Traderbill's Financial Markets Weblog

TB’s Quote of the Day:

“Anything that purports to describe the last 18 months as ‘efficient’ seems like a cruel joke,” said Nicolas Colas, chief market strategist at BNY ConvergEx Group.

All the factors that created the market’s collapse were hiding in plain sight in brokerage firm 10-K filings and news reports about the housing and mortgage markets. Hundreds, if not thousands, of individuals knew the risks in the collateralized debt obligations and credit default swaps marketplaces. Many of them even work in one place — New York City,” said Colas.

“We suspect the academic community will have a hard time explaining away the destruction of half of the value of the U.S. stock market in a little over a year after it took 70 years to create much of that same wealth,” the analyst said.

“What I’ve tried to say is don’t baseline your expectations on the notion that markets are as efficient as the academic world wants to believe, think for yourself,” said Colas.

A friend and reader sent TB an article by Simon Johnson, former Chief Economist to the International Monetary Fund (IMF) from The Atlantic. Here is the link but do not read this on an empty stomach. Sadly, it confirms TB’s greatest fears of the financial sector taking control of the government (remember TB’s criticism of the big five credit card companies writing the ‘new’ bankruptcy act, of Sandy Weill with the help of Senator Phil Gramm and Robert Rubin, repealing Glass-Steagall, of the Donaldson SEC excluding the big five brokers from minimum capital requirements and then the Cox SEC failing to even audit them once during his tenure?). Our government is bought and paid for but unlike the industrial/military complex that Eisenhower so feared, it is the financial/congressional cabal that has brought the U.S. and the world to it’s knees.  

http://www.theatlantic.com/doc/print/200905/imf-advice

Here is an excerpt that shows just why it was able to corrupt both parites:

From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.

It also comments on the revolving door between Goldman Sachs and administrations, as well as John Corzine becoming first a Senator and now Governor of New Jersey (TB commented recently on how Corzine publicly stated that all government contracts should be competitively bid for…except municipal bonds despite several studies that negotiated issues cost the issuer 25 basis points or more than competitively bid issues…and with no discernible benefits…except to the local politicians.The article closes with comments on how students are enticed into finance rather than other careers by the high wages and want to know the ‘tricks’ to make even more money.

Overnight, we learned that Wagoner has been ousted by the government from GM for failing to deliver…and that they along with Chrysler must revamp their recovery plans to get more aid. Isn’t this a bit late, folks? Why did we give GM $18 billion when they were already in arrears to suppliers by $13 billion…shouldn’t we have just paid it to the suppliers if the goal was to save jobs? Also, immediately after that the suppliers told GM they wanted to be paid with the orders! This, like AIG and Citigroup is beginning to look like one big Ponzi scheme that even Bernie Madoff could not have imagined.

Then there was the SEC request that publicly held hedge funds disclose their returns. While Fortress (FIG) agreed to do so (consolidated returns for groups of funds) except for funds formed in the past 12 months, which is understandable, Blackstone (BX) refused. Remember that Blackstone is the fund that CEO Stephen Schwarzman told Congress that private equity could not raise capital without the 15% tax…almost tearfully. Look:

“The individual rates of return have no direct impact on our financials and therefore we question the relevance to our investors,” said CFO Laurence Tosi in a December 5 letter to the SEC adding that detailed performance data wasn’t required under applicable regulations and wasn’t a meaningful measure of operating results…what the??? Gosh, if that is the case why should other money managers and mutual funds be required to provide returns and responsible ETF managers such as iShares voluntarily provide it on their websites? The system is broken!

On Thursday, CNBC’s Jim Cramer…or is it Jim Cramer’s CNBC?…breathlessly said that  now is the time to jump in and buy…he said this citing his many years as a successful hedge fund manager…that the hedgies were short and nervous and stock prices can only go higher. Some manager he…has he forgotten about T+3 settlement or not even bothered to look at the results of the prior five quarters? If TB who has never managed a hedge fund…but who as a professional money manager has managed more money than the talking heads on CNBC…if they ever managed any…knows about the gap between hedge fund quarter end and for the rest of the industry…what does this say about either Cramer or CNBC?

Last night’s actions on GM and Chrysler will no doubt bring on another rant of “they know nothing” by the unstoppable Cramer…you tell ‘em,. Jimbo.

To complete TB’s rant, aren’t we all a bit tired of Larry Kudlow’s “little grains of mustard” comments on every minor positive point in the economy? Oh? You had already tuned him out with his endless shouting over guests and repeating his points…sorry.

Have a good day but remember the water is not safe for swimming.

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, March 30, 2009.

Bloomberg Quote of the Day: “I read part of it all the way through.” Samuel Goldwyn – sounds like a Congressman, no? TB

…remember that old saying: “if you don’t like the weather come back in an hour?” That is about the way stocks were yesterday. First up, then down, then back up and we bounced off or remained above the 40 day moving average. But before you all go calling your brokers, today is the last day for T+3 settlement for the quarter! That means it is the cutoff for hedge funds and they can play to their hearts desire with impunity for the next three days…but can they take it down or will they even seriously try? Time will tell.

Do you realize that in two weeks, the Treasury has issued hundreds of billions of T-Bills and notes and executed a round of outright purchases of $7.5 billion of Treasury Notes in the seven year area of the curve yesterday. But over this period, Germany has had a failed auction of 10 year notes, solved by reducing the size of the auction, and the U.K. had a failed 10 year auction yesterday solved by offering index-linked Gilts last night that got bids in excess of 2.7x what they were selling. The unthinkable is a failed US note or bond auction and with a string of auctions…usually three a week plus the T-Bills…how long can they continue to sell them all? At least they are helping with the outright purchases but they are a pittance compared to what is being offered. Meanwhile, there is an active market in credit default swaps on U.S. treasuries! Has it occurred to anyone that IF the U.S. defaults the ‘insurance’ (sic) would be worthless? P.T. Barnum would be proud of this kind of marketing! Wall Street has now created the ultimate crapshoot!

Meanwhile, the dollar continues to be strong…off the highs but certainly kicking the Yen in the teeth while Sterling and the Euro swing in the wind. Watch the dollar closely…the index is trading at 83.83, in a range of 81.28 (200 day m/a), and 86.56 (40 day m/a). Respect a break of either of these ranges.  

Would someone please tell TB just what a ‘safe’ investment is these days? Cash under your mattress? But if you are wrong…or robbed…and the economy rebounds or at least the markets, which are quite capable of a substantial rally with or without the economy.

What we need however, is DIRECTION. Direction from a bunch of buffoons in Washington who are more concerned about their own wellbeing (getting re-elected or getting rich). Take your pick: the obstructionist GOP who thinks cutting taxes with an eye on zero as the appropriate rate, or the Dems, including Obama it would appear, who consider every social program they have ever thought of and ‘investment’ in the future.

In fairness, the neglect of the infrastructure since the ‘acting’ President of the United States, Ronald Reagan (not to be confused with vice president ‘acting’ as President under the previous, nameless, administration), has left us a skeleton of a country while lowering taxes to the wealthiest, and watching the gap between the top 2% and bottom 90% of taxpayers widen to laughable levels…laughable if it weren’t so dangerous to the survival of this great country….and just how did the wealthy show their thanks? Take your pick: either shipping their money off to Switzerland and other tax havens or having tax lawyers arrange to make an even smaller portion of their incomes taxable.

Yet the anger of the public has been directed at the ‘tax cheat’, Timothy Geithner and others. First, Geithner didn’t hide the income he merely didn’t pay the ‘self employment’ tax on it and when audited paid what the government requested. What he didn’t do, until requested by the Obama transition team was to pay the tax beyond the statute of limitations. TB has checked this out: if YOU were in his situation and asked your tax preparer if you should go all the way back and pay the taxes they didn’t even ask for, besides looking at you as if you were insane would do what his responsibility requires: tell you to forget it! But somehow this has become a sin. How many of you have said oops, I erred so I will file an amended return and pay up the difference? Dare we say none?

Contrast this to the hundreds…thousands?…of the wealthiest taxpayers who have money in the offshore tax havens? THOSE are the tax cheats! …and they are about to be caught. With the barrier of secrecy in Switzerland now down, they would be advised to have their tax lawyer work out a deal with the IRS…and soon, before they are notified by the IRS.

Still, every action, it seems, as an equal and opposite reaction as the game of Whack-A-Problem continues and gains popularity. But what is incredible is that the very problems that got us to where we are, mark to market accounting, lack of regulation of the derivatives market, naked shorting and the ‘uptick rule’ (which still gets discussed in terms of ‘one tick’ while those who short the most decry re-implementing it saying that is creates ‘complacent’ investors…are being discussed softly and proceeding at a snails pace while the individual investor has been driven from the market place and those that remain ‘in’ continue to suffer. Don’t know about you but give TB that kind of complacency over the unprecedented volatility we have been subjected to for nearly two years! What ever happened to ‘orderly’ markets? The fairest marketplace in the world has been reduced to a casino…without the free drinks or cheap talk! Are we having fun yet?

Hopefully…and that is a stretch…we have seen the lows… yet Nouriel Roubini is out saying that more banks will go ‘belly up.’ One thing about bears like Roubini or Meridith Whitney: they can be right for a long period of time but they never change at the right point. That is the problem with being a bear…your negative outlook prevents you from seeing anything positive and you miss the turning point. But so what? You have attained ‘guru’ status. Note that Robert Schiller who has had the longest run on being bearish, first on stocks, then on real estate, has not been nearly as vocal….perhaps he, at least, sees the light at the end of the tunnel. Without optimism, the markets, mankind, the world, would not exist. Hopefully, somewhere, someday, optimism will return…the alternative is too absurd to consider.  

Last New Years Day, TB watched a series of documentaries on the history of San Francisco from the Gold Rush of 1849 on. All were interesting but the most intriguing was the 1930’s. Not only did we have a destroyed economy but you couldn’t even drink your way out of it…not legally at least and that era produced the worst crime we have ever seen in this country…although the Mexican Mafia is now trying to give it a run.

The people…and families interviewed all said that the Depression was the best time of their lives. Huh? Yep, because family and friends became all important. Picnics, get togethers of all kinds as just being together meant something…not where you were going for dinner or what country you planned to vacation to next. Think about that and how family and friends have been reduced to acquaintances compared to that era. Truly sad.

The next commentary will be on Wednesday, March 25. TB

…

and the great flood lasted 40 days and 40 nights. Similarly, bear market rallies last 40 trading days producing a 40 day moving average. TB has found that to be a most useful measure in bull and bear markets. During bullish times…you do remember those, don’t you?…the 40 day provided ‘support’. If you go back to the Great Bull Market of 1998-2000 you will note that the leaders, mainly tech related, would bounce of the 40 day and simply move higher despite the fact that the ‘slope’ was incredibly steep. Conversely, in a bear market…undoubtedly you now know what that is…the 40 day provides formidable resistance. Most stocks and indices are at that juncture right now…so what happens today, not intraday but by the close, has big implications…for quarterend and beyond. A few leaders broke above and have been slammed back below and some others are hanging on tenuously, while the bulk are within spitting distance and waiting for market direction. You should be too.

Don’t be deceived by the daily pronouncements of the percentage changes since for stocks trading at single digit levels they are meaningless and can easily be influenced … manipulated…by the thousands of computer generated trades being done every hour of the session. Daily this is occurring with Citigroup, Bank of America, AIG, General Electric and Wells Fargo. Yesterday GE’s combined volume on all trading platforms was 1.2 billion shares, while the least of the group, GE had 180 million shares trade. Compare this to the total volume on the NYSE of 1.95 billon shares and you can see why these volumes are significant….most of the volume, being computer generated, is being done on the electronic platforms, not on the floor of the bricks and mortar NYSE. The price of the weakest of these, AIG is $1.60, while the highest, Wells Fargo is $15.42. Hopefully you can see the significance of this as it is no more meaningful than the number of pulls on a slot in Las Vegas. Got a hunch?…bet a bunch!

The point is that ‘fundamentals’ are meaningless here…only in the long run and in that world only exists long only managers, you, and TB. To the rest an hour, a full trading session, a week, is the long run. Thus the significance of the 40 day moving average as the point where long meets short. In this world, only ‘technicals’, inside days, outside days, key reversals, inflection points, stochastics, momentum, Fibonacci retracements, and moving averages apply. One would be advised to invest accordingly, or more accurately to trust reversion to the mean and buy the ‘weakest’ companies that have solid fundamentals, not the ones that have been the recipients of the latest rally on the concept of ‘reversion to the mean’ …unless they can take out that illusive 40 day moving average.

Dow Theory suggests that there is a link between transportation and industrials due to the fact that if shipments are up industrials should be producing more. Therefore, transports must confirm any rally in industrials. Lately, however it is the transports that have been leading industrials…even on days when energy prices rise as they did yesterday. The Dow Transports have now been up for eight straight sessions and they are just 3.2% below their 40 day moving average…for the first time since the yearend rally. The Dow has not been above it since the 12/30-1/9 period. .

The S&P 500 which is more meaningful now than the Dow closed right on the 40 day yesterday despite being down slightly after taking it out Wednesday where we have not been since mid-February, late January and not held above since the yearend rally.

TB believes much of this is ‘relief’ at the Bernanke Fed moves of Wednesday which are taking some of the fear out of the system. Yesterday the first $4.7 Billon of the new ‘TALF’ bonds were sold led by Nissan…amazing that that is an American company, dat soon? He also believes that the clowns in Congress are creating more problems by taxing the AIG bonuses…true they are reprehensible, but if they can be effectively taxed at 100%, who would stay on anywhere…or want to work for any recipient of TARP money? One has to use his head not simply listen to the masses…heed them but don’t do everything they suggest. TB also believes the worst of the credit crisis is behind us and the best of the banks will come back as will our two surviving brokers, Goldman Sachs and Morgan Stanley…oops they are banks too. Citi is scary…changes overnight might suggest that the company could be broken up? Bank of America makes one uncomfortable but should survive. Wells likely will, while PNC Financial, US Bancorp and others should come back…along with other regional banks but beware of the ones with high p/e’s as they are being owned for safety might not deliver the performance.

Swiss private banks by the way are taking it on the chin. Since Feb. 18, when the government said they would cooperate in tax evasion cases their stocks have fallen by about 10% while even lowly UBS has risen by about 1%. This could help the U.S. collect some taxes as well as other companies and the penalties could be huge, but don’t expect the Caymans, Antigua (which made Allen Stanford a knight), or other tax havens to cooperate…thus they could become the beneficiaries but fear might overtake that advantage.

Guesting on CNBC this morning are Michael Steinhardt,  Leon “Lee” Cooperman (two of the original hedge fund operators of a different era), and Dr. Love (Mario Gabelli)…who represents the conventional ‘long-only’ money manager…Mario has never met a market he didn’t like). The discussion of how hedge funds have morphed was interesting and that sector too, in the broad sense might be in for even more grief, but the strongest, most innovative will survive.

Hang in there for the ride of your life today…hopefully the rally continues…

…there were two markets yesterday: before the Fed announcement and after. Let’s look at them by sector:

Stocks: The Dow was off 138 points early in the session then worked its way back as the release of the FOMC announcement approached. Just before (2:12pm EDT) it was off 55, but by 2:15pm it was up 60…a swing of 115 points in 3 minutes, it then rallied to 7571 at 2:55pm then slipped to 7410 before coming back to close at 7486 for a gain of 91 points. Not only that but the high was 25 points above the 40 day moving average, then the close left it just 60 points below. The last time it was above was 1/12/09. The S&P 500, both Nasdaq indices, and the Russell 2000 all closed above…a very bullish sign. Volume was a strong 2.07B shares and Advance/Declines and Breadth were strong. Only non-confirming indicator was that both volatility indices declined by less than 1%? Strongest sector was Financials (+63%) led by Banks (KBW Bank Index +11.1%). Housing was up 6.9%. Do not confuse forced shortcovering with REAL buying.

Commodities: Declined by more than 1% on both indices but bifurcated as Grains and Energy declined while Precious Metals and Soft Commodities were strong. Gold had a wild ride that would have intimidated even Mr.Toad. The range on the day was 70 points” from $28 above the 40 day moving average to $6 below the 200 day with a close of $889.10 -$27.70 but in the afternoon session they rallied it back up $43 in 10 minutes! If you haven’t learned by now that this is a dangerous place to play, you now know. As for Crude it had an ‘inside day’, closing down $1.02 on April…expires tomorrow…but all contracts from 11/09 out were up with Dec.’15  up $1.55 and the contango widening again to $25.18.

Currencies: there was a stunning move in the Dollar Index which had been off slightly all morning. At the announcement it was 86.46, 2 minutes later it was 85.12, with an eventual close at 84.60. This took out the 40 day (86.73) and led to support at 84 (in the last few minutes it traded down to 82.91 almost closing a gap at 82.76…watch closely). The Euro and Yen were the biggest recipients of this largesse but even Sterling rallied.

Bonds: Saving the best for last! Immediately after the announcement the long bond swung to up 7-1/2 points and incredible move of over 8% and closed up 5-1/8. The 10 year Note rallied by 50 basis points, but the star was the 30 yr TIP which rallied 9-1/2 points and held almost 9 of them on the close…that was one massive short squeeze. TB feels that anyone with an ounce of sense would have sold into this rally, especially TIPS! While the CPI data showing a gain of 0.4%, this was due to a surge in gasoline prices which you all know has since abated, Food declined by 0.1%. Over the past three months CPI has declined at a 0.5% annual rate which means that TIPS negative inflation accrual exceeds the interest accrual. For this reason the TIPS ETF has suspended dividends for five months! The point is that inflation fears are just that: FEAR!

CNBC has it wrong once again as Becky Quick said this is the biggest gain in bonds since October 1987. First, that period was a multi-stage rally caused by futures being up limit for four days, Second, 10 year yields at the start of the rally were 10.23% so as a percentage change they were much smaller: 50 basis points at 10.23% is only a 4.9% gain while at 3.02% it is a 16.5% change in yield. Here is the actual data from 1987:

10 yr T-Note                Yield                Change

10/15/87                      10.23%                –

10/16/87                      10.13%            -10 bp’s

10/19/87                        9.65%            -48 bp’s

10/20/87                        9.40%            -35 bp’s

10/21/87                        9.31%              -9 bp’s

10/22/87                        8.92%            -39 bp’s

10/23/87                        8.97%              +5 bp’s

10/24/87                        8.72%            -25 bp’s

The rally ended on 10/24 for a total decline of 151 bp’s in yield. It then rose modestly before falling to a low of 8.09% on February, 10, 1988.                                       

There were several factors that led to the rally, most notably the Fed which amounts to a tremendous potential injection of liquidity into the financial markets…mortgage markets immediately responded. But for stocks the most important is the IBM-Sun Micro deal which is not a deal yet but came out in the WSJ as ‘in talks’. Sun has at least $2 billion in cash…earning nothing in money markets…Credit Suisse decried the merger as not a good fit, while NETAPP and EMC are listed as possible takeover targets. This morning Bloomberg is reporting that Cisco or HP could make a bid for Sun. All are sitting on billions in cash. Think what would happen to market confidence if this starts coming off the sidelines. Now add to that the renewed confidence in the banking system and we could be in for a major rally…but with a lot of ups and downs.

The biggest caveat is tomorrow’s option’s expiry which is a quadruple witching. It is also options expiry for BONDS which added to yesterday’s volatility. This still leaves quarterend in question as hedge funds square away for their March 26 close (T+3). Somewhere over that time period there has to be…should be? a correction.

Thanks to the last administration’s disdain for any form of regulation whatsoever, their fervent love of free market capitalism has been the root cause of the mess we are in today. Furthermore, the GOP is being totally obstructionist and not offering up any suggestions…instead focusing on what Geithner and Dodd knew about AIG and when they knew it. Our ex-President (sic) Cheney even broke a tradition by criticizing the Obama Administration over shutting down Guantanamo and restoring the Geneva Convention which as John McCain knows protects our own troops.

Sen. Dodd just released a statement that the language inserted in his bill that effectively guaranteed the bonuses to AIG employees was what the Administration requested and not his idea. This is a major credibility problem for Obama…they have yet to respond to the statement.  

TB firmly believes in capitalism but he at least is aware of capitalist greed and what happens when someone gets away with something…others begin to do it and that is precisely what happened. We need to restore faith in markets and that has to be done by tightening regulation through authority and better investigators…that should be a not too difficult task given all the Wall Streeter’s who have been laid off. The danger is Congress doing as they did in the wake of Enron creating too many regulations affecting smaller companies. Yet the people are up in arms and not going to take the drubbing by the rich that they have been subjected to for more than a decade. One would do well to heed their concerns and make changes before they are the ones who make the changes.

Yesterday’s markets were interesting as once again they took bonds down along with gold as stocks rallied. While the gains were positive they weren’t that impressive compared to the prior days highs although the Dow Industrials, Russell 2000,, NYSE Eneergy Index, and Barron’s 400 all had positive key reversals (higher high, lower low, and close above the prior day’s high), and both Nasdaq indices only missed because the lows were above the prior days low, and the Philly Semiconductor Index had a ‘parallel’ session  and still closed +4.1% as did the two Nasdaq indices. The only caution, besides options expiry on Friday, and that we are approaching quarterend with an unknown amount of hedge fund withdrawals, is that the highs were not that much above the prior day…we saw this when we were weak and kept making slight lower lows…it shows a lack of conviction. So either we are in for a major correction or it is to the moon, Alice…the moon! What is impressive, especially if you are a Dow Theorist is the Transportation sector which has posted six straight advances totally290 points or 12.1%, after three straight loses for 250 points or 10.8% and is now 185 points above the level…so watch the Trnnsports closely for clues of strength or weakness. In either event, this is nothing more than a countertrend rally in a secular bull market, however, IF we can get the financials back on track and restore credit, the good companies in all sectors can improve…but beware of Q1 earnings which start coming soon.

Here is a bright spot: according the WSJ, IBM is in talks to acquire Sun Microsystems (JAVA). At June 2008, Sun had over $2 billion in cash. The stock closed at $4.97 last night and is trading at $8.16 in Europe. Think of all the cash the Techs are sitting on and what that could do for the markets and confidence. Also, Darden Restaurants (DRI) reported this morning with earnings of 80 cents a share vs. consensus 68 cents.      

One last thing, Mark Hulbert is on CNBC this morning and while TB respects his opinions, he is saying the same sector leader in the last cycle does not lead the next one hence he is bearish on financials. Just as the other time revered  ‘mots’ however, it is different this time. Financials have been entirely written off and most are trading at single digits…some in low single digits…and it is their very survival that the market will depend on for strength. Also, we have ‘weeded out’ the weak ones now, except Citi and the rumors of BofA’s demise are probably excessive, although not of CEO Lewis. Still, TB would prefer to play in the preferred’s of sound banks with double digit yields and substantial discounts to par. After all, it is probably safer than bonds given the volatility of the past month or more.    

…is the Congress of the U.S. daft?..well, yes, but not in this case. Under the Fourteenth Amendment to the U.S. Constitution it only applies to criminal acts, and exceptions have even been allowed on these by the Supreme Court in laws such as the registration of sex offenders since that is for the public safety and not a punishment. In other words, if the maximum sentence for a crime at the time of commission was five years and it was changed to life, five years would still be the maximum for that offender.

TB is well aware of this from a case, United States v. Darusmont, which sounds like TB’s uncle committed a major crime, and is used as an example in law school. Actually, it became that as it went to the Supreme Court, who elected not to hear the case, even though he had prevailed in District Court and on appeal. The issue was taxation and whether the government could pass a law that would have economic repercussions after the individual had made an investment decision based on current law…sadly they can. The government could impose a tax on the amount of money in a savings account for the prior year if it so desired…oops…hope they don’t decide to do that to fund FDIC!

So you can forget all the ex post facto talk you hear about TARP, TALF, etc. More to the point, yes the government can tax at any rate those sick bonuses paid to the perpetrators of the problems at AIG which are now 80% our problem and counting.  Today, AIG CEO Edward Liddy who is working for the humongous sum of $1 a year (one dollar), will get skewered…why do all these hearings lately bring to mind the French Revolution?…yet they were contracts and to not pay them would have subjected them to litigation. Liddy’s error was telling Congress after the checks had been handed out last Friday…and worse, because of the way they were written, they will be paid not just next year as you have heard but for several more years because while they were paid ridiculously high commissions while the company incurred the liability, they were structured so that they would be on the hook for years so as more to match the company’s liability. But you have to consider the time…there was only one direction seen and that was up…until the trade became ‘crowded’ thus lowering the quality and making a graceful exit impossible.

So please Congress, forget voiding the contracts and instead set up a section that taxes commissions on derivatives heavily…but be aware of the unintended consequences for companies with derivatives traders that didn’t get in trouble…won’t they now demand more payment to offset the tax? Yes, and if they are good they will get it. So it had better be specific as to AIG or any company receiving federal funds.

As for the banks that received TARP funds but haven’t made ‘enough’ loans, some of the restrictions are ludicrous. The government felt that the big banks should take the money even if they didn’t want it to preserve the identities of those that did need it…it was their patriotic duty to take it…so then to  restrict CEO compensation to a profitable bank or have them slash the dividends on common stock…is absurd and only makes investing in a bank look less attractive. Does anyone not know that Citi, Wachovia and others were the banks they were trying to keep you from knowing about? This isn’t rocket science!        

How about we call it a day and wait for the conclusion of the two-day FOMC meeting and subsequent earth shattering announcement that they have left rates unchanged at 1%?

Bloomberg Quote of the Day: “May the saddest day of your future be no worse than the happiest day of your past.” – Irish Blessing…and TB’s wish for you!

TB’s Quote of the Day: “I think they (AIG executives), should apologize, then, as the Japanese do, either resign or commit suicide.” Sen.Charles Grassley (R) Iowa….Arigatgo! Chuck…how about Congress too? TB

…today is an important hump day as this is usually position squaring day ahead of Grand Ole Options Expiry. How it breaks could determine the path of the next three to four weeks. So far, they have not been able to take ‘em down but the rally seems to have stalled. Just how much pressure are the hedge funds under to delever (not to mention deliver), and how big are the March 31 redemptions? All those are factors but they are also being offset by positive moves on the political front. Stay tuned with your finger on the trigger.

…some years ago TB was in Ireland on St.Pats Day which for the benefit of those who don’t know is a religious holiday so don’t go looking for a pub to get sloshed in except possibly in Dublin….quite a shock to Americans. Ireland is a beautiful country as are it’s people…during the ‘potato famine’ from 1845-1852, during which time one million died and one million migrated to America, Australia and other places of opportunity in what became known as the ‘flight of the earls’ by their best and brightest. At the time TB was there, it was in the boom where you saw HP, and Intel plants and more…this allowed the ‘earls’ to return home. The only sad point was that the prices of homes were driven up sharply, beyond the reach of those in non-tech. Gradually the economy began to lift all boats until it got to the point where if you went into a pub you would most likely be served by a Pole. Now as the economy deteriorates the Poles are leaving and the Irish are back in the pubs…in both contexts. Across the sea by the way, TB heard recently that British pubs are closing at an alarming rate…TB’s observation; the worst pub fare in Ireland is about the same as the best in England…sorry old chaps!

So can St. Paddy save us today? Will Celtic Woman soothe the markets?  Will Michael Flatley be able to afford new shoes…did you know he is an American, yep born in Chicago of parents who migrated in 1947…and his shoes last about two weeks? Will the Irish tenors sing in Yankee Stadium?

TB remains cautiously optimistic…like trying to pick up a rattler without getting bitten. Slowly, or so it seems as things become drawn out when one is in the dumps, or ennui seems to be fading. The trick is to keep it that way but boy did AIG get everyone excited yesterday. Interesting that the CEO held his breath and then announced it after the checks were distributed on Friday! Memo to AIG’er’s, especially in the Greenwich derivatives group: cash the check but don’t spend it…yet!

Like a golf bet, which is usually won before the first tee, the terms of the contracts, just like with mortgages, were stacked against the company…Wall Street in fear of losing the best and brightest…now if that isn’t an oxymoron as who put us here but a bunch of brainy quants and traders. Commissions of as much as 30% on CDS/CDO were huge and paid up front saddling AIG with the liabilities when the group was first set up under Hank Greenberg, but he modified them so only 25% was paid in the first year and the rest over the next five years. Since TB doubts they went back to paying up front after he left, these bonuses only amount to ‘what they are due’, under a scheme that worked well until the trade became ‘crowded’ and once that happens traders hungry for commissions start lowering the bar…it works well…until it doesn’t, and then it hits the fan. So ‘technically’ these best and brightest earned them but TB wants to know in a world where fear is high and credit scarce just how much of a market there is for these geeks. Watch and listen.

Analyst Meredith Whitney on CNBC this morning kind of blew it for the banks. Last week, when Citi’s Vikram Pandit announced they had a profit TB thought he had his fingers crossed…then Jamie Dimon and Wells chirped in among others. Sure, the have a profit…and operating profit…how could the not with all that cheap money out there provided by you and TB, but it is not operating profits we need to worry about. It is the bottom line…see most analysts besides the lovely Meredith have drank the Kool-Aid of one time charges and using a bottom up approach profits…for all companies tend to look rosie. Those profits are also easy to predict…well they used to be…thanks to guidance for CEO’s who have no reason to lie, right? So these overpaid people with the green eye shades add or subtract a few cents and project based on trend and voila! …it’s time to hit the bars. What did we earn from the dotcom bust?…apparently very little as we are still as comforted by their musings as we are credit ratings issued by S&P and Moody’s.

Meanwhile, the top down estimates tell a different story and while the analysts (sic) had been pretty good at predicting until about a year ago, they are way off the mark due to one time charges. These are the worst idea that has ever occurred…except perhaps banks having to mark to market which will be discussed in a minute. One time charges are an excellent way to deflect blame as they are non-recurring…except they tend to be replaced by something else to shoulder the blame. For this reason it is better to layoff 1,500 at one time and take a one time charge than to do it in dribs and drabs…and besides the CEO gets a better bonus.

Banks marking to market came as a result of the Basel II Accord. Prior to that only the big banks marked to market on their trading accounts, just like Wall Street does. But the new rules said you had to designate…at time of purchase…if a security was for (A) trading, (B) “available for liquidity”, or (C) “hold to maturity. In the case of the latter, the banks did not have to mark to market…but IF they sold anything in this category they could be forced to mark their entire portfolio to market…sounds conservative, right? Wrong. In the middle category there was also a mark but only for informational and against liquidity.

Now consider If you are a major bank and your leverage is 20, 30, even 40 times, which is off the chart insanity, and the market is hot as a pistol…how would you classify the assets you are buying? If you picked B or C, go to the back of the room and sit down.

You would classify them as trading vehicles and thus book the gains from the marks. Why not? If  the value drops 10-20% you just sell out of the loser and chalk it up to experience…but then everyone starts doing it and levering up. The trade becomes ‘crowded’ …think of the exit doors in a theatre after someone yells “Fire!”

So there you are…but within the trading securities are three more classes: (A) liquid instruments where prices are posted on a major exchange, etc., (B) less frequently traded

securities but where price can be approximated, and (C) securities that have no liquidity so you have to use a model to price them. This is one of the concerns with JPMorgan: is their model might not be conservative enough thus making their losses look more benign.

What we need to do is take the securities that are really not for sale out of the equation, but then they already got to book profits on those gains, didn’t they? You also need to remove the toxic assets which have a market but it is so low as to be meaningless and are being exploited by the vultures. It is the problem we had on the way up in reverse:

It is insanity to price an asset on the last day of the quarter…it is for this reason that they staggered the fiscal quarters of the big brokers so that they could still provide liquidity. But 1,000 bonds or 100 shares of a stock can still seriously impact the price just as if someone tried to sell a hundred million bonds or 10,000 shares of a stock. So TB believes that any gains should be marked on the average price during the quarter, or at least the final month. On the way down, i.e. where we are now perhaps use the same formula or a representative model…TB leaves it to the experts to determine the methodology.

That could make a world of difference for the banks, and confidence in them. Also, this is one heck of a bad time to raise FDIC insurance rates for banks that have not created this mess and are instead victims of it. It is also these banks that provide most of the capital to small businesses…kudos to Obama for loosening up credit to them!

Finally, Citi is replacing some board members and that is a good thing…too late but a good thing…TB can’t quite figure out what Richard Parson’s brings to the table but that is the way Sandy Weill liked it…fewer people to ask questions. There should be a big overhaul of bank boards to obtain some expertise and definitely new, ‘young’ blood.

It does seem though that we are finally on the right path…and much of the thanks goes to Ben Bernanke…and now Geithner is getting on board…let’s keep on that path.

The fact that they couldn’t take the stocks down on Friday, despite a valiant attempt in the first two hours that only netted them a 64 point decline on the Dow, ended in a 110 point reversal to close up 54 on the session. More importantly, the Dow Transports which have been the strongest part of the market and that is important to Dow Theorists, fell 37 points in the first two hours but closed unchanged on the day…watch closely today for a continuation of the  rally. TB felt that the rally could end tomorrow or Wednesday due to Friday’s options expiry, but the overnight news on Bernanke and on Barclays (see below), could bode well for banks. Regardless beware of March 26, last day for T+3 settlement for quarterend (hedge funds). Four out of the past  five quarters have ended on a serious down note, while the last one ended strong only to four days later taking us eventually to new lower lows.

In either event this should be viewed as a countertrend rally as the most bullish Beranke could be last night was for the recession to end…he said that but when he clarified he actually implied an ‘inflection point’ where the rate of decline diminishes. In that case, it is premature for a bull market in stocks…but then you know that!

Once again it is the volatility in bonds that is making fixed income investment highly risky, watch closely the spread sectors (corporates and  muni’s which have been less volatile). The same holds for Gold, and while Crude appeared to be back in rally mode that now appears to be illusory as evidenced by the 1.7% decline in energy commodities Friday (Crude -2.8%), and it Crude is down $2 overnight, a 4.3% decline and 6% in the last two sessions.     

…the fact that the Swiss got religion and have now said they will play ball with other nations on tax evasion should be named the Madoff rule! There can be little doubt of the timing after they have refused in cases like Steffie Graff, Michael Schumacher etc. Dave Ross (www.daveross.com) wrote some great lyrics to the tune of ‘Johnny Angel’:

Bernie Madoff, Bernie Madoff

How he promised me that I’d be rich,

Bernie Madoff, how did I know,

That he’d be a sorry son-of-a-@#*&$

The complete song is on MP3 at the above website under the Dave Ross Show.

Also, in case you didn’t see TB’s email on Cramer vs. Stewart Friday, if you go to www.thedailyshow.com  you can pick up the entire show which starts with Madoff…then to Cramer as guest on Martha Stewart Thursday morning where he is pounding dough which has to be a metaphor…then the full interviews…excellent. If you want just the interview: Jon Stewart/Jim Cramer

Not only did Stewart best Cramer…he destroyed his credibility and in a gentlemanly fashion where Cramer destroyed his own swashbuckling image and crediblilty. This uncovers CNBC for what it has become theatrics of the lowest form. That is sad. Sad for the players of which a few are credible (it used to be a handful but now is just two or three who do themselves no good by not insisting on honest, informative reporting. Worse it makes a mockery of NBC parent of CNBC and both are owned by ailing General Electric…who TB wrote two weeks ago to complain and was told that they have no control over CNBC…they freaking own them!

Cramer said…and shook hands on it he would try a more serious format…he did not! His show Friday was the same old schtick. When two idols of twenty-somethings clash and one is injured so critically, can he survive? Hopefully not…and in the meantime it appears CNBC plans to alter its programming. They had their chance…and blew it. Who isn’t tired of their pontificating and screaming over one another?

On Friday, Wells Fargo’s Chairman Richard Kovacevich blasted the government over TARP, first by forcing them to take the funds then changing the rules which forced them to cut the discount rate but more importantly shaking confidence in all banks. This is especially timely as the FDIC is raising rates to all banks thus punishing the sound small banks who have also been penalized by the market. This is from the Bloomberg story:

Wells Fargo & Co. Chairman Richard
Kovacevich criticized the U.S. for retroactively adding curbs to
the Troubled Asset Relief Program, which he said forced the bank
to cut its dividend, and called the administration’s plan for
stress-testing banks “asinine.”
     When the U.S. Treasury persuaded the nation’s nine biggest
banks to accept capital investments in October, it signaled the
whole industry was weak, Kovacevich, 65, said in a March 13
speech at Stanford University in California. Even though Wells
Fargo didn’t want the money, it must comply with the same rules
that the government placed on banks that did need it, he said.
     “Is this America — when you do what your government asks
you to do and then retroactively you also have additional
conditions?” Kovacevich said. “If we were not forced to take
the TARP money, we would have been able to raise private capital
at that time” and not needed to cut the dividend to preserve
cash, he said.
     Kovacevich joins a growing list of bankers who are chafing
at restrictions imposed by the TARP program, which affect
lending, foreclosures, pay and perks. Lenders including Bank of
America Corp., U.S. Bancorp and Goldman Sachs Group Inc. have
said they want to give back the money. More than 500 banks,
insurers and credit-card companies applied for TARP capital, and
the government has distributed almost $300 billion.
     While Bank of America aims to return the funds, Chief
Executive Officer Kenneth Lewis praised TARP last week for
preventing a financial “meltdown.” JPMorgan Chase & Co. CEO
Jamie Dimon said it helped stabilize the banking system.

The last paragraph could be named ‘Two Leaders and a Fool.’

While on the topic of banking there is Bloomberg top story this morning saying that Barclays is working on a sale of its iShares unit to an undisclosed buyer. This is important and is boosting its shares along with all banking stocks…can this keep the rally going thru quarterend?…it is a possibility.

As for Bernanke Sunday night…TB thinks it significant that he gave an exclusive, including a rare tour of the Federal Reserve Building in D.C. to CBS’s 60 Minutes, not those other guys from GE-owned CNBC! His message was two pronged: to Main Street America but two Congress to put aside their political differences…that was a bold step for a Chairman to make. He also said that he made mistakes including AIG which is a boiling point for him (especially with the disclosure of $165 million to pay ‘contractual’ bonuses….more follows), this is something Sir Alan Greenspan, not to be confused with ‘Sir’ Allen Stanford, has yet to do. While credit is being given to Barclay’s for the overnight rally, TB thinks that this particular comment was also significant.

If you recall, TB defended paying of bonuses for commissioned salesmen of non-derivative products by troubled firms. The reason for this is that what they did were ‘risk- free’ trades. Traders incurred risk, and especially in derivatives. Those derivative commissions should have been paid pro rata with the life of the contract. In the case of AIG, it is bonuses paid to their Greenwich derivatives group…the one that got them in trouble in the first place…how many of those commissions which were paid on the contracts (reportedly they no longer were getting the entire commission up front but only a percentage with the rest paid out over five years or more), but many of those derivatives perhaps most have already gone ‘bust’. What is appalling however is the lack of willingness by John Thane, Ken Lewis, and AIG to disclose who got them and what they did. Unfortunately, the contracts would probably be upheld in a court of law but once you start setting aside contracts you are on a slippery slope for the entire legal system. Still, with the taxpayers now owning more than 80% of AIG the names and amounts should be disclosed. By the way…how much of a market do you think there is for a ‘derivatives’ trader? TB suspects that they are not in high demand anymore, nor are the ‘quants’ who support them. The regional dealers, who have not had one single problem, avoided it because they were not involved heavily in derivatives, so what they are after are the corporate bond and mortgage backed bond traders and salesmen. This is a reversal from 2004 when the derivatives traders were crowned king.