is NOT resolved NOW – we could be in for a economic crisis. But some would argue, while that may be true, shifting that risk to the US government doesn’t absolve the risk – but rather transfers the credit risk to the US, which could have longer lasting negative impacts to the economy.

Today will be about Congress and if they pull the trigger on the latest plan to bring about the New New Deal.

If this doesn’t work, well I know Paulson’s next idea: NO SELLING STOCKS AT ALL! Americans are no longer allowed to sell stocks ever! We can only BUY stocks. It is not American to sell stocks. (Of course this is a joke).

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Futures Pre-Market

The futures are paused with little volatility – waiting as if to move when they hear IF and HOW Congress will react to Bernanke and Paulson’s plan and increase in powers they have asked for. If futures remain, don’t expect big moves at the opening.

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Support / Resistance

Well – I guess supports are now in question again. The world didn’t think the bailout was a good idea, as per the credit value of the US currency.

INDU 11,000 / 11,500 (We are right back at the pivot point of 11,000 where we broke down 500 points, rallied back and went 500 points higher. I can assure you that we will NOT remain at the 11,000 line for long. The question is do we hold and does Congress sell the FAITH and we get a rally or does the world again say – thanks but no thanks.)

NDX 1650 / 1700 (We came off hard, 4.5% yesterday, and there is no reason for a rally – except if optimistic euphoria comes back into play.)

SPX 1200 / 1250 (Just like the INDU, we are at that pivot point. Do we HOLD at 1200 or does it break down again. It will really be based on how people react to Congress’s action.)

RUT 700 / 740 (This index has been between 680 and 760 – anything in the middle is just noise at this point. It is too hard to call – other than it has a big range.)

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Conclusion

There is no certainty in this market, we can’t make value or fundamental decisions because it is clouded by government intervention. Many forget this nation’s economy is an extended credit line by foreign entities the purchase vast quantities of treasuries, which allows our government to lend (print) more money. When the credit lines issued to the government dry up – then we have a bigger problem. First it was the consumers that was tapped out of credit (homes foreclosed, credit card debt, car loan defaults), that trickled up to the companies (their debt paper defaulted and they had to borrow more), now it is slowly shifting over to the government (who is printing and pouring money into the system that has increased the debt and now are on the brink of their credit failing).

Foreign nations are not dumb. They see the lending, the increase debt, the lower interest rates, treasuries (30 day notes) invert to NEGATIVE interest. They certainly don’t want to purchase more US treasuries as the currency’s credit risk increases and the interest to off-set that risk DECREASES. That means the government is printing paper and creating inflation, which could reach debasing or devaluing levels. In my opinion we are right on that tipping point of devaluing the dollar and it’s credit risk to a point we could see foreign nations not just slow their investments but actually run for cover and look to a NEW World Reserve Currency. China is moving into gold and Euros other nations are questioning the US dollar as a reserve currency. OPEC has even discussed taking oil off the dollar or creating a mix basket currency rate. The FAITH in the dollar is falling fast.

This bailout package COULD give us short-term reprieve in the market place, even spur another knee jerk rally. It may even save some companies from failing. But at what costs? I say the credit rating of our country is not worth the short-term help that printing money and bailing out a few large companies is worth it. The world would have more respect for this nation and its currency (sealing the faith) if we did not head down this avenue. However, I think it is to late – we have bailed out too many firms, pour too much money into the system, and given Paulson and Bernanke sweeping powers.

Owning some extra downside Gamma is probably something you should already have on!

I don’t expect this latest bailout is going to solve the longer term issue – that is Deleveraging – which will continue to happen (with or without) a bailout.

9/22/08 (Bailout USA!)

Traders,

Last Friday Wall-Street changed, with only two large investment banks left, Goldman and Morgan. Then over the weekend the final chapter of Wall Street concludes – with both Goldman and Morgan now being regulated by the Fed and leaving the investment bank realm. But what does that mean, it means they now have ACCESS to Federal Reserve and all its lending powers. Many people don’t realize this really doesn’t change much at Goldman or Morgan – you could always gone to Goldman or Morgan an open a account, get checks, get loans. They always offered banking services, this just brings them under the Fed Reserve (wing of protection) and different structure.

Over the week-end I listen to a European Economist that made an interesting observation – which we are seeing take place. He said that massive bailout package and the taking over of Freddie, Fannie, AIG – the US government is taking on huge debt. This is not just a US bailout – but a global bailout. It does lend some security and stability to the overseas market (temporarily) – enough time to unwind US dollar risk positions. The problem, worldwide, is the US Dollar (as a world reserve currency). The bailout and the massive credit lines extended by the US government – is bringing serious stress to the dollar and foreign nations are quickly losing faith.

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Goldman/Morgan Banks

As I mentioned Goldman and Morgan were always banks, you could get a checking account and get a loan from them, however they were not under federal guidelines and did not have access to federal funds (until recently and temporarily). The massive deleveraging that is happening – both in the traditionally banking side and massively on the investment banking side has put tremendous pressure on the firms to gather as much assets to keep the capital reserves up as they deleverage.

Allowing Goldman and Morgan are now in the same game as BofA, Wachovia, Citi, and others. They are going after deposits and will be offering inducements to bank with them. Why, because it is not over yet – they still have massive leverage and continue to need capital.

Is it really a big deal that Goldman and Morgan are now banks? Not as big as the talking heads are making it out to be, we already knew they were unwinding leveraged positions – this just gets them to Fed Funds the easier way and restructures the rules (which seem to be ever changing anyway) to become members of the Fed.

Think about his for a second and then ask yourself why they opted to become banks, rather than investment banks.

The Discount Window (the ability to borrow directly from the Federal Reserve) is only available to member banks (not investment banks). The Discount Window is a (traditionally) 30-day short-term loan that needs to be paid back in full, the lender of last resort. When Bear Stearns failed the Discount Window (in a emergency measure) was made available to a list of non-members, including Goldman and Morgan – both who have borrowed from the Discount Window. The window was to be closed to non-members in Sept, but it was extended to Jan 2009. The terms of the loan have been changed from 30 days to 84 days. I have previously mentioned that I was concerned that these firms will not be able to pay back the loans, hence the extension of the window and the terms of the loans being changed. I expected that many of these firms would merge with a member bank (JP Morgan/Bear and BofA/Merrill) – there was rumors last week that Morgan Stanley would be merging with Wachovia. It made sense more deposits and full access to the Fed.

Remember, these investment banks borrow money short-term to leverage themselves – if money is tight and there is nowhere to go – they need a lender of last resort – the Fed.

So, think about that for a second.
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The Bailout

On Friday it was $500 billion (1/2 trillion) over the weekend they tacked on another $200 billion with the possibility of adding even more. Just two days after the revealed plan, the new bigger (is better) plan includes other types of debt, including (but not limited to) car loans and credit card debt. It even goes as far as to imply that 700 billion could be just for starters.

The problem is that many are now questioning the Fed and Treasuries honesty and transparency of the problems in this country. Several analyst are already voicing their concerns as to the health of the economy. ``The costs of the bailout will be significantly higher than originally considered or acknowledged,'' said Josh Rosner, an analyst with Graham Fisher & Co. in New York. ``How, given these changes, can the administration and Federal Reserve believe they are being forthright in their unrevised expectation of future losses?''

Clearly the problems of the US Economy should not escape you, the recent actions of the Treasury and Fed are getting very lofty and taking the time to think about their proposals and actions should leave us all concerned. Congress is giving both the Fed and Treasury sweeping powers beyond their traditional mandates – they are becoming the most powerful arm (as per the economy) as we see power transfer from Congress to these two entities.

What is alarming is that many complain (rightly so) that banks and financial firms are not very transparent, but now shifting those losses to the Federal Government makes it even less transparent. Many analyst and economist are trying to figure out the impact to the Federal Government, we know its big the question is how well they are able to sell the FAITH. I guess at some level we could say we have moved to a Economic Socialist System were the risk is shifted to the government and its now more about faith that the government can absorb these losses. Those that don’t think through the problem and believe the government can wipe clean that debt, simply by absorbing it, could be in for a big surprise.

The NEW risk factor is now the dollar and buying power. These decisions by the government to bailout everyone and anyone has shifted the problem from the deleveraging (which is still continuing) to the debasing of the currency. Clearly the “Safe Haven” is NOT the US dollar anymore, China mentioned two weeks ago they are moving into gold and the Euro. Several other countries are moving into hard assets and also foreign currencies. We saw this happen on Thursday and Friday – Gold and other commodities rocketed higher.

Jimmy Rogers made an interesting point, he stated smart money will want some credible backing behind paper – and the only paper with hard deliverable assets behind them is commodities (futures). If the currency is devaluing (something that Rogers has claimed has been a risk for some time – now becoming a reality) the safe haven is commodities – which are quickly converted to buying power of any kind.

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Where is the money?

If the government is pouring money into the system, then where is the money. It is simply being absorbed by the losses in the defaulting debt instruments (write downs). The problem expands as banks are losing deposits (capital) and on investments. Last week you might of heard that the dollar broke, that meant that money markets dropped below 1 (dollar parity) – several banks FROZE money markets (from redemptions) to make sure they had enough capital. That created a panic – many people no longer could get access to their funds.

Paulson has stepped in with $50 billion to secure money markets – but that may not be enough, hence the 700 billion in purchasing all kinds of debt. However, that too may not be enough and will have to expand.

The problem is simple – it is massive leverage being unwound. When you have $100 dollars, but you borrow $500 (by posting your $100 as collateral) and then lend out that $500 at a higher interest rate (to profit) – when that $500 loan fails – your $100 capital is quickly used up. Now the lender who loaned YOU the $500 wants to be paid, you don’t have any money. So you now borrow MORE money to make up the difference.

The catalyst was the failure in the mortgage market, when 1 millions of home loans defaulted and people began to foreclosed – it spurred a secondary lending cycle as banks and institutions were borrowing money to keep their capital current and within Fed Regulations. The banks could NOT write down the loans to zero, because that would wipe them out. They would write down as much as they can to remain solvent, borrow some more for the next quarter and write down some more. The bank was assuming losses by shifting the losses of the loans they made by borrowing from the government. They are now in debt to the government for these mortgage losses.

Now that problem is being repeated in the credit card and car loan arenas – as well as other lending areas.

We are a nation of consumers – regardless of government regulation, under-regulation, over regulation, at the end of the day – this is not about Bush, Republicans, Democrats, - it is about the citizens of this country borrowing more than they could ever afford. Sure companies, banks, and mortgage companies are to blame for not managing their risk, same is true for the government agencies and Congress not being on top of this. However, it was the citizens of this country that borrowed trillions of dollars (home loans, equity lines, credit cards, car loans, etc) – a nation of consumers that have, for the most part, defaulted. We, the citizens, have been instrumental in bankrupting this country.

The best we can hope for now is Stagflation – consumers are tapped out, banks are tapped out, the government is bailing everyone out. Consumers barely have enough money to spend and their credit lines are gone. Three quarters of the GDP is consumer spending – that is expected to shrink considerably.

So far the money the government is pouring into the system is just paying down losses, they haven’t injected enough to cover that yet – which will take some time.

Some of you may be happy about the bailout – the reality (IMHO) this is a very dark time for this country and this time in our history could mark the Zenith of the US being the Economic world leader, I believe we have passed that baton, probably to China. It will take years to get out of this hole and I doubt the government will ever be able to repay the debt – two things are coming MORE taxes (a lot more) – just to pay down debt. At some point we must remind ourselves about a little tea party in Boston, at what point does taxation without representation become apparent? How much more can we bleed the citizens of this nation for other people’s (and companies) fault?

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Commodities Bottom?

If Rogers is correct, the dollar will continue to devalue (get weaker) as the government assumes more and more debt (doubling our national debt and liabilities). We saw the money markets freeze and also the 30 day treasuries trade for negative interest – as people rushed for safety and not knowing where to go. At the end of the day the dollar is a FIAT currency, meaning that it is used to REPRESENT the transaction goods and services. The dollar, itself, has no intrinsic value. So it’s those goods and services that actually has value. Energy, Food, hard commodities, are all things – that we the people need to survive. Rogers and others are calling last week a recent bottom in commodities, not just based on supply/demand (as they have historically pointed out) – but now even more so as the dollar continues to weaken.

Expect commodities to rally.

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Futures Pre-Market

The futures have been down in the pre-market but are drifting higher. The news about the massive bailout is twofold – on one hand there seems to be some relief that the government is bailing everyone out, on the other hand what does that mean about the health of the economy or the dollar. I think the Arb traders will be on the sideline – until more resolution as to what is actually going on.
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Support /Resistance

The market rallied Thursday and Friday as the government takes on all the bad debt (mortgages, credit cards, car loans, etc.) – as the market rallies, the dollar is sliding.

INDU 11,000 / 11,500 (We rallied massively – on the largest short-covering in history. We pulled off some from the 11,500 line. Remember, shorts are still handcuffed until Oct 2nd – so there is probably still upside pressure.)

NDX 1700 (1750) 1800 (I say that 1750 is the pivot point – either direction is in the cards – 800 issues are non-shorts – which could give some upside bias. However, there are many that are looking at the dollar sliding.)

SPX 1200 (1250) 1300 (1250 is the pivot point – again just like everything else – this rally was technical (short-covering) – don’t expect this market to move on fundamentals.)

RUT 720-740 / 760 (760 is the previous top – we are right there. Again – not sure what to make as long as the market is getting propped by the government.)
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Conclusion

The economic world is changing right in front of our eyes, policies are changing in hours not months. I got a look at the Paulson Plan $700 billion, it’s a 3 page piece of legislation that was drafted in hours. It’s absurd and very concerning. It is amazing that people are feeling confident and optimistic – the government is pouring 100s of billions into the market if not trillions – I don’t know what is so great about that.

In the last two trading sessions we have seen the dollar slide, gold, oil, silver, and other commodities move higher. The rest of the world does NOT seem to have the confidence that our government dumping money into the system is going to bring stability to the economic landscape.

Stagflation, inflation, recession, depression – the economy is drawing dead, any of those cards suck and means things are not going to resolve themselves until at the earliest maybe 2010.

Right now it is the Tax Payers taking on trillions in liabilities and we don’t see any ending to the debt loan in sight. I don’t think the $700 billion is even close to being enough.

First they came for the Naked Short-Sellers.

Then they came for ANY Short-Sellers.

Then the IRS strapped on their Jack-boots and came for Tax Payers.