Traderbill's Financial Markets Weblog

(Yesterday the stock market tanked…with the S&P 500 now below the 40, 50 AND now the 200 day moving averages. It was bad…but not quite bad enough since the volume was a low 1.1B shares and about 50% of that was BAC, C, and GE…the usual suspects. Also, while ever index had a lower high and a lower lower, all missed ‘key reversals’ by about a point thus averting disaster. A higher high, lower low AND close BELOW the prior days low is a very strong technical indicator…normally but not these days. Futures are tentative at best up slightly earlier and now oscillating around unchanged…caution! TB)

…yesterday, Fitch Rating Service let the other shoe drop on California, lowering the state’s rating to BBB from A-, just two notches above JUNK! That is actually a relief but Moody’s (A2) and S&P (A) are still reviewing and Fitch still has it on credit watch – negative as does S&P, while Moody’s has it as stable??? This on the dysfunctional state TB lives in where a failure to pass a budget is an annual occurrence. But the last two years have been unique: in 2008, it took forever to pass a budget as term limits have removed any semblance of order and both houses are sufficiently split between the GOP (a term the Republicans have tossed out …because while it is old it is no longer grand?), so there is no discipline…every legislator for himself! So when they finally passed a budget in October, a huge amount of damage had been done and the balanced budget (sic) was based on old data. Now, another year later (fiscally, but actually less than eight months) we are at the same ‘state’ or stalemate (?) again.

As was the case a year ago, the state cannot issue revenue anticipation notes (RAN’s) without a signed budget. Normally, for about as long as TB can recall, when this happened the banks would buy ‘warrant’s which were short term until the budget was passed then paid off with RAN’s and it worked…the banks got paid handsomely for their efforts and everyone was happy…well the taxpayer wouldn’t have been but he didn’t know what was going on. This charade all came to a screeching halt after 2007 when the banks balked at anteing up when they were hit hard and tax-exempt income wasn’t worth much and besides they needed to raise capital not to squander it on a state that can’t manage its own finances. Actually, TB believes that this all began when Schwarzenegger became governor in a recall election in 2003 (which was also stupid as he had just one more year and the costs were enormous), for the boring but not as stupid Gray Davis (doesn’t the first name say it all?), who was actually a victim of Enron who manipulated  energy prices nearly bankrupting (sic) the state. So the new Governator came in and found an easy way out…don’t raise taxes: issue bonds…lots of bonds. So we went merrily on our way…until the mortgage crisis…derivatives crisis…financial crisis.

But while our legislators receive their pay along with other state workers (thankfully, except for the solons…rhymes with felons), the state is relegated to issuing IOU’s to service providers. Last year, many of these went out of business as they could not meet payrolls but the media paid scant attention…so they are damaging the economy even more even as the Feds attempt to stimulate it. The IOU’s are also in the form of state tax refunds which will make people cut withholding in the future in fear they won’t receive them next year either…in the case of the government: better a borrower, right?

So over the weekend TB had a thought: why doesn’t some enterprising bank with some sense of creativity advertize the customers can use those IOU’s to make mortgage, credit card, personal loan payments, etc. without penalty. So let’s say your mortgage payment, and other payments to the banks is $3,000 and you have a state IOU. Why not accept it as payment and credit your account with the balance to be applied to future payments? Sorry, TB forgot the retarded banks…running 30:1 leverage or so but down from 40:1 would never think of doing that for a customer. In point of fact they would be doing it for themselves as that would prevent more loan delinquencies…why to they pay those shortsighted idiot so much? Stupid!

So yesterday, after hearing that bank credit card issuance declined 35% in the first six months over the comparable period last year while delinquencies are running 4.8% (!!!)

TB heard of an enterprising guy in Columbus, Ohio of all places who advertized on Craigslist that he would buy up those IOU’s…at a discount of course. He said that the lowest offer he had was a $2,000 IOU and several were for more than $100,000! Well, above his budget so he decided to make a market in them…and lo and behold, so did Wall Street…see the banks don’t have a monopoly on lack of innovation, Wall Street isn’t far behind! Now TB is concerned about two issues: he is at big risk of running afoul of the SEC as by making a market in the IOU’s he is ‘securitizing’ them. But another concern is scam artists who can create phony IOU’s and buy and sell them at will….and you didn’t think regulation was a good thing! Think people! Oh, and there is precedent for this as back in the late 80’s and 90’s there were fraudulent bankers acceptances…most on the Bank of Sark…TB kids you not…what kind of fool would buy that and later ‘bank discount notes’ which are non-existent securities but which TB researched for a member of his board at the time who despite having confirmed it with the Fed was told that he didn’t know much about investments as his friend had been buying them for years and they always paid off…think Ponzi or Madoff!

California, about a fifth of the U.S. economy and on its own the eighth largest country in the world is just the tip of the iceberg. CNBC this morning had several governors, including Minnesota’s Pawlenti, talking about their worsening situation…the beat goes on…and on…ad nauseum.

Another story this morning is on Long Term Capital Management Founder John Meriwether…who coincidentally TB mentioned yesterday. When LTCM blew up in 1998 with a staff and board of geniuses but who managed to lever themselves, according to some estimates as high as 100:1 (could have happened as asset value was falling faster than they could delever). Less than a year later he founded JWM Partners, yet another hedge fund but one which promised…well sort of…15% returns (isn’t that what Bernie had?), with 15% leverage….yet TB read in 2008 that he had hit 40% but again that could have been due to rapidly falling asset prices. Anyway, today he announced the closing of the fund…that’s two for two John! The question is how much did he pocket and how much did he lose with his own money tied up in the fund…ya know, that isn’t the point as shown by the following article from an Atlantic.com  article by Matthew Yglesias (3/19/08):

Fun with hedge funds: “JWM Partners LLC, the investment firm run by ex-Long-Term Capital Management LP chief John Meriwether, lost 24 percent in its $1 billion fixed-income hedge fund this year through March 14, according to two people with knowledge of the matter.”

This reminds me of a parable I’m stealing from someone else but I don’t recall who that is. Imagine I find a kind of gambling machine somewhere that works kinda sorta like an enormous roulette wheel. It has 100,000 possible outcomes, and on 99,999 of those outcomes it pays off at a 1:1 ratio. But on the 100,000th outcome, you lose at a 1:300,000 ratio. Obviously, placing a bet on that machine would be foolish. But suppose instead I set myself up as a financial assets manager. People invest money with me, I “invest” it for them by betting on the machine, and then I take 15 percent as my management fee. Well, the odds are that for a while I’ll be earning a good return for my investors. I’ll get a reputation as a genius. The volume of assets under my control will skyrocket, and with it my management fees. And then one day we hit the whammy and everyone loses everything. Except me — I’ve already pocketed all the management fees I need.

I mean, if I did that once, nobody would be crazy enough to help me start up a second hedge fund, right?

TB will leave you with that to ponder as you wonder whether it is wise to pay anyone 2% plus 20 to manage your money…also as of now JWM is down 44% for all those years…including fees and expenses of course. Remember a five year or even ten year track record does not mean a thing…or 14 years as we saw with Bill Miller of Legg Mason fame…in fact the longer you go the closer that six sigma event becomes.

Past performance is no predictor of future performance. Amen!

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Today, TB is attending the funeral of a good friend, Ernie Voigt, who died of cancer, fortunately a short bout. Ernie, who along with Bob Brown (Brownie) who founded Pacific Securities, a powerhouse in the SF Bay Area that participated with Salomon Brothers on big treasury bond issues in the 1980’s. Ernie, who let his friend sleep on his couch for four years while he was a struggling actor…that man was Clint Eastwood. Ernie, whose friends ranged from stable boys to CEO’s seemed to be the epitome of Will Rogers quote: “I never met a a man I didn’t like.” Ernie, who presided over a weekly pick up group of investment professionals in the East Bay. Ernie, who was captain of his camp at the Bohemian Grove. Damn, TB is going to miss him! He was a ‘oner’.

Have a reflectful day and think how valuable your friends are to you!

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC, © July 8, 2009.

TB’s Quote of the Day:

You don’t tug on Fuperman’s cape
You don’t spit into the wind
You don’t pull the mask off that old Lone Ranger
And you don’t mess around with Jim

- the late Jim Croce

…after Thursday’s stock market breakdown that couldn’t even benefit the long end of the bond market, hopefully dear reader you can forgive TB for being convinced that yesterday would be downright ugly. To recap, the major stock indices were down 2-3% on Thursday and some major sectors fared even worse (Energy -3.5%; Oil Services -4.4%; Financials -3.7%…REITS -5.9%). The only forgiving fact was that volume was just 738 million shares, less than half a normal day and lowest of the year! Then over the weekend as TB was checking the stocks he follows (about 60…not being a Jim Cramer who can keep 2,000 stocks or more in his head), he noted that an inordinate number gapped down on the open Thursday in response to the rout in the global markets, a trend that continued and was even worse on Monday…especially India which fell 5.8% due to record debt issuance both in dollar terms and as a percentage of GDP causing the Rupee to do a death spiral.

So the stage was set for a huge selloff…yet it failed to materialize. Despite the futures being down well over 100 overnight, and still off 70 or so, the Dow opened down 1,  then oscillated around unchanged for most of the session before rallying in to the close in the final half hour as we have begun to expect. TB left for the gym before the opening and was shocked when he saw the monitors!

But just what did we get? No closing of the opening gap down from Monday, several indices took out key moving averages, the highs were not much different than Thursday’s lows and the moves of individual stocks were random and pathetic. In other words, it was a meaningless session aside from bucking the entire rest of the world. But think about that: as mentioned above, global markets tanked on Thursday, then we went down which in turn took them down on Friday while we par-tayed. Then down again yesterday before the open so were we to follow suit? Apparently not.

So TB will no longer prognosticate in this ‘thin of thins’ market. He won’t tug on Superman’s cape, definitely not spit in the wind, no way will he try to remove the Lone Ranger’s mask and while we don’t have Jim to mess around with anymore, he will not tempt Mr. Market! No sir! …but he will remain a BEAR!

There are definitely two schools of thought on the economy. The ‘V’ shaped recovery contingent, and the ‘L’ or worse minority. Is ‘L’ the new ‘V’?

TB is in the latter camp and has been due to his own enlightened theory (if we are trying to repair our balance sheets…corporations like Microsoft are borrowing when they don’t need it just so they have it if and when they do need it…banks are being more restrictive than ever in their lending and focusing on rebuilding their balance sheets and of course paying back TARP funds so they can pay execs whatever they want (it may not be the primary reason but TB has yet to hear another)…unemployment is near 10%…actually around 16% when you count discouraged workers and those working part time but wishing to work full time…wages are not going up…the stimulus is being offset by increases in state and local taxes…it’s a mess.

Yet the supply-siders, Art Laffer, Brian Wesbury, Larry Kudlow, and others are worried about INFLATION! Wait…weren’t we just worried about DE-flation and shouldn’t we still be? We should unless the ‘V’ is on the way and employers will somehow use up all that excess capacity and in a feeding frenzy start giving out big wage increases to the rank and file…and that folks is NOT going to happen…any more than the consumer will be back.

Just as they did in 2007, this same group was worried about rising commodities prices causing inflation…yet while it was double digit in raw materials prices due to the rigged commodities market where the banks were buying unlimited contracts in oil and other commodities so they could write ‘commodity index swaps’ to funds, and those increases even carried over into intermediate goods but the end users were already concerned about their mortgage payments, housing prices had already peaked, retailers were seeing it so they balked at paying the wholesalers who ended up with excess inventory and that stopped the entire process…can anyone recall a similar time? Just out: banks issued 38% fewer credit cards in the first half of this year than the prior year.

Yet the supply-siders insist that we have to have a huge jump in interest rates…what with all that debt…and they might be right but it seems highly unlikely. Yesterday, TB read in John Mauldin’s Outside the Box edition a compelling case for the ‘L’ team and why even though commodities prices might rise (except it appears that even that idea may be wrong as speculation was driving prices higher again, not demand…how can there be rising demand when every storage container in the world, except coffee cans is brimming with crude? Also, the selloff in crude yesterday was precipitated by a report that crude could fall to $20….T. Boone Pickens was on CNBC this morning and recall he saw $70 oil while Goldman was calling for $75-85. But today he repeated what he had said when oil was in the $50 range: we will see $60 before $40. TB recalls that too. Whatever happened to those dire ‘peak oil’ forecasts? A good recession will cure that every time but it is now what we do that will determine the future price. If we do as we Americans so often tend to do and think we dodged a bullet we will pay for it later…in spades! We have to conserve and we have to find alternative sources of energy or at least develop them.

But even if commodities prices do rise, if incomes are not rising and credit isn’t available doesn’t the elasticity of food and energy mean that we have to take more from discretionary income and divert it to paying the heating bill? TB would say yes and in the article they proved it with actual data not just a gut feeling as TB was working from.

That also means that corporate earnings will be less…and remember the banks have not even addressed their commercial loan problems yet…and that means that the p/e ratios are still too high…particularly after last quarter’s huge rally. So either the ‘E’ has to go up or the ‘P’ has to go down.  Think about it.

There was only one issue TB had with the piece and that was a biased support of hedge funds. It said that we should not blame the financial crisis on hedge funds with 1.5 to 2 times leverage yet trust banks with 30 times leverage. Hedge funds were NOT using that lower leverage during the build up to the crisis…certainly not the average fund. The only thing John Merriwether learned from his fiasco at LTCM was to not use 100 times leverage. His new improved fund was at ‘just’ 30 times when he had to shut it down. Also, there is a huge difference between a long only fund and one that either uses derivatives exclusively or significantly since derivatives by their very nature are leveraged! As for the banks, he is right…you should not trust a bank with 30 times leverage yet that is where they are. Remove the FDIC guarantees and they are toast!

A last comment: Libor, the rate banks lend to one another at in London, is still dropping. While the 1 month rate has been steady at 0.30%, the 3 month rate continues to fall On June 18 it was 0.61% while overnight it fell to a new low of 0.54%. A caution here as that rate is an ‘average’ and Citi or BofA are not borrowing at the same rate, in fact the spread from the high to the low is quite large. Think about this as the 2 yr T-Note rate is <1%!  

Yesterday TB closed with: “Good luck today and this week…it looks like we are going to need a lot of it!” That remains solid advice.

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC, © July 7, 2009.

TB’s Quote of the Day: “Wimbledon is a social event, not a sporting event.” – Mark McCormick, What They Don’t Teach You at Harvard Business School…he used this phrase to convince Rolex to sponsor Wimbledon as they were opposed at the time to associating their name with sports. He can be forgiven for that having died before seeing the Men’s Final yesterday when Roger Federer defeated Andy Roddick in the equivalent of six and a half sets, including a stunning 15-14 final set. That feat was only surpassed by the sportsmanship of both men as Federer won his fifth Wimbledon and captured the title for the most majors won at 15. Truly a great accomplishment. 

 (When TB posted today’s commentary early he proudly told his wife who quipped: “you will end up writing another one…well she was right and here it is. TB)

…at the other end of the spectrum from the above is Alaska Governor Sarah Palin who resigned saying she had “a higher calling” then to serve as a lame duck…this from someone who served just one term as Mayor of  and not even a full term as governor…is there a law that prohibits a governor of Alaska from serving two terms? Was the higher calling giving speeches for $100,000. Think how close she came to becoming Vice President and could have potentially become President if something happened to McCain…of course she can now aspire to bypassing that step and going straight for the gold…not!

As for the bad start, that would be the market. Here is the table produced by TB last week and now updated to include the first two days of July…thankfully saved a third by the Fourth:

Also of interest were REITS and Oil Services which fell 4.6%, and the KBW Bank Stock Index, down 1.9%. Contrast with the returns for the entire month of June and there is little doubt that next week will be interesting and exciting, particularly since both Nasdaq indices gapped down on the open Thursday.

A lot has been said about Treasury’s being rich, about corporate bonds being cheap but the sad truth is that on any given day…or during the day both sectors can either. A Bloomberg article this morning on problems faced by corporate treasurers points this out. Microsoft in May issued a 30 year bond despite sitting on $25 billion in cash as a precaution due to the recent problems in the credit markets. The $750 million issue was brought to market on May 11 as 5.2% due 6/1/2039 at a slight discount  of 99.786 and a spread of 105 basis points over the 30 year treasury!…for a AAA/Aaa rated bond!

Two days later it hit its high price of 103.212 but then look what happened:

5/15       98.962

5/19     101.500

5/27       95.450

6/4         98.480

6/10       93.556

6/16       98.368

On June 29 it was 101.137 and closed Friday at 98.113. TB has 37 years experience in bonds and wouldn’t think of trying to trade that…how can you? The nice thing about bonds is you can easily see the percentage change…from issuance, in two days it rose 3.4% and less than a month earlier was down 9.4%! On a smaller scale the same goes for U.S. treasury’s and especially TIPS! Don’t even ask what one is to make of last Thursday’s big curve steepener. What’s a mother to do???

Overnight activity is what caused this piece to be written…not to mention Wimbledon and Palin. Get this: India is going to issue a record $93 billion of bonds to balance the budget…is that all?  We did 50% more than that a week ago alone! Both of the Indian stock measures plunged by nearly 6% as a result of the Rupee taking a nosedive (US investors note that the India Fund trades at a 10% premium to the Net Asset Value). TB bets they will have no problem selling that debt…well maybe but you can bet there will be strong demand from the Chinese, right? As is that isn’t enough, rioting in Xinjiang province has killed 140 taking the Hang Seng down but the two mainland exchanges are up more than 1%. Global stocks are tanking except Korea which you might think would be leading the pack, and U.S. stock futures are tanking in Globex trading…not good. Ah, so buy Gold you say and TB would agree but it fell $8.70 overnight as the miserable dollar strengthened…oh and a report saying the obvious as TB has said indicates that the global glut in oil will drive crude prices down to the $20 range…gee, and Goldman Sachs (who is just a heartbeat away from the government…or less) just saw it at $75. Why don’t all of those strategists just resign…the only one worth his salt is David Rosenberg!

Good luck today and this week…it looks like we are going to need a lot of it!

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC, © July 6, 2009. 

…why wasn’t everyone shouting: green shoots! green shoots! ??? After all we only lost 467,000 jobs in June and revisions to April and May subtracted 8,000 jobs, so we weren’t off that far from the three month average of 436,000 and much better than the six month average of 564,000…so ignoring May’s ‘low’ 322,000 (which was seen as an inflecton point by some optimists at the time…just as they saw the ‘dip’ below 600,000 on weekly jobless claims that lasted one week…but hey if you are never an optimist how can you possibly get in front of the herd…but on the other hand using FILO (first in last out) means that if there is a fire you are DEAD!), being lower than the string of six month averages could be an inflection point and it is actually below the 472,000 twelve month moving average! Hip hip….hooray! But getting serious the market finally decided it is serious…serious enough to look down and even look back for the past half month and ask as Admiral Stockdale did after being harpooned by Ross Perot: “Who am I? Why am I here? …and we all know what that got him…and Perot!

Anyone who used the term ‘green shoots’ since its utterance in Congressional testimony by Fed Chairman Ben Bernanke last March (did it cause the market turnaround?), and  which if you Google it will get you 778 million results! Here is one you might find interesting…especially since TB has said on several occasions that this time is worse than the Great Depression (and we are in denial that is is even a depression at all):

 What’s striking is the optimism: story after story says, in effect, that the worst is over and recovery is just around the corner:

(Name and title omitted), predicts an abrupt recovery in stock and commodity prices by Labor Day due to current consumption exceeding production. Distinguishes between two types of depression, “V”-shaped and “U”-shaped.

One thing that surprised me about the WSJ story, however, was this assertion:

Of course, the current recession is nowhere near severe as the Depression. A great series of charts by the (omitted) shows that by almost every measure the Great Depression was more severe by this point in the cycle.

When was that written? March? April? How about in 1930 in the WSJ and thoughtfully reproduced by Paul Krugman (NY Times, Opinion, June 23, 2009), which referred to a WSJ. The more things change the more they do remain the same! The two omissons were Col. Ayres, VP Cleveland Trust (who even would listen to a lowly VP these days), and Council on Foreign Relations, which TB redacted to make you think about it. So if the Great Depression was merely a depression compared to the Great Depression, what does the New Great Depression make this depression…er…recession?

TB would argue that the reason this time is different than other post Depression recessions is that during the Big One a family had only one worker (thus doubling the  odds of at least one spouse either losing a job or having hours reduced, and also the debt levels plus savings requiring both to now work just to keep up with the monthly payments. Furthermore, the lack of fiscal restraint at the state and local level means that they are having to now charge for free services or raise taxes to keep from laying off even more workers (a reader also sent some articles on the Hamptons – East Hampton and Southampton where budgets were fudged to ensure elected officials stay elected and like Orange County Moody’s didn’t pick up on it…why do we pay for those ratings anyway or more importantly rely on them accept to protect advisors from lawsuits?)

The payrolls report also pointed out two glaring areas: first, 52,000 government jobs were lost…these being temporary workers which caused the increase in government job in prior months this year…and contrasts to an average of +4k for the last 2, 6, and 12 months!; second, was temporary workers which declined by 38,000 after falling by just 8,000 last month compared to the six and twelve month averages of -54k.

Why isn’t the stimulus including a lot of government employed jobs for all those ‘shovel ready’ projects? After all you aren’t going to find them at the states where one-fourth have unemployment and several are following California’s lead to the abyss.

While TB was right on the direction of the stock market he missed it by just shy of a week due to his theory on T+3 settlement for hedge funds being the key as it has now for four of the last six quarters (he also erred in thinking payrolls data would be .

Charles Kindleberger, a brilliant man, along with Hyman Minsky (Minsky Moment, not Minsky’s Follies), set out the seven stages of a financial crisis, here they are with TB’s comments on what happened:

1. Displacement – the aftermath of the 2000 crash, recession, and 9/11.

2. Boom – led by housing which fueled home equity withdrawals due to low interest rates

3. Bubble – derivatives embraced by Wall Street and hedge funds fueling an insatiable demand for product resulting in a lowering of credit standards. Also, a surge in commodities prices due to banks entering into limitless commodities index swaps which caused inflation fears to soar yet were baseless.

4. Financial Distress – borrowers unable to make payments on subprime loans which was hidden until the SIV crisis hit taking foreign countries and banks with it

5. Crash – what ensued from investors finally feeling the pain and panic at banks and shadow banks.

6. Revulsion/Discredit – a loss of confidence in our banks and even the governments ability to rescue them or the economy drove stocks to lows suggesting that even the soundest of banks were on the brink of default.

6-1/2 – TB’s Rule -Optimism…Green shoots, talking about the huge rally from the March lows in percentage terms in an effort to get investors minds off the real loss of wealth

7. – Depression – if TB’s rule is correct and there is a realization that even the experts don’t have a clue or are in abject denial – it is the final straw that causes stocks to languish for years or even decades…Pimco’s Bill Gross says a decade, to Neil Howe, who believes in 80 year cycles and thus sees this lasting for 20 year (or less if we have another world war)…but relax as we are already two years into it! See…not so bad!

To add to the complexities, the markets are now more highly correlated than at any time in the past 25 years or more making hedging or even diversification difficult if not impossible.

So what is the best investment? Save and do that by paying off your high interest debt. There is no greater return than you can anticipate…18-24% and when it is gone your monthly ‘nut’ is dramatically reduced (be careful on your 5-6%) mortgage though as a lack of liquidity in housing may make that preferable to having too much of your assets tied up in your home…and where you are if you have owned your home for ten years or more and not withdrawn equity. One of the first tax benefits to go may be the $250,000 ($500,000 per couple) exemption from capital gains on a home sale…after all they are currently discussing eliminating the mortgage deduction which would have been a good idea 20 years ago but would be a disaster today. But think: who benefits from that 250k deduction? Certainly not the majority and especially not the lower 80% of taxpayers.

The Bible of the Navy before adopting The Uniform Code of Military Justice was Rocks and Shoals…that is where we are today and we must not founder!

The coming week will be interesting and hopefully shed some light on where we are headed. The first quarter started off with a major rally…actually a continuation; the second with a rally that took us thru mid-May then slowed but still was a good quarter, in fact the best in years. This quarter, the first to not begin with a rally this year is off to a rocky start. Stay tuned.

The coming week will be interesting and hopefully shed some light on where we are headed. The first quarter started off with a major rally…actually a continuation; the second with a rally that took us thru mid-May then slowed but still was a good quarter, in fact the best in years. This quarter, the first to not begin with a rally this year is off to a rocky start. Stay tuned.

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC, © July 3, 2009.

…by the time you read this we will have the employment data for June. Jobs were expected to decline by 345,000 so if you see just 325,000 they will be whooping it up. Such is the nature of green shoots and this despite the worst job market in 25 years.

Not only that but finally condos and co-ops in Manhattan are dropping like a stone, -18.5% year over year as the collapse of Bear Stearns and Lehman Brothers finally caught up with them…what did we expect? This is the first price drop in the four housing recession and it across all sizes and price ranges. Another brown shoot.

Yesterday’s equity market rally just about offset Tuesday’s decline and since the middle of May the indices have been ratcheting down. Did you notice that the rallies have come on the first trading day of the month (except April 2), each month since the March lows. Then we went flat until the next month but that came to a halt in June…good luck. Still the high correlations between all asset classes are making it difficult to do much of anything leaving an alternative of cash yielding less than 1%…not much for compounding. As the return tables yesterday showed, returns in all asset classes are all over the place for various time periods and with no consistent direction…even for treasuries which have been routinely oscillating 15 basis points a day making investing dangerous. There is little if any predicatability and definitely no trends.

Well, let’s see what reaction there is to the payroll data and about two hours later the big traders will be headed for the Hampton’s…if they haven’t been forced to sell their places or are trying to which is a fruitless endeavor. There shouldn’t be much else left today.

The highlight may have already occurred as Johnson & Johnson (JNJ) announced they are investing $1 billion in Elan (ELN) for an 18.4% stake. The shares surged 28% in Euro trading to $9 from $7, last nights close, where they have been hopelessly mired in a range of $7.60 to $6.50 for three weeks. The surge however, is more likely due to short covering as the 40, 50, and 200 day moving averages have converged at $6.97 to $7.21.

We just got the jobs (or lack thereof) data for June and it is awful. 467k fewer jobs bringing the total job loss since Dec. 2007 to 6.5 million! Meanwhile the unemployment rate rose 0.2% to 9.6%….stimulus isn’t accomplish much so far or alternatively, what would it be if we didn’t have it?

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A friend in London, Mark Gilbert, wrote an article today on the big banks crying foul over increased regulation…seems they all still have their jobs despite the stupidity of their herd-following instincts that we are all paying for. Ken Lewis is the epitome of this but most of the other big bankers also failed to use common sense as they violated tried and true banking rules (such as 60% loan to deposit ratios and while those will not come back the might get back to 70% and increase the allocation to treasuries which helps the government…like getting their loans back…while tightening credit and overall lending), in search of a new paradigm….TB has seen this at least four times in his 37 year career and all ended badly.

Meanwhile in Japan, more restrictions are being placed on derivatives bringing cries of ‘stifling innovation’ which most of us would agree is a good thing after the way it served us last time.

It is this latter comment that worries TB the most as the banks are clearly in the sights of the Obama administration but scant attention seems to be trained on Wall Street and hedge funds…better tighten it down, Barrack or growth won’t be the problem…again!

Enjoy your long weekend and think how great it is to be independent…but TB has to wonder what those founding fathers would say if they saw how greed nearly destroyed this great country taking the rest of the global financial system with it!

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC, © July 2, 2009.

TB’s Statement of the Day: The Fed should tighten, after all that is what Paul Volcker did in 1979 when unemployment was 11% and even though interest rates rose to 20%, it opened an era of prosperity. (paraphrased from Larry Kudlow acolyte Brian Wesbury in an interview on Bloomberg TV…would have had the quote but was too shell-shocked to get it all. Gee, did the problems of 1979 have the same root causes as today??? NO! TB  

…not only is the convergence of the moving averages aligning, but we are seeing a convergence of returns but not in a good way. Yesterday, TB recounted his conversation with an iShares worker on future consumption who asked if maybe the strong rally in stocks would make people more willing to spend, to which TB said uh….no! Also, yesterday TB commented on a Bloomberg article that the correlation of returns was at a record high thus there was no hedge. Here is your first look at returns on key indices for June, the quarter, year to date, and 12 months:

© TBD Capital

If you looked just at the quarter you felt really good, but for the year to date it was a wash thanks to that miserable February and of course June. But the key is how could anyone feel good…unless you owned bonds…but here is the rub: those positive returns can be eradicated in a few days as the other columns show…and what about commodities which were supposed to be the play? Cash would have been better and without the volatility that has plagued everything else. Does that want to make you want to go out and buy yourself a present?…say a new car like a GM?

Of course, on Monday TB’s column was on how shifting the starting and ending date of any quarter or year by merely a couple of days can dramatically change the returns, even the direction. Note how close the returns for the past year were and that for al lthe stock indices they were negative. Now let’s look at the star performers of the quarter highlighted in bold. Why do you think they outperformed? Were small stocks better?

No, small stocks which not only are the bulk of the S&P 500 and the Russell 2000 and even the Nasdaq…especially after the financials were decimated during the selloff…had huge percentage gains and those translated into a lot of index points. TB has been commenting daily on the relatively small moves in index points of the key movers and how frequently they offset one another. Those stocks of course are the big ones who have the higher weighting in the index but if they aren’t up that much something else must be driving it.

Let’s take an example of a stock (XYZ Superwidgets) that a year ago was selling for say $30 and traded down to $3 for a 90% loss. Then let’s say last quarter it doubled to $6. We heard of these in comments of how a stock had doubled or even tripled from the lows. Well guess what: XYZ is still down 80%. So when you blend together the index you can get these wild swings, but do those gains mean anything positive. No. Here’s why:

Let’s say you bought 1,000 shares of Citi (C) for $1 and it rose to $3…you made $2,000 on your investment…that’s it….you risked losing $1,000 and doubled it, before taxes and commissions. Now let’s say you had bought 100 shares of a $10 stock that rose in value by $3 or just 30%…you made $300…boring, but you made a sound investment (hopefully) of a stock that will continue to rise whereas Citi has flatlined. But that return is no longer exciting but you are more likely to see your $10 stock become a $20 stock than see Citi go to $5…that is the difference between investing and speculating.

Now consider the volume in just two stocks, BofA and Citi which have routinely been 50% of NYSE daily volume…yet the stocks are going nowhere. That means we are in a void where even the biggest movers of REAL stocks are a tiny fraction…that is a market you cannot play in, but you can buy stocks that produce solid dividends and have growth prospects in any market…growth in earnings is what we should have been watching not growth in price…just as we should have done the example above and found out just how doubling your money works out in dollar terms. TB knows this because of his fixed income investing. If you are buying a long term bond you can look at the yield but in a short one, especially a year or less you have to translate the percentage to dollars and compare that to the risk being taken. Is a 10% return for one year worth the risk of losing your money? The same goes for stocks.

Last week a stock technician on Bloomberg was asked about the low volume. He said: we have just completed a huge deleveraging and 1.2 billion shares a day may be the ‘new normal’. Just completed? What is he smoking??? Today, Bill Gross said the deleveraging could last for a decade…and TB concurs…do you think the banks are back to anywhere near their normal capital ratios? Wasn’t it suspect when we learned that BofA was the second soundest bank (according to the Feds stress test), despite having had to raise capital since then, and Global Finance only had four U.S. banks on their list of the 50 safest in the world and JPMorgan was only 47^th? We are in a mess and as Bill Gross also said the Fed will have to keep rates low a lot longer than expected, despite what Brian Wesbury thinks. The supply-siders are all wringing their hands about the coming inflation when they should be worried about deflation.

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Well, finally Al Franken is off to Congress…the Senate no less! Last night TB heard a political analyst say that he is so far to the left he wrote a book called Rush Limbaugh is a Big Fat Idiot and Other Observations. Hey! He’s talking about one of the three spokesmen for the GOP here! The other two being Newt Gingrich and Dick Cheney. Have we forgotten already about Rush Limbaugh and Dick Cheney saying they hope Obama fails? What kind of scorched earth policy is that??? If I lose, I hope America loses?

TB is no fan of Al Franken but as the pendulum swings back in the other direction from extreme right to extreme left it will come back towards center…eventually, and that is the only good thing for America. But remember a lot of what you are seeing the may seem extreme is actually offsetting the other extreme’s of the past dozen years and actually more as the seeds of government being evil began back in 1980 with Reagan and we suffered dearly for it. TB still thinks the greatest living American is Paul Volcker, without him we would never have achieved the prosperity we did…and then frittered away.

Happy July to all…just have to make it through tomorrow!

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC, © July 1, 2009. 

…weighing in at 1.06B shares, yesterday was the fifth lowest volume day of the year! This follows Friday’s 2.34B share day, the second largest of the year, but as noted if it had not been for that massive Russell index rebalance that added 1.3 billion shares in the final two minutes of trading (without moving the market), it would have most likely been about the same size as Monday. As for yesterday’s ‘action, there was none. What’s that you say? Nothing??? What about the fact that the Dow Industrials closed at 8529, slightly above the 200 day moving average (8479), and even above the 40 day? Big deal! After all the last time it closed above 200 day was on June 12 but average then was 8642, and the average is dropping 0.8% a week…in other words it is 2.6% lower now! That is a pretty low bar. At the other end of the spectrum is the 40 day moving average with an equally steep upward slope as is the 50 day and for the last six sessions we have struggled to get back above both. The point is the gap between the three averages is almost as convergence: 95 points or about as much as the Dow gained yesterday! In other words, within a week the three will meet around 8450 and that will be one tough hurdle to overcome if, as most expect, we catch a downdraft. Worse the sideways action of the first half of June and two down steps since means that the 40 and 50 day will flatline near there while the 200 day continues to decline. Too much to digest? Suffice it to say it is not a bullish case. 

 Bloomberg reports volatility has plunged with the VIX closing at the lowest level of the year yesterday, 25.35 a decline of 37% ytd and the first close below 25.66, it’s level before Lehman filed for bankruptcy….but is this a good thing or just complacency?

Now think about that, and think about the old saw “the stock market is always six months ahead of the economy.” Always???…how about usually and if stocks are so smart how come something as simple as bonds lacks that predictability? Stocks have probably predicted 12 of the last 6 recessions…it isn’t about the economy, stupid…it’s about psychology…plain and simple…and don’t try to say it is on wisdom or insight because if it was we wouldn’t have had a dotcom boom where a bad IPO only doubled the first day! Remember these are the same people who told you to watch for inflection points…in fact, that is the key to their wisdom. Look if GDP falls by 2% a quarter at some point it has to only fall by 1% and that would be an inflection point and if it gets weak enough at some point it has to turn positive but if it is down 10% and gains 5% (which could occur in a boost but not be sustained, it is still decidedly negative and not induce employers to start hiring…it might, but it depends on a lot more factors: like consumption (isn’t that what they used to call tuberculosis?).

TB was talking with a chap from iShares who called yesterday for a critique of the seminar he attended. The comments turned into a discussion (if all of the surveys went as long he would be lucky to complete five in one day), and discussions make TB think, and thinking is good, right?…at least if you don’t overthink.

So here was what TB hypothesized: imagine five years ago a couple recently married, two jobs but she is now pregnant. They leave San Francisco where both had been renting prior, and move to the ‘burbs’ and by a McMansion…after all, their incomes will support it (ignoring the fact that at least for a brief period she will not be working and ideally never). So they move in to the new home in their Camry’s. But then they notice that the neighbors are driving Beamers’s. Wait…we live in the same homes…so we can afford a BMW….subject to approved credit…which they readily get and lease the Beamer. Meanwhile, their old furniture looked pretty shabby so they bought new and upgraded the kitchen plus added about 4 HD tv’s. Meanwhile, their commute is costing more, and other expenses are rising…and they were smart enough to buy a fixed rate mortgage.

But they also note that their salaries are not rising as fast as they were and the bonuses are smaller..not to worry we will just get better paying jobs…perhaps. Then comes 2007 and all is not so good…they had taken out a home equity loan to finance some things and pay off the credit cards which mysteriously were rising again…perhaps it was that Hawaiian vacation and all those dinners at nice restaurants.

She has the baby but decides to keep working…either that or move. But then she gets cut back to part-time which isn’t all bad because she can spend more time with the baby. Then his job…he worked for Merrill or some broker…evaporated or if he was able to stay it was for less money and less of a bonus on the table. The credit card bills start to mount…isn’t it great that you can now charge your groceries? (TB recalls Robin Williams on an old Mork and Mindy when he was talking with Orson, telling him about life on Earth “they don’t use money, they just wave a plastic card…except at the grocery store…must be too hard to repossess). That was a logical extension of credit card use for vacations and dining out…but the original plan was to pay it off each month, not to finance it.

That is where many folks are today…trying to rebuild their finances along with others. Suddenly, the BMW, which they were so proud of on day one isn’t as meaningful…in fact it never was because two months later, both saw another car they liked better. So they are now saving…or more accurately consuming less…much less. But the best place to save is not the bank at rates of less than 2%…and they learned that the stock market is not a bank (remember though when Art Laffer and others told us it was…that savings was actually much higher because the savings rate does not include capital gains?…what capital gans?), it is by paying down those double digit credit card debt…you could pay down your mortgage too… but why do that if it is “upside down”?

The point of the above is that consumption will not return to anywhere near the old levels. Now the experts will argue this point because it always has and always will come back. But consider we are facing double digit unemployment (16% if you count part timers who want to work full time), job losses are still rising, half of those unemployed have exhausted their benefits, and none of them with any savings. This is the result of three generations who have never learned how to save and ‘buy now, pay later’ is ingrained in them. This time credit will not be so easily available even if you want need it. In fact if you need it you probably can’t get it.

Yet our elected politicians want a rapid fire rebound…do your patriotic bit as Dubya said and go out and shop! IF that works, and it won’t, we will be back where we are or worse in a few years.

We have near record excess capacity and a huge unemployed workforce just dying to take a job…any job. So do either of those factors suggest that wages will be rising anytime soon? After all, if we are going to save, the only way to offset that is with higher salaries and those will prove elusive. Batten down the hatches as we are just in the eye of the storm…it ain’t a perfect storm…just a great big one.

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Yesterday morning, TB heard one of the enlightend commentators say that Bernie Madoff’s sentence would be nowhere near 150 years because no federal judge would do that…the defense was asking for 15 years but he said there would be a compromise at say, 30 years which is the same thing as life since there is no parole in the federal system.

Well, the judge mustn’t be enlightened because he slammed him with the full 150 years the prosecution asked for and he was right to do so. This was an amoral man…one who just to keep his scheme going plundered charities…including those of his own faith…and has shown no remorse. He is either insane or just plain greedy…and should therefore be removed from society permanently…except prison society and he won’t be going to a Club Fed either for his offenses were far to egregious.

TB would also like to see every money manager who received fees for steering their clients to Madoff relieved of all of their assets…especially those greedy hedge fund managers who were paid 25 plus 20 to manage money and merely pushed it off to him, and received a kickback on that too. This man was evil and so were his accomplices.

Also yesterday, a friend sent this in response to the comment that Sears was going to forgive payments on unemployed…those who purchase between now and August that is:

Sears has a great marketing/financial trick. They advertise a big discount on appliances then when the customer shows up, they make him open a Sears credit card to get the discount. That card has 27% interest rate! One of my young client couples did it last year and are struggling to pay it off. Nice way to make $ no?

Might as well go home now as the market is done for the quarter.

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC, © June 30, 2009.

Bloomberg Quote of the Day: “I never did give them hell. I just told the truth, and they thought it was hell.” – Harry S. Truman

…that would be Friday last! Anyone who would place a trade technically or otherwise on the action of the day would be a fool. Consider that The Dow was off 0.4% at the end of the day and the S&P 500 -0.15%, while both Nasdaq indices and the Russell 2000 were up less than 0.5%.  Advance/Declines and Breadth were all very slightly positive. Now is where it really gets hinky: There were 139 new 52 week highs, not only an increase of 75 from the prior day and the highest number of new highs since the entire selloff began and there were just 13 new lows…OK, you give up, you say…so what happened…and what about that big 2.34 billion share volume, 200 million shares higher than 6/19 option expiry and second highest volume of the year…that has to mean something…sadly, no.

Twenty minutes before the close volume stood at just 720 million shares…on a normal day it would have ended around 1.2 billion shares judging from recent history. Instead, at two minutes before the close total volume was 1.3 billion shares with about 1 billion shares on the close which has to be a record…that has to mean something…uh, no.

Well with all that volume in the final two minutes there must have been some reaction. Actually, the indices barely budged. The Russell 2000 Small Cap went from 510 twenty minutes before the close to 514.50 ten minutes before the close then settled at 513.22. What was that all about? Take a look at this post from Barron’s at 3pm EDT – as if that did any of you any good:

Today will be the liquidity event of the year!  

So sayeth Credit Suisse in a pre-market note to clients.

“As we’ve mentioned here throughout the week and in previous notes, today is the annual Russell reconstitution.  All changes take place on the close.  Total gross trading is estimated to be about $28 billion,“ the firm told clients in US Trading Daily advisory.

Financials are net to buy in Russell 1000 and 2000.  Over 900 names are estimated to have more than 1 day’s volume to trade.

Well isn’t that special…$28 BILLION and it is published less than an hour before the close! Nice reporting guys, and CNBC and Bloomberg too! As silent as they are on options expiry and that is considered news coverage? Not only that ETF indices with over $500 billion in assets (found that in 2008 on the last rebalance) were impacted. So there you have it…nothing to see here! One stock Bridgepoint Education (BPI) which was added has risen from $10 on  May 20 to $13.48 the day the rebalancing was announced, and closed Friday at $16.94…just off the high of $16.94…it went public on 4/27/09. The volume Friday was 1.49 million shares or more than one million above average! TB did not ‘cherry pick’ this stock just a representative example of the B.S. we are subjected to!

Guess you should have ‘sold in May and gone away,’ right? Let’s see, now when was the peak of this rally (which was actually a lower high as the Dow Industrials did not take out the 9000 resistance that it struggled with for three days at the January highs….you do remember that failed rally don’t you?…a presidential one that couldn’t even make it to the inaugural)? Answer: that would be on June 11 at 8878…ditto for the other indices although at least the two Nasdaq indices closed just off the highs but the 100 faces heavy resistance at 1500 ad the Composite at 1875-80, while the Russell gave up all but 12 points of the June gains. Soooo…what else are we going to do for the rest of the summer? …and it isn’t even July 4^th yet! Don’t ya wish you could just hibernate?…or take a long vacation? Nothing to see here! 

Don’t bet against the dollar! China has dropped its bid for a global reserve currency and the currency strategist who had the best calls this year are now seeing a rise of more than 4% after the steepest three-month decline since 2002. CIBC, Deutsche Bank, BofA, and Wells Fargo are all in the camp after being right so far this year. You wouldn’t know it yet but after last week’s three Treasury Note auctions when more than two-thirds of the $114 billion was sopped up, who knows, and with repayment of some of the TARP funds some of the pressure is off but make no mistake the issuance will still be huge.

That said, TB still thinks the U.S. Treasury market will remain the most treacherous where timing is everything but there is no way to time it with 15 basis point moves almost a daily occurrence and often offsetting….leaves on shaking his head.

Commodities also seem to have lost their luster and the IEA this morning says oil demand will be below 2008 levels until at least 2012…not good news for the already battered energy sector and especially for oil services. All storage capacity for crude is taken and silver has had such a runup  (25% ytd) that Barclays Capital says investors should take the money and run.

So where to put one’s money? Well, if you are trying to diversify you might as well leave it in cash. According to Bloomberg, correlations between the indexes are 0.74% this month and that folks, is the highest in FIVE decades! This explains why crude gains have mirrored stocks and we see both stocks and bonds up or down the same day.

That should give you enough to digest for one day: Tomorrow is month/quarter end, Friday is a holiday for July 4^th in the U.S., and the payrolls report for June will thus be delayed a week…with weekly jobless claims rising one can hardly stand the wait, right?

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To end on a sign of the times. Sears, the largest U.S. department-store chain will not repossess appliances and will suspend payments for unemployed workers. Get this: those who purchase appliances between July 6 and August 1 will have one-twelfth of the purchase price credited to their account for every month they are out of work and those out of work for more than a year will have the full debt forgiven. Hmmmm…if this sounds a lot like ‘we finance what we sell’ that is because it is! Take GE whose financing activities are its single largest component (but please don’t regulate us like a financial company).  When the going gets tough the inventories move to accounts receivable…always been that way…always will! Hey…besides what are you going to do with someone’s old washer or dryer…besides pay to store it! Get real!

Have a great, short week…but you don’t have to have a fifth on the fourth!

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC, © June 29, 2009.