Archive for September, 2008

9/30…if you can keep your head

September 30, 2008 at 4:57 am · Filed under economy, financial, markets

…you are either a fool, a member of the US Congress, or both! Note that Ben Bernanke and Henry Paulson are not keeping theirs as they know what is happening…TB didn’t spend 36 plus years in this business to not be able to see one when it is happening before his eyes. But what do you do? Jim Cramer says to get ready to buy a few good stocks…but then didn’t he call a bottom 2-1/2 months ago? He doesn’t seem to recall that and if he changed his mind TB never saw it unless he said it after we plunged back to the lows. Then there are those lovable GOP Congressmen like the one who didn’t want to saddle his daughter with all that debt. Hello??? Because we are putting the money up doesn’t mean it is going to be lost…not unless every mortgage in the US goes down the drain and if that is the case. 
 
TB wishes to apologize to readers for his rant yesterday…but not to the members of the US Congress. Interesting that the mascot of the GOP is an elephant…an animal designed by a committee, while the Dems have a jackass…’nuf said. If TB has to hear these fools say “we need to get it right,” his monitor will be toast! Get it right? Name one thing they have gotten right in their careers? By the time they possibly could understand it will be a moot point. Like that GOP Congressman who called himself a fiscal conservative, so proud that he was protecting his daughter…well if things go bad he better hope she doesn’t see that interview. TB can’t think of a thing that the government has deliberated that has been such a hot button…except the wasted effort on the Clinton impeachment which if the Senate had merely issued a censure (as they should have to Nixon), would have put him in his place.
 
The cost of borrowing overnight in dollars jumped the most on record. Overnight Libor jumped 4.31% to 6.88%, an all-time high according to the British Bankers Assn. A week ago it was 2.95%! True, it is quarterend but this surge even dwarfs the percentage change TB has seen in times of tight money. The banks simply do not trust one another…and nobody trusts the banks. That is what is so insidious about those who say we have days or weeks “to get this right.”  First, we have confused a credit crisis, which is systemic, with a loss of confidence in the markets. Then we (Paulson and Benanke) decided that we could just throw dollars at it…but nobody has that much money and as John Maynard Keynes discovered there is a ‘liquidity trap,’ his explanation why monetary policy doesn’t work. Keynes posed that there is a point that the more you try to prop up the markets the more people become alarmed, as in the shock of requiring $700 billion dollars…and talk that it could top a trillion. See the problem?
 
Next comes the problem that their are two players who provide liquidity to the market: dealers and hedge funds. The latter have been made irrelevant by the ban on shortselling which expires Thursday. TB felt that the two days of rally we had last week were due to them buying after the cutoff for their quarterend…unlike the prior three quarters where they were shorting. This put them in a position to be outright sellers. Why? Because they are under pressure from their prime brokers (who have to reduce their own leverage), to reduce leverage and that is further compounded by huge withdrawals due to poor performance. Furthermore, hedge funds with prime brokerage accounts at Lehman cannot even get to those assets and it could take them months…or never! The ill-advised short-selling ban which then defensively spread around the globe only worsened the situation (why didn’t they merely reinstate the uptick rule and strictly enforce naked shorting?…note that the threshold list as of yesterday still shows 20 stocks naked for 100 days or more, half of them financial stocks…out of nowhere came Wachovia at 105 days??? that was not showing before…Chipotle Mexican Grills still leads the pack at 509 days). Furthermore, hedge funds and other speculative accounts have found more synthetic ways to short. They can bid up the cost of credit default insurance…which has nothing to do with reality yet credit decisions are based on it…they can sell or short bonds which in an illiquid market drives up the spreads…you get the picture. How the world came to rely on CDS as the benchmark is merely due to volume and hype…another form of tulipmania. Doubt it? Hedge funds drove the cost of credit default swaps up on five Irish banks…that’s how you overcome a short-selling bank. Overnight the Irish government had to issue guarantees and the stocks are surging…no doubt with the hedgies taking off the CDS and buying up the downtrodden stocks…what kind of person can make money while destroying confidence in a global financial system?…a lot of them.
 
After TB’s rant yesterday a blog reader commented he should cool down as there are always opportunities to make money. No, that is not the problem, it is what we are doing to the banking system. On Friday, someone said that had the bailout been passed last Thursday WAMU would not have been taken over…that is wishful thinking…the depositors had already lost confidence and that was why the Fed’s stepped in…it was too late.
 
Wachovia is another story. CEO Robert Steel (TB had planned to title yesterday’s commentary “…the man of Steel” but that was derailed by our inept Congress), who was not the root cause of WB’s problems. He had gone on a tour trying to build confidence in the bank. But management had severely impaired his ability to act and build confidence as Lanty Smith, the Chairman, who finally ousted the CEO that got them into the mess, Kennedy Thompson, yet none of the board had resigned. That is not how you build confidence. To his credit, Steel came on board and put up his own money to buy stock, $10 million (?), which TB thought at the time while gutsy was premature…he had no idea what he was dealing with. But he failed to raise new capital which in hindsight was a mistake…Jim Cramer had Steel on his show a week ago and had confidence in him…yesterday he debated whether he should be on Cramer’s “Wall of Shame.” He actually gave an objective analysis and you could see how much he was struggling with it.
 
But yesterday, after closing at $10 on Friday, Wachovia opened at $3.50 as we learned they were to be taken over by Citi of all things, when Wells Fargo and Banco Santander had been interested. By the end of the day, the stock was on the pink sheets. Now there is a lot of talk about the Fed playing favorites: JPMorganChase, Bank of America, Citi, Morgan Stanley and one other whose name escapes. This morning the word is they gave it to Citi to shore them up!!! Destroy shareholders for the benefit of the egocentric Sandy Weill?…and remember when their then-CEO had to testify before Congress along with Merrill and BofA…you’ve come along way, baby! …and this is supposed to build confidence in the financial markets…and especially banks? Guess nobody else has friends like TB who hears at least once a day…should I take my money out of the bank? TB says sure, put it in a money market fund…put it under your mattress…and if the end of the world comes what will you have?
 
What we are seeing is triage…while Congress plays. If we had a real leader in Congress, he or she would cut the damned rhetoric and go back to square one: “Here is the bill…no add-ons…no frills. You are voting based on polls which is understandable in an election year, but if 100 or so banks collapse by election day where will you be? You will be out of a job.” That is the kind of tough talk we need, and we need it now.
 
How does one deal with a plunging stock market, and commodities, a bond market that was up 2 points on the long bond, then down 3/4, then closed up over 4 points on the day…30 yr TIPS which had been regarded as toxic as concerns shifted from inflation to deflation or worse, and rallied over 2 points yesterday…but still have a real yield of 2.3%? The answer is, you don’t. Nothing makes sense.
By the day TB is convinced we do not deserve to live in, let alone decide how to run, this country of ours…the greatest in the world. We should all be taken out behind the shed. Bush just gave his third short speech in as many days…sounding solemn…and pointing out the problems we face, yet ignoring the fact that he, who will go down as the worst President in US History, thru his administration is the root cause of the depth of the problem. Meanwhile, McCain continues to see tax cuts for the wealthy as the solution, while Sen. Orrin Hatch announces that a tax holiday on buying real estate is the answer. Senator, has it occurred to you that the problem isn’t taxes it is that the mean and median income are too low to allow people to buy homes and in this environment they cannot and will not rise…meanwhile the incomes and wealth of the upper tiers are falling…think about it…somebody needs to do it.

TB

 

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9/29/08…ship of fool’s

September 29, 2008 at 3:52 am · Filed under economy, financial, markets

…whereas our elected officials are so proud of ending their speeches with “God bless the United States of America,” after the politicized antics in this country following the massive coordinated intervention by the central banks, the cry in Europe is more likely to be, “God damn the United States of America.” Because the very same politicians…on both sides of the aisle who listened to lobbyists who fattened their wallets and an Administration who didn’t do one thing to rein in Wall Street or the banks and mortgage companies, spend that past five days strutting their stuff…belittling Bernanke and Paulson…saying that this was the socialization of America while the financial system of the entire planet hung in the balance.
 
Our malaise has now spread to Europe with Fortis being bailed out by three governments overnight. It’s problems stemming from capital depletion from propping up their ABN-AMRO subsidiary. It appears they did that alright but they so damaged themselves in the process that they are imploding. They are now seeking a buyer for ABN. Furthermore, the runs on banks her like Indymac and WAMU, are being replicated in Europe and there is little confidence. Some official said the other day that had Congress acted by last Thursday, WAMU would have been saved…TB doubts this…perhaps a week before but Thursday?…the Feds seized them Thursday night transferring the deposits to JPMorgan. Meanwhile, over the weekend, Wachovia has been negotiating with Wells Fargo and of all things, Citi? Rather than rally the stock, the way the deals have been going of late, WB closed at $10 on Friday and is now trading in overnight market at about $3.50! Wake up and smell the napalm. 
 
Occasionally a reader will write that they like the column and would like it more if TB would keep politics out of it. In each instance he has written that he would like to do just that but the politics and financial system have become so deeply entertwined that he would be derelict to not bring it to readers attention. How long as TB been warning of the problems a laissez faire government has created.
 
It is also disingenuous for the GOP to try in a presidential election year to blame the Democrats for the problem…only in the past two years have they had a slim majority in the house…and virtually tied in the Senate. Not only that, it took six years for Dubya to find his veto pen, a warning to them to not attempt to make policy. Then McCain and Palin have criticized their own party for corruption and SEC Chairman Cox who was appointed by Bush…are we to believe they are the only honest people in the entire party and that miraculously the two of them will bring both parties to their knees and solve problems? After hearing the few interviews Palin’s handlers have allowed, not to mention her support even while governor of a secessionist group and her husband’s “Rove-like” refusal to obey a subpoena to testify in an investigation of his wife, TB can no longer stand silent: Sarah Palin is not competent to be the President of the United States. If you think that is partisan or sexist, consider that Washington Post writer, Kathleen Parker, a conservative who endorsed her originally has written that she should step down. This is critical since it is not a remote possibility that she could be President on Inauguration Day. Consider on the other hand that if something were to happen to Obama, Biden has even more experience and has shown an ability to reach across the aisle. By no means is TB telling anyone how to vote but don’t be so glib as to endorse any candidate just because of their party. TB was forced to abandon the GOP during Bush’s first term and then registered as a Democrat for the primary…but he cannot accept either party as doing what is best for America, and now the world.
 
The WSJ wrote over the weekend that Sen. Dodd, after a badly flawed presidential bid, now has a chance to elevate himself. Not in TB’s eyes, forgetting the GOP rhetoric about Dodd and Frank being responsible for FNM/FRE, how did the WSJ miss the fact that we barely have enough Fed governors for a quorum, even as bank after bank collapses. Dodd has sat on two board appointments for months now while our future is in the balance. Sen. Dodd, put them out for an up or down vote NOW…stop playing the politics you are so well known for.
 
Why is it whenever there is a debate the dems seem to be respectful while the GOP won’t let them finish a sentence. TB is not talking about the Presidential debate but former Congressman Shaeffer and Congressman Udall on Meet the Press. Shaeffer was a disgrace…there was and could be no debate with his continual childish haranguing. Get this: he is out of office 2 years and has the audacity to say it happened on Udall’s watch? If you cut a rope to one strand and it doesn’t break until someone else comes along is it their fault? But the most disgusting commentator is Charlie Gasparino on CNBC who gets in shouting matches every time he on these days blaming the dems for everything. One thing Udall did though that was annoying: he was asked by Tom Brokaw if Charlie Rangel should step down from his chairmanship since it turns out he is living in subsidized housing and failed to declare income from a place he has in the Dominican Republic. Udall’s answer should have been “yes” instead he said the he would hope he does…and you wonder what is wrong with America…both parties have fatal flaws.
 
We cannot go thru this every week…we now know that last Friday the ECB was injecting more reserves…same as they did the previous Friday, and overnight European stocks are down 3%, the Nikkei is down 1%, Hang Seng and India down 4% and Australia down 2%. We have destroyed global confidence in the financial markets…even a socialist system is better than no system…and we are on the brink. This is a travesty.
 
Bush just gave another two minute warning….this time he essentially said to Congress what TB would say: sit down, and shut up! Use your brains not your mouths (not so sure that is a good idea).
 
Not going any further today, TB has stuck his neck out with his readers and it is impossible to tell how the market will react at the end of the day. Remember it was down Friday till not long before the close.
TB and his wife just made reservations to go to DC just before and during the Inaugeration…interesting as there are no cancellations after Nov. 4….wonder why that is? Duh! We are going back to see friends who are there for a few months so either way we are going. The way things are going it could be the last one…tongue in cheek…even TB isn’t that pessismistic, right?
 
Hoping you all survive the week ahead! That won’t be a lay-up.
 
TB

 

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9/26/08…the mighty Paulson has struck out!

September 26, 2008 at 4:25 am · Filed under economy, financial, markets

…there is no joy in Mudville today. Thank God our founding fathers are not alive to witness this. As much as they argued among themselves, they accomplished something. TB first found himself bashing the capitalism that he loves, now he finds he has no faith in our government…none whatsoever. Wait, this is not fair to those great men who created this ‘grand experiment’ 232 years ago…TB has no faith in our elected officials. He has jokingly said: can’t we just adjourn Congress for one year and see how it goes? As of this moment he would dismantle this group of little boys and girls and send them packing…oops, forgot they have their golden parachutes in the form of retirement…but at least not one of them would be able to find a job in the private sector as they would no longer provide value by peddling their influence.

If TB hears one of them say they “chose a life of public service” he will be sickened. Today’s commentary was written yesterday as a form of relief believing that today would be brighter…it is not. First, late yesterday afternoon we heard that WAMU had been taken over by the regulators and JPM was getting the branches which will take them from a wholesale bank to the second largest retail bank as well. Just how much of the entire financial system will they end up with defies comprehension…and all in the belief that Jamie Dimon is the savior? We only have a handful of major banks that are sound and how much can they absorb? In August, a WSJ article said that according to Institutional Risk Analytics they are forecasting 110 banks with $850 billion in assets to fall by next July. That’s eight times the FDIC’s total reserves. The man who said this Chris Whalen was on CNBC this morning saying that Washington is not solving the problem they are merely treating the symptoms. While something has to be done and soon, there has to be a shift to treating a systemic problem rather than applying boxes of Band-Aids in a desperate attempt to improve market psychology. Despite an ailing global financial system, hedge funds are still trying to game the system and Wall Street is creating more synthetic methods to short stocks…parasites…but what will it get them if they bring down the system? Nothing.

With WAMU gone, and the devil is in the details because JPM ‘cherrypicked’ the assets, they were saved from using their remaining reserves just for WAMU, the first half being lost on IndyMac. Now consider that WAMU was the biggest borrower from the Federal Home Loan Banks, and to those of you who think the stock might even be worth the 35 cents a share it traded at overnight, think again! Home Loan has first dibs on assets…got it? Also, isn’t raising FDIC insurance rates going to be the equivalent of raising reserve requirements as the Fed did leading to the Depression?

The second thing that happened was that the bailout or whatever you wish to call it was falling apart. Later, TB read on Bloomberg that it was the GOP who was split down the middle that derailed it. There is no longer any possible doubt that the Bush/Cheney or Cheney/Bush Administration will go down in history as the worst ever. Once they could no longer bully and cajole, the transparency of their clothing was obvious. That is where we are this morning…the dollar after rallying again is slipping…the Yen being the only winner as the UK and EU don’t look much better now than we do. Furthermore, even Gold isn’t rallying, Dow futures are -168 and treasury’s (note TB didn’t say bonds as their value certainly isn’t enhanced) are stronger but not all THAT much stronger.

Since TB can offer no sage advice, solutions, or comfort, here is what he wrote at 3pm yesterday afternoon…the title was to be …Friday Funnies…but no way is there anything to laugh about today:

…after a week spent dealing with the clowns in Congress and a market that a week ago regained all the gains of the previous week, then today with a deal allegedly being cut on the bailout, stocks rallied eradicating the prior two days of losses. This on the final day for T+3 settlement for the quarter. Don’t forget that Tuesday is quarterend, then on Thursday the ban on shortselling is lifted and Friday is non-farm payrolls and unemployment…and based on last week’s initial jobless claims which was the survey date it doesn’t bode well for the numbers…but if you feel lucky and think this bailout or whatever you want to call it will solve everything then by all means buy…but you will not be seeing TB in that line.

How about this from some guy at the Hoover Institute…now think how stupid that name sounds in this environment…perhaps it will be another 20 years before we get another GOP President. Anyway this ‘fellow’ said that the solution to the problem is to fire Paulson…then he said you can’t really fire him as his term isn’t up…Huh? Hasn’t he ever heard of Paul O’Neill? Anyway, he said that this is all a big snow job (no pun intended) to scare people into hurry-up legislation like the Administration getting us into the Iraq War…wait a minute…isn’t the Hoover Institute aligned with the supply-siders, neo-cons, etc. Perhaps it is so bad that they feel if they distance themselves from Dubya, McCain can get elected.

Or how about yesterday afternoon when the GOP beat the Dems to the punch declaring that McCain said he was going to go back to DC and stop campaigning to help solve this problem and no debate tonight. But then Obama came on and said he initiated a call to McCain suggesting that. But by the time TB got around to telling someone about it Obama said that he was going on with the debate…makes you wonder if he got ticked off that McCain tried to take the credit…easy fact check…the phone records…who called whom? Now the interesting thing here is for once we have some real meat for a debate and McCain doesn’t want to…with all his experience he should be eager to, right? Then came the suggestion that McCain and Obama not participate and instead have Biden debate Palin on the subject…what a hoot!

Moving right along we have Sen. Bunning, God rest his soul…please…on a rant that made no sense whatsover and also claiming that the bailout is not necessary…let them fail…and he blames Bernanke. Those of you who saw the testimony the prior time know how he took Bernanke to task on Fed policy. With all due respect, Bunning is a moron but typical of the breed from what TB saw in the hearings. So TB has had enough for one week and no prognostications…nothing more this week…instead a friend forwarded this piece that is either brilliant or lunacy…but at least it’s humorous and we taxpayers can use some of that besides the antics of our elected officials:

Hi  Pals,  

I’m  against the $85,000,000,000 bailout of  AIG. Instead, I’m in favor of giving $85,000,000,000 to America in a ‘We  Deserve  It  Dividend’.
  
To make the math simple, let’s assume there are 200,000,000 bon-a-fide U.S.  Citizens 18+.
  
Our  population is about 301,000,000 +/- counting every man, woman and child. So 200,000,000 might be a fair stab at adults 18 and up…So divide 200 million adults 18+ into $85 billon that equals  $425,000.
 
My plan is to give $425,000 to every person 18+ as a ’We  Deserve  It  Dividend’. Of course, it would NOT be tax free.  So let’s assume a tax rate of 30% (The GOP wants it to be 15%. TB).
  
Every individual 18+ has to pay $127,500.00 in taxes. That sends $25,500,000,000 right back to Uncle Sam.
   
But it means that every adult 18+ has $297,500.00 in their pocket.  A husband and wife has  $595,000.

What would you do with $297,500.00 to $595,000.00 in your family?
 
Pay off your mortgage – housing crisis solved.

Repay  college loans – what a great boost to new grads
   
Put away money for college – it’ll be there
  
Save in a  bank – create money to loan to  entrepreneurs.
   
Buy a new car – create jobs (perhaps some that even pay a decent wage. TB)

Invest in the market – capital drives growth
   
Pay for your parent’s medical insurance – health care improves
   
Enable Deadbeat Dads to come clean – or else
 
Remember this is for every adult U S Citizen 18+ including the folks who lost their jobs at Lehman Brothers and every other company that is cutting back. And of course, for those serving in our Armed
Forces.
 
If we’re going to re-distribute wealth let’s really do it.  If we’re going to do an $85 billion bailout, let’s bail out every adult U  S  Citizen 18+!
 
As for AIG  – liquidate it. Sell off its parts. Let American General go back to being American  General. (By the way, not one of AIG’s 50 or so insurance subsidiaries is in trouble…this was derivatives. TB)
 
Sell off the real estate. Let the private sector bargain hunters cut it up and clean it  up.
 
Here’s my rationale. We deserve it and AIG doesn’t.
Sure it’s  a crazy idea that can “never work.”
But can  you imagine the Coast-To-Coast Block Party!
How do you  spell Economic Boom?
I trust my fellow adult Americans to know how to use the $85 Billion ’We Deserve It  Dividend’ more than I do the geniuses at AIG or in Washington DC .
 
And  remember, The Birk plan only really costs $59.5 Billion because $25.5 Billion is returned instantly in taxes to Uncle Sam.
Ahhh…I  feel so much better getting that off my  chest.

Kindest personal regards,
Birk
T. J.  Birkenmeier, A Creative Guy & Citizen of the  Republic

What is wrong with America? You are the problem…for not being “mad as hell” and re-electing these overpaid idiots…listen to them today…bashing Paulson and even Bernanke (what has he done wrong?). No, these are the GOP leaders who believed in capitalism and that to regulate it in any way would hinder it’s success. Now they want to just let it fail…and tomorrow all will be well again…that is not to be! 
 
“Those who cannot learn from history are doomed to repeat it.” George Santyana. Hoover rides again.
 
TB

 

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9/25/08…send in the clowns!

September 25, 2008 at 5:34 am · Filed under economy, financial, markets ·Tagged , ,

….the title of the Stephen Sondheim song from “A Little Nightmusic” has always been a favorite of TB’s for it’s imagery and sung beautifully by Judy Collins. The play itself was a play on Mozart’s “Eine Kleine Nachtmusick,” translated it means “A little Serenade,” but Sondheim played of the literal translation. See what taking German did for TB? Jawohl! After listening to two days of testimony by Bernanke and Paulson (one by Cox who was rendered redundant due to is idolization of Cheney’s neo-con objectives), TB couldn’t help but think that in arguably the worst US and global financial crisis in history…certainly in magnitude if not effect, of these lyrics from the song:
 
        Don’t you love farce?
        My fault I fear.
        I thought that you’d want what I want.
        Sorry, my dear.
        But where are the clowns?
        Quick, send in the clowns.
        Don’t bother, they’re here.
That is the most accurate description of the situation. As TB has frequently remarked, it is a true “perfect storm”…even if it is a cliche…speaking of which “drilling down” has now become one along with the even cruder “bring a bazooka.”  Since TB’s forecast of what is to be in the markets this week has been off…albeit on at some point in the session most days…he spent the day reading volumes of papers on what is wrong.
 
TB knows what is wrong…capitalism has gone awry…just as it did 80 or so years ago…and since capitalism relies on greed (why else would anyone risk their money and spend valuable time if it were otherwise?)…and the blame lies at the feet of Ayn Rand and her disciples including Milton Friedman, and the neo-cons. What kind of moron believes that powerful people with money can put aside their greed and for the common good and think about the long run, rather than short run gains. Look at the robber barons and you have the answer. This led to an enormous wealth gap and if you are a true capitalist doesn’t putting money in the pockets of those who work for you mean more sales of your product? Not at Walmart for sure who even brags that their employees are their customer base. So unless we are to subscribe to Ivan Boesky’s “greed is good” theory…in the end though was it…or for those on Wall Street who are now seeing their fortunes decimated…much more so than in the dotcom bust.
 
Robber baron’s aside, one need only to look at corporate America’s fighting environmental issues for years and now suddenly becoming ‘green.’ Think if they had thought of the long run…instead the CEO’s who have gone from 10x or less the wages of the average employee when TB started in this business 36 years ago to 400 or 500 times or even more. Furthermore, as the stock tanks the company falters and they are out the door they have their platinum parachute to protect them while investors, employees, etc. all get punished for their sins.
 
TB read and article form Bloomberg from 2006 that explained how we got here. Starting in 2003, derivatives began to move to the top spot and “quants” were hired at two to three times what corporate traders were paid as Wall Street went from commission and trading driven to product driven. Also in 2003, the SEC made the decision to allow only the big five firms (thankfully) to expand their leverage to 40x instead of the regulatory 11x…which is really a joke as they drive it down into compliance at the end of each quarter. Now, with three of the big five gone and two having been made banks which do not allow that latitude…other than JPM which is running 50x…how do they do that??? What happened to Lehman is illustrative here and though TB has commented on credit default swaps it is important to know that there is no such thing as a “hedged” CDS position…unless they were to enter into the offsetting trade with the same counterparty. This plagued Bear Stearns also as the swaps just pile up on one another until the hedge becomes meaningless…except in value at risk (VaR) models that are used by everyone thus further increasing the chances of disaster. So Wall Streets derivatives fees far offset the commission on securities sales something that had never happened in the past…and the worst part is there is no transparency…you have no idea who owns what. Not only that but the sheer size of the trades means that even a small percentage can be billions and when you are that highly leveraged and the floor falls out you get a double…triple?…whammy. The best guess is the leverage at the two remaining big five investment banks…oops, now commercial banks is 25x…more than double the regulatory limit for a bank…but rather than sell assets they are raising capital to reduce the leverage…last TB looked this also lowers earning per share which are already being decimated by those profitable derivatives becoming toxic waste…yet they need not be if only excessive leverage had not been employed…more greed. Even LTCM founder John Meriwether who learned the sins of 100x leverage is effectively out of business with his new, improved hedge fund JWM…at 40x and imploding…they learn nothing from experience.
 
Enough of this blather that is being hashed and rehashed and not understood by 99% of the populace, let alone that percentage of Congress. Especially the GOP who believes in free markets who says “let them fail…so we will suffer a little pain but then things will go back to normal.” Not only is that statement inane but it forgets that there is a difference between not over-regulating and benign neglect and a cancer. By eliminating Glass-Steagall…the brainchild of Sen. Phil Gramm…who along with his wife Wendy (director and on the audit committee of Enron), believe that no regulation is the best regulation and then he had the audacity to refer to the American people as a “nation of whiners.”
 
One of TB’s wife’s favorite TV shows was The Gilmore Girls. Coincidentally, “his contractor for life” has a brother, a thinking economist (rather than those who have mentioned here who are really “political economists” and slant their views to support ‘free market goals’, and the wannabe Larry Kudlow who is delusional), who TB has followed for more than a decade, David Gilmore. David forwards his commentary to his ‘big’ brother and when he sees something he thinks TB would be interested in he forwards it to TB. Here are two from September 23rd, morning and evening:
“It’s an Archie Bunker World. Congress and Paulson Have an Agreement: Don’t Confuse Theater with Done Deals.” What he says makes sense. There is no way that the Administration would have proposed their audacious socialist plan unless the fix was in. Huh?, you say. Think about it, the more outlandish the proposal the more wiggle room you get to run it past the morons on the hill (TB’s words). So you hash out a deal…give them two days to show how they are not in the Administration’s pockets and then come up with a compromise that makes everyone look good…did Karl Rove have a hand in this? Think about it as it is so logical…and the stock market has been held hostage…but you saw yesterday that we had the least volatility in more than a week as people just refused to try to trade on the soundbites. Now, as David suggests, if an announcement is made, bingo! you have the makings of a rally…especially with the shortselling bans that expire Oct. 2 in place. TB loves this comment: “Congress doesn’t know the difference between a CDO and a UFO”, yet they will decide our fate…God Bless the United States of America.”…please! The point is don’t let fear make you a seller here…buyer? You decide but nothing feels worse than to sell at the bottom.
The second piece “Don’t Just Do Something, Stand there!” is an expression TB thought was his from decades ago but may have come from the pages of Mad Magazine. He refers to this as the mantra for the world’s central bankers…and then goes on to imply that whatever solution is proposed the devil is in the details as it always is. Don’t let your fears overcome your common sense. The upside to this is that if you take out all of your money and hide it…what can you do with if in fact the global financial system implodes?…or your Krugerrands which at $900 or so are a bit unwieldy for paying for groceries…unless you will take the change in…uh…dollars? 
TB went to Berkeley last night for dinner with friends (Corso which if you want a restaurant that takes you to a trendy restaurant in Florence is the place for you), and he watched as a woman in an electric wheelchair, well into her 80’s or even 90’s transited the ramp to the bus…on the back of her chair was this bumper sticker: “Impeach the Son of a Bush”…a bit late for that, eh, what? Then he heard a not so funny comment that “Cheney will go down as the worst President in US history.” Signs of the times.
 
How anyone with a mind can feel better after Bush’s speech…when the man himself has no clue of the seriousness of the problem…and the people can smell it…or is that just fear? Worse yet, after two days of hearings with politicians all preening for re-election while taking the valuable time of the two key players in a solution…makes TB wonder who’s running the store?
 
Months ago TB said you cannot solve a problem until you admit there is one…we are still in denial and even Paulson who says “there will be plenty of blame to go around,” isn’t saying who will pay for it, other than the taxpayers who have already been disadvantaged…wonder if the GOP still wants those permanent tax cuts? Equal time: Obama…you can stop talking about a windfall profits tax on the oil companies as even Exxon Mobil has had a negative return since before the price of oil fell!
 
TB

 

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9/24/08…the Angler who fell from grace to the sea

September 24, 2008 at 4:30 am · Filed under economy, financial, markets

…that would be Dick Cheney, ‘Angler’ being his Secret Service tag. TB became numb, as other market participants yesterday to the five hours of preening of Congressmen and Senators, that could have been consolidated into about one hour with no loss of content. This is exactly what TB meant by the perfect storm of a financial meltdown this close to a critical Presidential election (and critical to those panelists hoping to show for the first time in their careers just how much they care about the American people). But did you notice how kind they were? The rantings of Sen. Bunning were missing and when SEC Chairman Chris Cox read the boilerplate speech on what has been accomplished at the SEC under his tenure he was thanked by Sen. Scheumer who added without inflection “in the future please deliveer your speech to the Committee more than 20 minutes before you appear.” It is obvious why he did so as having come under fire from virtually everyone he didn’t want to give advance notice that would give them questions to ask. TB is not exaggerating…it was the same canned speech he has been giving and that is what brings us to Angler. Bloomberg in a 33 page article Monday wrote a scathing rebuke of his tenure and showed how rather than protect investors he worked against them…and the SEC staff when they tried to intervene on several occasions. He was reportedly ‘guided’ by Angler who it has been shown has been effectively President for the past eight years and has controlled access to the President by even Treasury Secretary Paul O’Neill! Clearly it was Dubya’s idea to spread democracy to the Middle East but it was the Angler that mounted the attack along with his former mentor Rumsfeld.
 
Hello, TB??? We are in a crisis and this is what you choose to write about? No, it is critical that we see just what happened. How the VP became the most powerful man in America (replaced now by King Paulson), and that this GOP Administration has done more to promote the wealth gap, and destruction of the financial system than any other factor. Excessive speculation? Shorting stocks? No those were the effects of the free market capitalism dogma that in the end is not only causing the downfall of capitalism but the global financial system and economy as well…yet they have the audacity to blame it on the Democratic majority which is far too slim to accomplish anything without GOP support. That is where we are now…the two parties coming together yet it is ironic that those who created the mess want nothing to do with a bailout…as disgusting as the thought is…but the alternative is unacceptable!
 
The hubris of the Administration submitting a plan that gives total control to the Treasury Secretary…a man who has seen every plan he attempted thus far fail…and this is not being critical since only he and the Fed Chairman have been working from the onset to solve the problem…where was everyone else including the President and Angler appears to be missing in action…or is it AWOL? Even if you believe Paulson is the man…he will be there for less than three months yet whoever his successor he would be given the same authority and without any right of Congress to question and no right of legal review. So in trying to solve this problem the solution offerred by an Administration who has not only ignored but violated the Constitution, now wants to resort to socialism…why not just throw the whole thing out…and this from a party that wants ’strict constructionists’ for Supreme Court justices…so long as they vote their way! Not only did the Administration forbid Harriet Meyers from testifying but when it was taken to court the judge (a Bush appointee) in a decision on Sept. 11, wrote a scathing rebuke…but did they concede? No, they are appealing it so that it won’t come up before the election…but you can bet this is not a dead issue and will come up in the next Congress which will not likely be so favorable to the GOP. That is, of course that the country is still operating by then….and it is no exaggeration that we were and remain on the brink of disaster. Interesting how incensed people were at the price of gas yet we are all talking calmly despite the greatest financial crisis since the Great Depression. Already, the Treasury debt has reached 70% of GDP…the highest level since 1954 when we were still paying off World War II debt…and you can bet there is more to come.  
 
Following are some observations on recent occurrences:
 
What is a ‘bank’? Remember Golda Meir’s answer when asked “what is a jew?” Her reply was “anyone who says they are.” Guess that holds for banks these days as Goldman and Morgan Stanley applied Sunday for bank holding status and had received it by early Monday morning…so if the ability to shove even more of their worthless derivatives down the drainpipe of the Fed means anything, they immediately embarked on raising capital? Has the Bank Holding Company Act been revised to allow anyone to invest 5% or more without scrutiny and approval? It must be as for months they have been talking about that rule as making it difficult for banks to raise new capital. Ya gotta wonder…
 
Shortselling: The total ban on shortselling is one of the most idiotic things that could have been attempted. The argument for the 799 financial stocks plus the two dozen or so added Monday is indicative of how desperate the authorities are. The ban should have been strictly an enforcement of the naked short rule and they should have immediately called for coverage of the shorts on the Threshold Securities list which is as long as 505 days…that is inexcusable…yet no one has queried Cox on that. The puzzling thing is even though Cox is under fire he has made no attempt to resurrect the ‘uptick rule’, this time with a 10 tick minimum? Hedge funds remain their own worst enemy by defending broad short selling instead of covered shorts…investigations are going to make them look bad. Those that survive that is. Is this so simple and acknowledged as needed by everyone that it is ignored due to the need to buy more bazooka’s??? Note also that the ban produced exactly one day of rally…which put most of the banks at 12 month highs…and Wells Fargo at a record high only to be trashed on Monday…$300 billion just doesn’t go very far these days does it?…or even $700 billion!
 
Also note that when the hedge funds couldn’t short financials the shifted to retail stocks and yesterday it was to the entire industrial sector along with energy. Yep, another whack-a-problem.
 
Buffett/Berkshire: Has Buffett lost his Graham & Dodd value marbles? Remember this is the man who made a $15 billion bet against the US dollar…and lost…taking some of TB’s money with him. But now he is putting in $7 billion into Goldman Sachs…$5 billion in 10% preferred and $2 billion in common and they then went after $3 billion now that his imprematuer is on the stock. But what is Buffett thinking: first Goldman and the other four big brokers were exempted from 11x leverage by the SEC in 2003 and allowed 40x which got us where we are today…so now as banks they and Morgan Stanley must shrink back to 11x and best estimates are that they are at about 25x…have those rocket scientist analysts who rely on ‘earnings guidance’ figured what that along with dilution will do to the stocks? Buffett is no fool and he has invested in Wells Fargo and now Goldman to fill out his financial stocks portfolio. But TB thinks that like Huey Long who stopped a bank run by depositing money (knowing Long’s reputation though he probably winked and had someone pick up the money at the back door so it could promptly be returned to she shoe boxes). What is even more interesting about Buffett is that if he was a dollar bear then he should be even more so today…right? Incidentally, on Friday BRK stock rallied to the highest level since Dec 2007…only to fall 6.4% the last two sessions. TB thinks that many remember Berkshire as the best stock you could have bought in the 2000 crash…but forget that one reason was that it did not participate in the rally and in fact peaked in Dec. ‘06 and by Feb. ‘00 had delined by 38%!. Not so this time as BRK had rallied along with the rest…see what happens?
 
There are millions of stories in the naked city and these are but a few…surely you can come up with more.
Remember that even if we rally today, tomorrow is the last day for T+3 settlement for quarterend and TB fully expects a retreat between Friday and Sept. 30…and the shortselling ban is lifted on Oct. 2. Then comes the employment report on the 5th which is what we might all need (I’d rather have a bottle in front of me than a frontal lobotomy). Perhaps TB is wrong…as he was that the pattern indicated a rally yesterday…but don’t bet against it.
 
Lastly, TB put a lot of blame on Sen. Grassley when he meant ex-Senator Phil Gramm…hopefully Sen. Grassley will accept this humble apology for taking his name in vain…no apologies to Gramm, however.
 
Hope you all come out unscathed…or at least only marginally singed.  
 
TB

 

 

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9/23/08…the word for today, boys and girls, is Pain!

September 23, 2008 at 5:04 am · Filed under economy, financial, markets

…as of the close last night the Dow 30 is down 17% ytd while the S&P 500 and Nasdaq are -18%. Essentially we are skidding along the bottom but you wouldn’t know it by the huge moves. Since we took out the July 15 lowest we had just one close below it and the following day set the new low and had a huge capitulation trade. The point is we feel the pain but don’t notice the upticks as much…except the cheerleaders on CNBC…to do otherwise would discredit serious reporters (can you imagine the CEO’s who parade across saying “I get my news from CNBC”?…now you know what is wrong with corporate America…try Bloomberg instead and get facts not hyperbola). Look at the changes in the Dow, S&P 500 and Nasdaq 100 over the past four sessions:
 
Dow: -373 vs +369 vs +410 vs -449 Net change: -43 
S&P 500: -47 vs +49 vs +49 vs -54 Net change -3
NDQ 100: -4.5% vs +2.8% vs +4% vs -5.1% Net change in points -54 or -3.1%
 
Those figures are below in the market summary most of you never read but that is the most valuable tool for TB in figuring a strategy (for what that’s worth)…in other words a roadmap…would prefer a GPS!
 
Now let’s look at what happened on the up days. First, the most positive was the capitulation trade last Thursday, and the follow-thru on Friday but every index was up or down just a few points on the week even with global bans on shortselling (a major mistake), and injections of hundreds of billions of dollars by the central banks. Now the bad news: we had just one day (Friday) where new 52 week highs exceeded new lows (barely)…this is only the second time this year that has happened a clear sign of a bear market. Even on rallies the Advance/Declines and Breadth are positive by far lower ratios then on the down days. What is going on?
 
Readers know that TB had expected the short-selling ban to cause covering and that hedge funds would go long financials in particular…that happened Friday taking most banks back to their highs, and Wells Fargo to a record high, only to be negated yesterday. Again, TB had expected this to hold till Thursday when the hedge funds cut off their books for quarterend, then…as they have done in the past three quarters take the market down thru Sept. 30…and perhaps further when the shortselling ban on financials is lifted on 10/2. The difference this time would be they would be selling long positions rather than shorting…and isn’t it rather obvious that they are being reined in by their prime brokers on leverage? So what better way to do it than as outlined above? But TB believes they were so uh….miffed…not the word of choice…that they decided to prove that shortselling ban or not, they could control the market, not the regulators…and it appears they proved their point. Ironically, thru futures and options which has been TB’s argument all along as to why naked short regulations should be enforced and tightened and the ‘uptick rule’ reinstated…but TB believes shorting (which is not a bad thing if they cover them so it should not have been banned and worse the ban spread round the world…and what do we have to show for it?…a one day rally that cost hundreds of billions of dollars). Naked shorting is just a way to muscle your position on the market destroying anything in its path…especially when several funds get in on the same trade like a pack of wolves.
 
It is ironic that John Meriwether who was a brilliant trader and founded Long Term Capital Market which imploded almost 10 years to the day that his new fund JWM, which was also leveraged 40 times is about to be shut down with 40% or more losses. To show that TB is not without a sense of humor he offers the following quotes from a Wall Street Journal article on Sunday:
 
“Extraordinary times make life exceptionally interesting,” (Meriwether) and his colleagues told investors in a letter sent Sept. 12. The letter said managers would soon be in touch to discuss the status of their biggest fund. “My partners and I look forward to our forthcoming discussions.” Yeah…uh huh!
 
Then… 
 
“In the short run, it’s a very difficult situation for JWM,” says Eric Rosenfeld, an LTCM and JWM alumnus who still has a significant portion of his net worth inveted with Mr. Meriwether. But “in the long run, these are good trades.”   
 
TB distinctly recalls this long run speech twice before in his career…in early 1994 when Orange County Treasurer Bob Citron said that market fluctuations don’t matter “because we hold to maturity.” Mr. Citron’s ignorance can be excused (but not his trading practices); the other time was when LTCM was flailing and they were trying to raise more money. The point is when you are leveraged it is the same as John Maynard Keynes famous quote, “in the long run we are all dead.” His other remarkable quote was: “Markets can remain irrational longer than you can remain solvent.” This time around the markets are not being irrational, it is the players who are…the market is correct…as it always is…in the long run.    
 
TB feels that the efforts of Treasury Secretary Paulson (including the legislation which will make a man with just three months left on his term ”king”), and the governments of the world while heroic is pyrrhic at best. We still have the very people who caused it whining as the powers that be attempt to solve the mess that they caused…with the neglect of an Administration whose goal for the past eight years is to minimize any and all regulations on any phase of the economy…except terrorism! Speaking of whining wasn’t it former Senator Gramm who said “the American people have become a nation of whiners”? With all due respect Senator…they weren’t whining…they were justifiably sobbing.
 
TB has been vindicated in his condemnation of SEC Chairman Cox and other regulators as well as the Congress that gave them a rubber stamp to take as much as they could from the American people in the name of capitalistic freedom. Think how far just a few gentle nudges would have gone to prevent this…instead Wall Street and the bankers bodily threw us over a cliff while enriching themselves.
 
What a terrible time to have this happen…less than 40 days before an election with neither candidates having a clue what to do. That period will be followed by another 60 days until inauguration while the seats are shifted like the deck chairs on the Titanic. Cliche or no, this is a perfect storm! Not pretty!

TB heard this morning that credit default swaps on US Treasury’s has widened in the wake of S&P saying the rating is not under review despite more than doubling the deficit and the national debt over the past two weeks. If you recall, TB talked of the stupidity of basing whether the Fed will tighten on probability dictated by Fed Funds futures. This is just as bad. Think about it: how many portfolio managers would by credit default insurance on the US Treasury? ZERO! BUT, a speculator would and this is a ‘fun’ game for hedgies to play as they trade the widening and narrowing spreads…that is the extent of it because if the US government were to fail there isn’t a currency in the world worth owning…except perhaps Swiss Francs but don’t count on it. What about gold?
 
A friend called a coin dealer asking about buying Krugerrands and was told there are none available but he could take an order. Krugerrands are popular with gold bugs because they have no collectible value and are just one ounce of pure gold. See…gold bugs have it in their head that gold is the only thing of value if currencies collapse. When it was $35 an ounce perhaps that was true. But consider: if the currencies collapsed and we went to a barter society you go to Safeway and ask if they will accept your Krugerrand to pay your bill which is $86…the cashier checks with the manager says yes they will but they will have to give you 800 DOLLARS back…there, that solved a lot!

 

 

Hopefully the above column has deterred you from testing your investing prowess against the market. In an era where only algorithmic trading is succeeding, only a fool would believe he could win. 
 
To end on a humorous note, spellcheck keeps trying to replace ’shortselling’ with ‘chortling’. Not a bad choice when one stops to think about 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 September 23, 2008.

 

 

 

 

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9/22/08…Whack-A-Problem

September 22, 2008 at 3:57 am · Filed under economy, financial, markets ·Tagged , , , , , , , , ,

(Overnight Update: In addition to the rapid changes reported below, Goldman Sachs and Morgan Stanley applied ‘yesterday’ and received early this morning acceptance to be considered ‘bank holding companies’. Of the big five firms they are the only remaining ’stand alone’s.’  The ramifications of this are enormous…first they will have all the borrowing advantages of commercial banks from the Fed, but will also be supervised by the bank examiners, and unless revisions are made to the Bank Holding Company Act, major new investors will have to be approved. This will also impair their ability to generate profits as before as their leverage will be limited. Exceptions were made on minimum capital rules by the SEC in 2004 allowing only the big five to increase their leverage from 11x capital to 40x. Does that help to explain why two of the five are no longer there?…and why it hasn’t spread to the smaller brokers? We do live in interesting times. TB) 
 
…TB was going to use this title from a Motley Fool email: …The Mother of All Bailouts. Instead, this one stolen from John McCain speaking on Iraq almost two years ago: “What I am afraid of is we are about to play a game of whack-a-mole here. We move troops, it flares up, we move them there.” (actually not expressed very well). The reason is this is a game that started out slowly…very slowly in August of 2007 yet despite the problems in Europe officials just seemed to believe it “it can’t happen here.” With good reason too since there had not been a major financial disaster since LTCM in 1998…despite an energy crisis and the collapse of the stock market and the Enron/Quest/Worldcom debacles, not to mention Parmalat where we never did find out who held the ‘risk.’ That is how regulators become complacent.
 
Then, a year ago…eight months after Ben Bernanke had been sworn in as Fed Chairman, McCain said of Alan Greenspan: “If he’s alive or dead it doesn’t matter. If he’s dead, just prop him up and put some dark glasses on him like, like ‘Weekend at Bernie’s,’ McCain joked. “Let’s get the best minds in America together and fix this tax code.”
 
If experience counts it is incredible that even after the subprime bubble McCain still saw Greenspan as a guru…that’s makes two: he and Greenspan, for Sir Alan exemplifies the regulatory neglect that got us to where we are today.
 
The draconian measures taken last week in which hundreds of billions of dollars were injected by central banks around the world…with the Fed doing the lion’s share…it’s balance sheet already bloated with assets which may or may not be worth the paper they are printed on. There can be no doubt the entire global financial system was on the verge of collapse. Yet within minutes of the announcement hedge funds and others who have profited from the chaos or stand to lose money from the trading restrictions were decrying the moves as ’socialist’…some even saying we were in Paris.
 
Stop for a moment and think: have all the central bankers of the world lost their minds? Are politicians on both sides of the playing politics by joining hands in solving this crisis…and less than 60 days before a Presidential election?…the answer to both is a resounding NO! They are scared and if you had the information they are privy to you would be just as scared. TB cannot believe that the very hedge funds and other speculators who drove us to the brink would have the audacity to cry foul over this…even though to TB at least, it appears they went way overboard…but that is how you make a statement: not with one bazooka but four and you damned well don’t keep it in your pocket, Mr. Paulson!  
 
First, the ban on any form of shorting of the 799 financial stocks (which did not include GE or CIT Financial, both of whom are begging to be added to the list as well as scores of other companies), was excessive and like whack-a-mole caused a similar reaction in the UK only worse as it was a total ban on shorting (not even exempting dealers), thus causing an excess rally as shorts covered. This spread throughout Europe and the UK and finally to Australia where they are concerned for the well-being of the long/short funds. All eyes will be on Australia tonight for a clue. Not only that but seeing three money market funds ‘break the buck,’ the Treasury said it would insure against that event for a fee for any money market fund. TB heard a commercial just before this announcement by Gabelli Funds touting the fact that their fund was “100% US Treasury’s.” After fees of course you would most likely have a negative return and think of the ramifications as every money fund rolls all maturities into treasury’s and sound companies cannot roll over their commercial paper…which means they would have to draw down their backup lines from the banks. How long before the banks decide they are a bad risk since they can’t roll their paper? This is the plot of several shock books and movies in the 1980’s and it seemed preposterous. So the Fed said they would buy up any commercial paper from the money market funds. Now another whack-a-mole: Fed Funds and $ LIBOR had soared to 6.5% or so on Thursday and Friday wasn’t starting out any better. The Fed was getting calls from banks that they were afraid depositors would take money out of their accounts with FDIC insurance (since if WAMU goes down that would take the remaining reserves of FDIC)…in other words money market funds were better than insured deposits! This gives a totally new meaning to “We Are The World”! To sum up: in an effort to shore up the ailing US markets the Treasury transferred the problem to one of worldwide proportions! WHACK-A-MOLE…WHACK-A-PROBLEM!   
 
From an old friend who analyzed the securities market for more than 20 years for a major consulting group and a loyal reader:
 
“What annoys me is that when there is no crisis, sensible regulation is rejected.  When the crisis comes, we make it up on the spot – rather than think the rules through – of course eventually it turns out to be the wrong approach – or at least leaves serious holes.
 
With this flight to quality, all treasuries in money markets etc. , business freezes up. 
 
Of course a little foresight might have been helpful – letting the housing bubble deflate slowly rather than burst.  The bust is causing a lot of unnecessary hardship and important real losses – as neighborhoods deteriorate – and banks collapse – but hey – we cannot intervene,  people have to take their medicine.  arg!”
 
Readers know how outraged this writer has been over the lack of response from the SEC Chairman who it can unequivocally be stated aided and abetted the problem thru his neglect. As a former Congressman with zero investment experience it is TB’s belief that he listened to the same members of the financial lobby that contributed to him when he was a Representative. He should have known that in the financial business, or politics, your friends are only that while they are benefiting financially. McCain, sounding like he has been reading this column, referred to “turning the stock market into a casino” and then went on to say he had “breached the public trust”, something TB did not say. Not for one minute does TB believe that Rip Van Cox did that…rather his lack of experience left him catatonic in this crisis that he had no ability to comprehend. For that very reason TB believes that any candidate for SEC Chairman should have extensive investment experience as well as banking experience (TB has both and is available if anyone wants to forward his resume…although it might be best to send it to the Obama camp). Then he said that he would have fired him if he were President…I believe replaced with someone with experience would have been more appropriate. This attack on another sitting Republican incensed the Wall Street Journal powers that be so much that they wrote a scathing editorial decrying McCain…isn’t that just as counterproductive to the party they represent as what McCain said? For the record, during the Mike Milken/DrexelBurnham scandal despite incriminating articles on the front page by experienced investigative reporters they continued to defend them to the end, making a mockery of their own reporters. The editor, Jude Wanniski, even visited Milken in prison…TB knows this because Jude called on our firm and then said he had to leave as he was “having lunch with Mike.” For the record, as brilliant as he was, Milken was at the very least unethical, and TB will discuss that with anyone who cares to do so. TB interjects this anecdote to say that if Milken had done this type of thing while working for the government, that would be a breach of the public trust, not what Cox did.
 
Chris Cox now knows that whichever candidate wins he is out of a job. The look on his face coming out of that emergency meeting Thursday night told volumes…this was not the same confident man who testified before his colleagues less than two months ago…he looked like most Presidents after their second term. But Cox resembles most of the appointees of this Administration who appear to have been given a mandate to do nothing…at least nothing that would hinder the unbridled growth of capitalism.
 
Henry Paulson as tried his best, despite every solution he has proposed has failed, yet even he has refused to blame a single CEO for the problems they have created…no one has been charged…despite a cost of hundreds of billions of the taxpayers money. Remember when Bill Gross said the tab would reach $400 billion and was mocked by Kudlow for it? It now stands at $500 billion and that is before the events of last week, meanwhile the publicly held debt of the US treasury doubled when they assumed the obligations of FNM/FRE. Think about that…and cry…or at least pray for us…someone had better. 
 
TB flipped back and forth Sunday morning between Meet The Press and This Week. Both began with an interview with Henry Paulson and the questions were good and the coverage very similar. Once again however, Paulson sidestepped the fact that it was the entire US Government that failed in its oversight and allowed this problem to occur. Then the two show diverged with Meet the Press having Sen. Dodd (D-Conn) and Rep. John Boehner (R-Ohio)…both defended the treasury plan and Dodd as usual was less than impressive saying they have to proceed slowly with any regulation and thankfully not the Democratic candidate while Boehner said that he remains “an unrepenting free markets advocate.” There you have it in a nutshell, Dodd doesn’t get it (as goes for 99.9% of America, or more), and Boehner can’t see that deregulating the financial markets brought us to where we are today. Meanwhile Sen. Shelby (R-Tenn) decried Paulson and said that Congress would not rubberstamp what he has done…the world would be a different place if he like Sen. Bunning (R-Fla) had their way…dragging their feet so as not to interfere with big business. On the other hand, MTP had Mike Bloomberg on, looking very Presidential and not taking any bait…his remarks were thoughtful and to the point. If Obama is elected TB believes he should be made a “cabinet member at large” with the ability to oversee any and all departments. Then came the panels…TW with the effete Sam Donaldson and out of touch George Will, neither of whom gets it, and on the other hand MTP had Steven Pearlstein of the Washington Post who has written some great article lately on this problem, the wealth gap, etc. Who else? CNBC’s Steve Liesman and Erin Burnett who also don’t get it (Bob Pisani closed Friday night saying tearfully ”I am so proud of every one of my colleagues” who performed miracles in his opinion. Burnett had the audacity to say the unemployment situation is not nearly as bad as in prior slowdowns…guess she doesn’t know how many people who earned $45,000 or more are making $25,000 or less and the number of people working part-time for economic reasons! So both struck out with TB on that coverage. God help us!  
 
TB’s forecast for the week: just an educated guess that many of you will disagree with vigorously. It is still based on TB’s hedge fund theory of T+3 quarterend but rather than shorting, they buy heavily in front of Friday and then sell thru the 30th…in other words just a variation of the last three quarters. First off they must have been told to reduce their leverage by their prime brokers (why lend capital at less then the marginal cost of raising more capital?)…and they too are afraid of net withdrawals! One estimate is that as many as 1,000 funds may go out of business…TB believes this is conservative. Then, after we get through quarterend we will wait for Friday’s payroll report will be ugly.
 
Listen to this: Barron’s has a piece on BofA’s Ken Lewis who brags of buying Countrywide and Merrill Lynch and says they filled two holes they had…excluding the ones in his head thinks we are in a shallow recession! A true bottom, according to Lewis, until the housing market turns around in the first half of 2009. TB wishes him good luck but it could in his next job…is he too big to fail? Barron’s also believes the good banks have rallied way to far on the shortcovering and ban on more shorting…and that they will soon start raising capital. Not just raising capital mind you but diluting earnings even as more charge-offs occur…the peak could be in the first or second quarter of next year TB thinks. Thus it would be a good time to do two things TB: ask yourself where the replacement revenues will come from…and get ready to sell into the rally next week…even if the bank stocks don’t rally more (common not preferred), they cannot keep climbing. Hopefully, the floor is in but are we about to set the peak? You decide! (This was written before the unexpected and unprecedented conversion of Goldman Sachs and Morgan Stanley to bank holding companies…and less than one day after they applied….the fix is in! As a result stocks are lower, following the dollar, gold and crude are up and bonds are weaker…tough market to call. TB)
At best we rally thru Thursday, then selloff thru quarterend…and the ban on shortselling financials (but not naked shorting) expires on Oct. 2. We are playing a very dangerous game of chicken!
 
TB

 

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9/18/08 10:45am PDT Update: socialization of the stock market?

September 19, 2008 at 6:49 am · Filed under economy, financial, markets

 

…we all know that at extremes, the pendulum swings violently the other way. you all know TB’s position on the SEC and Christopher Cox as well as the CFTC on lack of position limits for banks. While ‘benign’(?) regulatory neglect has been the hallmark of the Bush Administration, Congress is equally to blame for pushing homeownership for everyone, and the Greenspan Fed did nothing to stem the growth of subprime lending. A total failure to regulate that combined with the greed inherent in capitalism nearly destroyed the global financial system and taking along all economies as well.
 
The moves of the past several weeks culminating with this mornings total ban on shorting 799 financial stocks represents the other extreme. Sadly, TB believes less draconian moves could have salvaged the markets and still maintained a capitalist bent. Instead, we are introducing moral hazard, by not allowing the markets to self-regulate thru covered shorts.
 
Forgetting the sins of the past, TB believes this is what should have been done:
 
1. The moves by the Fed concerning money market funds were the most important thing that happened overnight. First, they are willing to insure funds against breaking the buck for a fee but more importantly they are willing to buy commercial paper and other securities from the funds. Gabelli this morning proudly declared that their money market fund is 100% US treasury securities. All mutual funds were headed in that direction as holdings matured or were able to be sold. The inability to ‘roll’ commercial paper has been the topic of several novels and movies…it would have caused financial problems for even the best companies in America. Thankfully the Fed foresaw this!
 
2. The implementation of a ban on naked shorting for all stocks, although it was way too late, and even though pension funds could have stopped lending shares when they saw what shorting was doing to their portfolios, was excessive. Furthermore, temporarily banning any form of shorting 799 financial stocks is not only excessive but promotes speculation to above fundamental valuations. It should be repealed as soon as it is apparent that markets have stabilized.
 
3. Requiring hedge funds to report their short positions is invasive and unnecessary. Using an embedded code that can only be deciphered by a few people at the SEC, hedge funds should initially report their net short positions in this manner (as they may have several portfolios within a fund) but then, on the morning of the next business day report all additions to short positions. This is imperative so that the SEC can determine whether insider information, creating rumors, or other forms of market manipulation was used.
 
Conclusion: Due to the way this program has been instituted, and in fairness it had to be drafted quickly and is a work in progress, the market will rally…and continue to rally…until it doesn’t. The reaction is somewhat muddled by the fact that today is options expiry (quadruple witching). The rally could end as soon as next Friday the day after the hedge fund books are closed for the quarter. For the past three quarters they have driven the market sharply lower till at least the first of the month and as long as the 15th by shorting. This time, the pressure on them may be to deleverage so they could be making outright sales rather than shorts…either way this puts conventional money managers at a distinct disadvantage. Once the next rally begins it could run till after the elections and possibly near Dec. 31 till the process is repeated again…that’s how TB sees it and strongly suggests you review your portfolios and sell losers into the rally. Advancing issues are leading declines by at least 4 to 1 this morning. Read and heed.
 
The law of unintended consequences, as always, will prevail.
 
Good luck and have a great weekend!
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 September 19, 2008.

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9/19/08…from the ridiculous to the sublime

September 19, 2008 at 4:34 am · Filed under economy, financial, markets ·Tagged , , , , , , , , , , , , , , , , , , ,

(To all of you who wrote yesterday on the column, TB sincerely thanks you…Bruce, you are going to get a reply today…it is a testament to the troubled times we live in as so many are seeking information…hits to the Blog have doubled this week including two record days…and there is so much misinformation and disinformation out there. TB collapsed into slumber at 8pm and woke up at 2am…it’s getting better…wife was awake and so we discussed her concerns…she is the one who for as long as we have known one another calls the stock market ‘gambling’. TB modified that to ‘casino’ due to the naked shorts and McCain actually said that yesterday!  Many thanks!
 
 
..the debate goes on: to short or not to short, or more accurately to allow naked shorting or just covered shorts. Why is this so difficult? John McCain finally checked in on it and TB thinks someone handed him one of the recent TB columns. He said that speculators and hedge funds by naked shorting have turned the stock market into a “casino” and that the regulators “were asleep at the switch,” and that specifically the SEC is mandated to regulate the financial markets and that Chairman Cox “breached the public trust” and that if he were President now he “would fire him.” (Only the last two comments aren’t TB’s, didn’t have the guts to say that)
 
Inflation is hell…you sure don’t get much for $180 billion these days. In a coordinated move by all the major central banks plus $58 billion by the Fed to brokers and another $28 billion to AIG, all they could do was get the Dow up about 170 and it barely held. THEN, they started shorting the venerable Goldman as well as State Street Trust and poor old Morgan Stanley. Finally, enough was enough. The BOE banned naked short selling in the UK.
 
TB has made it perfectly clear that he is not opposed to short selling. Short sellers who cover their shorts due the market a favor…think of Bill Fleckenstein on the GSE’s and other stocks he has written about. But TB loathes the parasites…the bullies who tell brokers they have arranged to borrow the stock (which they may have done by all asking the custodians if the stock is available (wink), then when they go to borrow it, miraculously it is gone so they are naked. As Forrest Gump would say, “naked is as naked does”…so cover your shorts fool! This is where the SEC failed its responsibility and Chris Cox, like Nero fiddled while the market burned (actually Nero did not play the fiddle as that was happening but Cox may have done so or something similar). The sad part is that the villains have convinced so many, especially the malleable young that there is no difference and in a capitalist society you should be able to do anything you wish…even if it is at the risk of collapse of the entire global financial system.
 
Consider that even after the combined addition of over $200 BILLION, the stock market climbed slowly then paused and failed. Only after several pension funds said they would no longer lend Goldman or Morgan Stanley stock, and various other entities including the Bank of England banned naked short selling of financial stocks…while Elliott Spitzer clone, Andrew Cuomo imposed a ban on the financial stocks on the original SEC list (what authority does he have to do this?), did the stock market rally…410 points or the most in six years…never mind that we have had declines of 500 and 490 points this week and that yesterday’s rally, while TB would call it a ‘capitulation trade’, did not even recover all of the prior days move and in fact virtually every sector except financials (ex-brokers) did not even recover the prior day’s loss or merely offset it. TB believes the quarterend activity we have seen for the last three quarters (see yesterday’s column) will recur but this time the hedge funds will not be shorting after next Thursday but continuing to deleverage (either voluntary or forced), so there will be high risk over quarterend and until payrolls the following Friday. Then…you could get a very strong rally that could last past the elections but to TB’s way of thinking will peak before yearend.
 
Overnight Globex futures have the DOW +304, SPX +46; NDQ +44. We may being seeing records for the overnight session here as the FTSE has been up over 400 points or about 8%, the depressed Hang Seng and mainland China +10% and virtually every major bourse up at least 5%. But beware that not only is today options expiry in the US (quadruple witching), but draconian rules on shortselling are being imposed that is causing the hedge funds to cry foul…and yell ’socialist.’ Be careful what you wish for as pain inflicted on hedge funds can more than offset the gains in the traditional portfolios of pension funds. Yet short term, this may stabilize the markets, but what are the longer term implications?
 
Also overnight the Lloyds Bank TSB takeover of troubled mortgage lender HBOS was sealed making Gordon Brown a hero and giving him the highest popularity levels of a PM since Margaret Thatcher! This follows the meeting of Paulson, Bernanke and leading members of Congress to hatch an RTC clone to take over problem assets…while the details aren’t clear the idea is to take troubled assets off the books of financial institutions at current market value…then slowly sell them off. By effectively putting in a ‘floor’ the assets should climb in value and recoup some of the cost (most?). This is because we own the biggest printing press for currency the world has ever seen…note however this is not the ’sterilized’ lending that has been done so far and will be inflationary so even if they recoup all costs it will be amortized thru inflation to the taxpayers…not good but would you prefer the alternative? Also at the meeting was a very haggard Chris Cox…looking as one might after a 40 years sleep and a far cry from the dapper man addressed as ‘the honorable Mr. Cox’ at the Senate hearing less than two months ago. He looked very glum…you might too knowing that regardless of which candidate wins you are out of a job and worse will go down as the worst SEC Chairman in history.
 
Now lets look at some of the issues TB follows…TB has liked preferred stock…sound companies with great dividend yields…including banks like USB, WFC, Royal Bank of Scotland, ABN-AMRO and others and sound industrials and utilities like GE, AT&T and others. The baby was thrown out with the bath water as they were trashed across the board…this is similar to what happened in July as the market bottomed and provided huge returns in the wake which were then wiped out again this week. Royal Bank of Scotland 6.75% declined by 36% from Monday to Wednesday to $7.98, a yield of 21% then rallied yesterday to $13.20 for a gain of 65% and now yield 12.8%…recent price was $22; ABN-AMRO 5.90% fell 41% to $6.71, a 22% yield then rallied back by 67% to $13.20 and is now yielding 12.8%…get the picture? Think, if these banks are out of business your money…any currency…is worth zip…so forget hiding it under your mattress. Remember preferreds are thinly traded and very volatile.
 
Another stock TB follows is CapitalSource (CSE), a lender to small and medium sized businesses. Over the past 12 months the stock is -32% but due to a big dividend if reinvested it would be -23%. Recently it slumped after having gotten back to $16.77 on 6/7 but then they announced earnings which were fine but that due to the acquisition of Fremont Bank they would start paying a normal dividend. The stock dropped to $9.61 on July 15 after paying the dividend and had gotten back to $13. Ironically, the stock has held its value despite about 13% short interest and after trading to just below $11 Wednesday rallied to $13.50 yesterday. This is the world we live in…there are opportunities.
 
Note that while TB owns the above stocks he makes no recommendations on them they are only shown to point out the fact that these are irrational markets. They will continue to be irrational as leverage is unwound. Consider that brokers have only gone from about 40x leverage to an estimated 25x so there is much more to come and outright selling due to deleveraging can be just as damaging as short-selling.
 
Here are a few bizarre things TB has noticed:
 
*Auction rate securities: good tax-exempts (those with solid underlying credit ratings), are providing yields of 6% plus…tax free…Lehman is no longer trading and can only ‘roll’ clients positions. If a holder wants to put or someone wants to buy they are referred to one of the other auction agents on that security…what a mess.  
 
*Money Market funds. First, the Reserve Fund ‘broke the buck’ with huge net withdrawals and $785 million of Lehman paper and had to suspend redemptions for seven days…after that there would have been a run. Yesterday Putnam broke the buck and is closing down their fund and returning the money to investors but will make them whole, and BNY/Mellon broke it but will put up collateral. Schwab went to great lengths to show they hold no AIG or Lehman paper and only some Merrill tender option bonds which are not at risk in TB’s opinion due to the BofA buyout (TB ran into an old friend and institutional options specialist for Merrill who he found out left and joined JPM in November but was just laid off. He said that Merrill would have been out of business this week without the BofA buyout…TB queried him on this and he vehemently insisted that would have happened…shocking). Overnight, the Fed announced they would offer insurance to money market funds for a fee to purchase collateral to maintain the $1. This is huge since a fund that breaks the buck and can’t anti-up collateral becomes mutual fund and we could have had an epidemic of failures. Therefore as securities mature they are being replaced with T-Bills. TB believes this is why short T-Bill yields are virtually zero and have briefly traded at a small premium…watch the Bill market closely for clues. Had the Fed not done this the commercial paper market would have collapsed causing even sound companies to be at risk of defaulting on obligations.
 
*T-Bills. As stated above the yields on short bills are near zero even as supply is increasing. Some have even traded below zero to a premium, an event that has only happened once in US history in 1934. Even the longest bills, from June ‘09 out to 8/27 are yielding less than 0.5%. 
 
*Options expiry. A ban has been placed on shorting 799 financial stocks…what a day to do this. We are not talking about naked shorting but any shorting…a very bad idea as it will drive prices way above fair value and cause dislocations…another reason TB believes wherever the market rallies it will be lower by September 30…you can stop shorting but you cannot stop selling, especially by funds forced de sharply reduce leverage. Make sure you are comfortable with everything you own and if not this is the selling opportunity of a lifetime…ultimately we are near the buying opportunity of a lifetime…in the right stocks.
 
*Long term performance. Based on performance during the recent selloff large caps have offered less protection than smaller stocks. Also, except for one day in the selloff, value has outperformed growth. Yesterday, value stocks in every size category outperformed growth by more than 200 basis points! To TB this is entirely rational and also that solid dividend payers should outperform everything…just an opinion but TB firmly believes in reversion to the mean and we have had excessive growth in both the economy and stocks and are still above the long term trendline on the S&P (about 1000) and Dow (8000). This is not to say they have to fall this far but one should not argue stocks are ’cheap’ here. Also, despite the strong growth in the economy until last year savings are negative, debt levels and consumption are off the charts, and real wage increases have been nonexistent for a decade! Add to this the collapsing housing market which can only continue with reduced credit and that will lower long term growth of the overall US and global economy…after all, we are the biggest consumers in the world. 
 
One has to wonder what would have happen if 15 months ago modifying the uptick rule to 10 ticks to compensate for decimals rather than eighths, and coming down hard and fast on naked shorts might have altered the picture. While TB blames Alan Greenspan for not having the guts to sound the alarm on subprime lending, and Congress created the problem in 1999 and failed to set up procedures to protect us, one man could have made a difference…Christopher Cox…but for one reason or another that defies comprehension he waited until it was too late. Had he acted, even Bear Stearns might have survived, as well as Lehman and AIG. The only positive here is that without his shameless neglect we might have gone back to business as usual. But given the massive losses incurred in the derivatives market that is doubtful. Hopefully at least we are now on the right track but improvement will be at the pace of a wounded snail.   
It is a much brighter day today…we have staved off disaster…but it will take years, and decades to get back on track. Worse, those who have lost their nest eggs and are at retirement age may never regain them. If it is the top 20% (?) that hold 95% of the assets in this country, the recent stock market losses have done serious harm. Whereas the housing crisis affected mostly the lower 80%, it is the stock market that impact the wealthy. Note how well the New York City housing market held up while the rest of the country tumbled…now due to Wall Street’s woes it is being impacted heavily. Changes in the way compensation is paid out will make it a long haul to turn it around. A friend sells jewelry to very wealthy people in New York City…she had several of her clients say over the past week that they aren’t buying due to stock market losses. We need change and quickly…can Obama or McCain deliver better on their promises…you decide but consider thoroughly before you cast your vote…the future depends on it.
 
Hope you all have a great weekend and at least feel we have stepped back from the brink.
 
TB

 

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9/18/08…the future as history

September 18, 2008 at 4:06 am · Filed under economy, financial, markets ·Tagged , , , , , , , , , , , , , , , , , , , , ,

(The following was written at 12:30 am PDT as TB was restless. At 2 am he went back to bed and awakened to a new world. At 2am the Dow futures were down 45…they are now up 125! Not only do we have the new improved ban on naked shorts…finally…but the central banks have in a coordinated move prepared to inject more than $150 billion in support of the financial companies…this is huge…in addition, WAMU is seriously seeking a buyer having forced their largest shareholder who over the past six months injected billions and has little to show for it to waive its right to compensation for WAMU’s sagging stock price…reportedly JPM, Wells, Hong Kong Shanghai Bank, and others are interested potential buyers. We could see a huge…at the minimum shortcovering rally today. Also talks of merger of Goldman, Morgan Stanley with banks (JPMorganStanleyChase?), including Citi (?) and Wachovia. Wachovia’s market cap is $19.5B with a neg p/e and -81% past 12 mos and a 2.2% dividend while MS is $24B 4.8x p/e, -67.5% past 12 mos and a 5% dividend that has not been cut. Question is what does that accomplish? Cosmetics…brokers now want depositors so they do not have to rely entirely on capital markets…self-inflicted pain.
It is also obvious however that the regulators will extract their pound of flesh in the form of significantly lower leverage and that will dramatically impact hedge funds and while it will restore the global financial system it will also insure much lower but stable long term growth…once, that is we get to the recovery stage. Also, reduced leverage will be a big negative for emerging markets. TB)
 
…if you Google the subject you will get a lot of different topics from the book of the same name by Thomas Heilbroner, who also wrote The Worldly Philosophers, and died in 2005. TB was first subjected to the book when in college and majoring in partying. He took an interest in the book but not in studying for exams, much as he did in western civ. To those of you who are underachievers there is hope that later in life you too will get the blessing…and curse…of a thirst for knowledge as TB has.
 
TB believes this may be the most important piece he has ever written and if he had the readership of say Dow Theorist, Richard Russell, he might be able to make a difference on the outcome of the next two weeks. Of course he will never know unless the mainstream media somehow picks up on this offering, which is in the spirit of Nostradamus, Criswell (1950’s), and other seers of which TB is not.
 
We begin with the history which TB stumbled on quite by accident. It was the selloff that occurred beginning on his birthday December 26th, a most unusual even due to the magnitude of it and the timing. To understand you need to know the following:
*Money managers are paid on the value of assets at quarterend 
*Hedge funds months and quarters end on the fourth trading day before since settlement for equities is trade date plus 3 days…otherwise due to leverage they would have assets on the books that have not been ‘borrowed against.’ This does not mean they cannot continue to trade…they can and do.
*All other managers are measured at the actual quarterend.
 
Hold that in mind and recall that due to the holidays, Wednesday Dec. 26 was the last day for T+3 settlement in 2007. It was also a market ‘top,’ and from 12/26 to 12/31 the Dow fell by 2.1%…not huge except that in thin trading this seldom happens. Instead the volume of trading on 12/31 was and above average 167M shares. The selloff continued into 2008 until Jan 22 for an additional 9.8% decline before beginning what we now know was a bear market countertrend rally of 6.4% or almost exactly 50% of the decline ending on Feb. 1…a dead cat bounce. After selling off it tried again in vain to rally coming just shy of the 2/1 high and then on Feb. 27 began to dive again to the March 10 low close (-6.3%). As a result of TB’s discovering the 12/31 selloff, he began looking at each of the next two quarters and found similar results…TB…like any good detective…does not believe in coincidences, whereas ‘quants’ who devise all the models, including the revered ‘random walk hypothesis’ do and thus label it ’systematic’ risk, which is undiversifiable and also known as ‘market risk.’ Yesterday was the perfect example of this as there was no safe haven. Thus the quants throw this out as ‘white noise’ and yet as The Black Swan and other studies have shown it is far too significant to ignore as the theoretical models do. Models are valuable tools but as we should have learned from Long Term Capital Management are meaningless the more people are aware of them and are using them. This reached a peak with overleveraged financial institutions as well as hedge funds a year ago and we are still paying the price of deleveraging…TB heard yesterday that the brokers are perhaps down to 25:1 leverage from 40:1, meaning we still have a long way to go, so yesterday’s low could be and likely is an interim low.
 
Now that we are up to the present, let’s look at what happened in the past two quarters, noting that this pattern did not exist prior to the yearend selloff. The outcomes were slightly different each time but the end result is still the same:
 
First Quarter: Following the run up from March 10, the rallied until March 25…the last day for T+3 settlement then dropped by 2.4% thru March 31, then came the ‘April Fool’s’ rally, to a 13,058 close on May 2 with a slightly higher high on 5/19 but a lower close of 13,028. Sorry about the numbers but they are important.
 
Second Quarter: From May 19, we dove almost uninterrupted to the July 15 low which was seen by many as the end of the bear market, a 16% decline. June 25 was the last day for T+3 and the next day the market dropped 359 points and by March 31 was 4% lower. The selloff continued for an additional 3.5% to the July 15 ‘bear market low’ which it turned out not to be. That date the low was 1.2% lower a the bounce was declared a ‘capitulation’, and until last Monday it appeared that might be the case, but Lehman Brothers, Merrill merging with BofA, AIG, Washington Mutual seeking a buyer…of last resort, and talks of the only remaining big brokers Goldman Sachs and Morgan Stanley seeking to find a banking partner, and the oldest money market fund, The Reserve Fund ‘breaking the buck’ due to large Lehman holdings, and having to suspend withdrawals for 7 days…IF TB is correct this akin to your banker telling you to come back Monday for your money…you will and so will all of the other depositors. All of this led to the sharply lower low and new low close yesterday on the Dow, S&P 500, both Nasdaq indices and the AMEX composite.
 
That was the recap, now comes the difficult part, the forecast. First, you are probably asking the question of why would the hedge funds do this? TB’s reply: because if your performance looks bad you can still make someone else’s look worse! Think about it. Here is TB’s scenario thru yearend, take it or leave it:
 
1. Friday is quadruple witching and given the volatility of since last Friday which has pushed up the volatility indices to the danger zone (see last nights stock summary), anything can happen on Friday. But it will be meaningless for future direction.
2. Next Thursday is the last day for T+3 settlement so the beginning of next week will also be useless.
3. IF TB’s hypothesis is correct the market will go down from there at least thru Sept. 30 and given the overall weakness that could continue all of the next week until the payroll numbers on Friday, Oct. 3.
4. As weak as TB expects them to be, this could cause a further selloff so the first chance of a recovery would be early the next week. Then we could have a major countertrend rally possibly thru the elections and well into December, but TB believes this will culminate in yet another quarterend – yearend – selloff of major proportions which could extend to Inauguration Day or longer, followed by yet another countertrend rally…remember the financial markets will continue to get weaker and the cost of money over yearend could be huge.
 
What could derail this forecast:
 
1. Yesterday, SEC Chairman “Rip Van Cox” awakened from his slumber and said he was making it “crystal clear’ that the commission has a ‘zero tolerance’ (?) for naked shorting. This from a man who eliminated the ‘uptick rule’ effective July 2, 2007…very close to the market peak (even though the rule was meaningless since instead of 1/8 a tick was only a penny…it should have been amended to TEN ticks instead). They also announced they would not allow naked shorts putting out a daily ‘threshold list’ of naked shorts of 10,000 or more shares and more than 0.5% of the float in a stock that haven’t been covered a day after T+3. While that list is promulgated daily TB can see no sign that any enforcement has been done as at least 20 stocks have been on the list for more than 100 days…the longest being more than 500 days!
 
Go back to when the SEC prohibited naked shorting for FNM/FRE…right after ‘the honorable’ Chris Cox sat beside Henry Paulson before a Senate committee and was handled with kid gloves while Paulson, as well as Bernanke were attacked, he announced the ban later amended to include the primary government securities dealers (although not announced as such), while not extending it to the rest of the financial stocks…a very bad decision…so we are led to believe they have been studying the problem since and just concluded what TB and Jim Cramer have been saying for nearly a year that naked shorts are dangerous and convert the stock market into a casino…do not confuse this with other speculative shorting which allows liquidity and corrects overvaluations. What TB wants to know is why the strong statement by Cox did not take effect immediately instead of today…just as the earlier ban gave them three days to continue to short the stocks. One has to ask if Bear Stearns, Lehman, AIG, and others might still be around and investors would not have lost so much money had the ban been in place along with an improved uptick rule since last July. TB suggests the declines would not have been as sharp or the loss of confidence so large.
 
Think what the SEC has done to the global markets thru inaction on this. Think also how the CFTC taking so long to realize the need for position limits on banks did to inflationary expectations as well as individuals and you can directly attribute this to the dramatic change in global markets. Poor Ben Bernanke has had to struggle with this against the inflation hawks who were screaming at him to raise rates…and think how disastrous that decision would have been.
 
TB has been commenting on how low treasury bill yields have been, notably the 1 month T-Bill which has been at just 0.25% for three days. As TB writes the yield on the THREE MONTH T-Bill has fallen to 0.7% or 76 basis points below the close on Tuesday! There has only been one time in history it has been lower and that was in 1934 when normally discounted bills traded at a premium…in other words a negative yield…the ultimate flight to quality…think of it like putting money in a Swiss bank account and paying fees for the safety. Watch closely as the Fed issues $85 billion of 35 day cash management bills to pay for the AIG loan…if rates don’t rise we are in trouble…TB believes much of the drop yesterday was due to money market funds buying bills after the Reserve Fund ‘broke the buck.’
 
2. A change in accounting methods which would minimize the losses on financial assets…but will investors see thru that. Also, what if FNM and FRE were allowed to pay interest on the perpetual preferred stock only so that banks could reverse the write-offs and restore the lost revenue (Wells alone had to write down the final $300M of $600M invested with a loss of about $50 million in dividend income). The decision is impacting the entire preferred stock market which has declined by 21% in just the past two days…affecting ALL preferreds and bank preferreds even more. Royal Bank of Scotland preferred which is not in any trouble…although you can’t prove that with the lack of transparency has declined by 49% since last Friday and is now yielding 21%! A travesty.
 
Obviously, there are no guarantees to the above forecast, but unless we see drastic action by the authorities. Finally, at least, the SEC has ‘acted.’ Overnight the European and UK central banks, along with Japan have agreed to inject $180 billion into the financial markets…will that restore confidence? You better hope and pray that it does…there are no atheists in a financial crisis, and this is one! 
 
3. The decline of the power of hedge funds. That power derives from leverage, in fact some estimates as the alpha (value added) of hedge funds indicate that as much as 80% of the excess returns come from leverage. Leverage helps on the way up and destroys on the way down as we are now seeing. TB believes that only the algorithmically traded hedge funds (computer models with no human interference) are the ones who have been making money and that has been largely on large liquid stocks such as XOM where they can ‘range trade,’ and these are the most volatile stocks in the indices as a result appearing in the movers that TB shows in the stock market summary every day…that is why he does it. If banks are deleveraging, and brokers are deleveraging…both forced…there is no way that hedge funds who rely on them for their leverage cannot shrink and without the stimulus of 20% performance balances most, or many, will be gone a year from now and the sham of their performance will be known. Thus, it is possible that we might not see a repeat of the past three quarterends…but don’t bet against it.
 
One can only wonder how much higher the US and global equity markets might be if the SEC had merely enforced the ban on naked shorts. Take a look at Brazil, the last major country to have positive returns this year. The Bovespa was up 56% from March ‘07 to the 5/29/08 peak. From 5/29 to 9/17 it fell by 36% and is now unchanged since March ‘07. It is down 28% ytd and turned negative on July 1 – down 28% in just three months! What’s wrong with this picture…a manufacturing economy and both a producer and exporter of energy…what could be better? This is not about economic fundamentals!
 
One last point: yesterday TB heard the risk of default on Goldman and Morgan Stanley had risen sharply…as measured by the credit default swap (CDS) market. That is as absurd as using Fed Funds futures to determine what the next move of the Fed will be. Those are bets…or they may be hedges…but the point is they are based on market psychology not underlying fundamentals (although the opacity of the markets makes really knowing anything impossible). Consider how CDS swap spreads on GM rose when it was going to be cut to junk…around that time TB had heard that about 90% of the entire CDS market concerned GM. Then, Kirk Kerkorian announced he was going to buy stock in the company and they cam back in sharply…think: this is buying stock in the open market and has nothing to do with the underlying financial condition…rather it is one investor who placed a bet…and later rescinded it. It is comments like this on default risks that sharply lower investor confidence are generally self-serving.
Barack Obama has blamed the financial crisis on hedge funds and John McCain places no blame but says he will solve it…both are wrong…it was the Congress that both candidates are members of that laid the groundwork for this mess without setting up proper regulations, and it was the SEC and the Fed that allowed our financial institutions to take on unprecedented levels of debt due to huge derivatives trades. As always happens in capitalism, greed takes over and people who are compensated…grossly over-compensated for trades with other peoples money are going to grab what they can to the detriment and destruction of long term goals. Aren’t any of them going to pay for their sins?…other than rotting in hell? 
 
The following was written by Bill Kidder of www.kidderreports.com, an excerpt from his commentary:
 
“The End of the Reagan Revolution
It’s over, ending with the collapse of Anglo-American finance system in the summer and fall of 2008. The Reagan Revolution began when Reagan fired the air controllers and declared that government is the problem, not the solution Since then, free market capitalism has reigned — treated like a religion.  Regulation has been the devil on earth.
 
Deregulation was a good thing…provided we kept up the necessary oversight of our financial markets. Sadly, we did not and the Bush Administration is directly responsible for the end of the Reagan Revolution which they so dearly love.
 
TB

 

 

 

However, anyone who has worked in a competitive capitalism environment knows about the incredible pressure to survive — and how it leads to dishonesty by some players. Rules and enforcement is needed. Otherwise, the question becomes: do I plan dirty too or take a walk. Hey, it’s the real world, so most everyone caves in or develops a blind eye. That is how and why Wall Street turned into a septic tank.” 

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