Joke of the day: “Dubya was talking with friends and when asked what he that about having a ‘car czar’ for the auto industry: ”I thought he was President of Afghanistan?” – Jay Leno
Comments on the markets last week follow the first part of the commentary. TB
…who was the man impersonating John McCain for the last six months of the election? Well whoever the man was he is gone and Mac is back…sounding like his old self and looking rested. TB believes he will be a lot more useful in the Senate than Obama would be, whereas Obama will be immeasurably more useful as President. Would an incoming McCain have been able to do what Obama has already without drawing the ire of the GOP? Thankfully something is being done before the elections and McCain seems to have signed on board…goodbye to the Rove, Palin wing of the GOP…hopefully. It is time to do what Bush promised us eight years ago and promptly forgot: to bring people together. History will not treat him lightly for that and it will go even harder on Cheney and Rumsfeld. The damage those two have done to America, both domestically and abroad cannot be overstated. End of story.
TB’s take on the bailout: The indignant GOP Senators (some from states with Japanese automakers), was a sham. First, Paulson says no to TARP money…it wasn’t intended for that purpose which is interesting since he has had no problem dispensing it (without concessions or accountability…especially to Citi…and worse refusing to disclose where it went…amazing that trillions of dollars of loans and guarantees don’t have be accounted for to the taxpayers). THEN, Dick Cheney, such a lovable man, tried to persuade the GOP Senators that they must do it…they balked. NOW, the Administration, not thru their Treasury Secretary, who they have been content to let run the show, says that TARP money can be used. If this is starting to look like a sham to you, you are not alone…that is exactly how TB sees it. How about this: we are further along in the year yet the auto makers lowered their request and Ford withdrew their request. So now they need just $14 billion…of course they will be back. But as George Will pointed out yesterday, there are 3,000 parts suppliers affected who alone are owed $13 billion! This is because they are, or at least were, paid three months in arrears by GM and are now demanding payment with orders. It is those 3,000 companies that TB worries about, not the Big Three. Think how many people that would affect both directly and indirectly…we cannot risk that. So TB says, disburse the $13 billion directly to the suppliers…now…then have the automakers requisition payments to them going forward…that way it gets to the right place. Any thoughts? In defense of the banks, one enlightened individual on Meet the Press said the banks are the villains as they won’t lend to the Big Three…well if Cerberus won’t give any more money to Chrysler…and the money the banks got from the TARP has to be repaid at some point in the future…would you lend to this ship of fools? Not TB! TB doesn’t claim to know what the answer is but he does know that what we are attempting will be a spectacular and expensive failure!
Bernie Madoff…front and center. This is a failure…a failure of him to take his fiduciary duty as an investment manager not only seriously, but to defraud his investors. A failure of investors (TB loathes the term savvy investors as it always seems they are the ones who come up with egg on their face), both individuals and professionals including we are learning, hedge funds, banks (especially Banco Santander, who it had appeared thus far could do no wrong), to do their due diligence…and those who did and wrote the SEC but were ignored (after all he was a former President of the NASDAQ), making the SEC once again the biggest offender. Investors deserve much more from a government agency charged with protecting investors to maintain orderly markets. A travesty.
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Enough of this, now let’s look at last week’s markets:
What a week it was too. Focusing on the Dow Industrials, Friday Dec. 5 was a key reversal, normally a sign of a very strong market (yet readers know that the track record for these moves in this sick market has been not only abysmal but has created bear traps). A reversal is a higher high and lower low than the prior day (an outside day), plus a close above (or below) the prior day’s range. Not only was there a reversal but the close was 60 points above the double top created on Wednesday and Thursday which should have created strong resistance, especially after the weak open and low that was 250 points below the prior days close and 130 below the that days low! What’s more it followed a jump in the unemployment rate and a loss of 1,250,000 jobs in the past three months alone! Pray tell: in what hell should this produce a major rally?
Monday was even more difficult to understand as we tacked on another 300 points despite gruesome descriptions of the economy over the weekend. Nevertheless, we accomplished one thing that they failed to do on Friday: the intraday high had been 8,686, while the 40 day moving average was at 8,701. Monday’s close however, eclipsed it with a run to 9,026 before finally settling at 8,934 or 221 above the average!
Ahem, now for the rest of the week which had a lower high each and every day, and a lower low every day except Tuesday (which only missed by 15 points but was also a meaningless inside day), and every day including Monday had a low below the 40 day m/a. Friday’s high, 8,683, was just 10 points above the 40 day and then they took it down, only to feebly recover on the close. That does not bode well for today, or this week with Friday’s options expiry, the last of the year and a quadruple witching. No, Virginia, Santa Claus is not coming this year…only Ben Bernanke and the Fed and a likely 50 basis point, pushing on a string, rate cut tomorrow. Isn’t it nice that the Fed and the Treasury are providing all this cheap capital to the banks yet it is doing nothing for lending, which is in fact becoming even tighter! It is more like trying to move mercury with your finger as it envelops it…and therefore it is toxic too.
The other indices fared poorly too all struggling with the 40 day, while only the extremely weak Philly Semiconductor Index managed to close above it on Friday, but don’t bet on follow-thru there!
Bonds continue to be nerve-wracking. You can make or lose a point…two points…in minutes…and now they are talking about it being in a bubble stage (David Rosenberg of Merrill), TB agrees it is but look how long the equity and real estate bubbles ran…they run…until they don’t.
Commodities are weak and can be expected to do worse. Gold, despite a valiant attempt to rally significantly last week failed, while Crude is going nowhere (can you raise prices by storing oil in tankers when the entire world knows you are doing it?), and the only thing of interest there is the spread to the long dated contracts. A year ago they were in backwardation which is normal (the longer contracts trading cheaper than the front end), while we just came off a record high spread, contango of $40 and even with a backup late in the week, the December 2015 contract (the longest with any significant open interest is $31.50 above the lead contract: $77.81 vs. 46.28??? Obviously, this implies that oil prices are way too low but it gives us no clue as to how low they could go or how long this situation can last. Furthermore, the lessening of the contango reflects the cost of maintaining this bet…good luck.
Currencies are very strange: there is now talk with U.S. rates so low of a ‘dollar carry’ trade replacing the ‘yen carry’ trade as the low cost provider! The deteriorating British economy has pushed the Pound Sterling to a record low against the Euro! Wow!
More on real estate: if you recall my email exchange with my friend in L.A., the foreclosure specialist, where he saw the bottoming in real estate prices around mid-year and then a return to 2006 levels. I challenged that assumption and this was his reply with a frightening follow-up:
I may be wrong on the 3 years returning to 06 prices but they will be going up. The feds are forced to push the prices up so not to hurt the people that are paying their mortgages. If prices remain flat that means that there will be more short sales and more foreclosures and the lenders will all be upside down more so than now. There will be a lot more than 700 trillion dollars.
To make matters worse the city of L.A. is trying to put foreclosed SFR under rent control. I addressed the city council last week and explained what it would do to lenders and values of properties. No lender would want to put a loan in LA City especially if the owner decides to make that house a rental.
Rent control on foreclosed homes…now that is a great idea when you are trying to put a floor on real estate…perhaps the L.A. city council should offer their insight to Congress on the auto industry…
Hope your week goes well for you and that you remember that any liquidity in the markets is drying up by the minute so the market is subject to the whims of the big guys.
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 December 15, 2008.
