Traderbill's Financial Markets Weblog

Bloomberg Quote of the Day: “ Everyone rises to their least level of incompetence.” = Laurence J. Peter…the famous Peter Principle…is that why Congress…or the Presidency is the last stop for most politicians??? TB

TB’s Quote of the Day: “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. “ Lord Keynes

…09/09/09…a great day for numerologists! The last such date was 08/08/08 which the Chinese chose to kick of the Summer Olympics – gung hay fat choy old chap! ‘8’ is the luckiest number to the Chinese followed by ‘9’. Not so to the Japanese who associate it with suffering…perhaps from all those wars with the Chinese? Certainly now China is on top. Today we hear that China’s car sales may reach 12 million this year, taking out the U.S. as the world’s number one market…well we’ll see about that…we might just toss in another couple of  ‘cash for clunkers’ deals and show them a thing or three! Wonder how much of that $3 billion has reached the auto dealers??? Not much from what TB reads.

Today is also the 252^nd day of the year (2+5+2=9).

But nevermind cars…they are now going to take on Airbus and Boeing in aircraft. Now this is a country that can’t control quality in food, or drugs…or keep the lead out of the paint in toy’s but build a plane??? That’s the ticket! You fly’em…TB won’t!   

The beat goes on in stocks…and on…as yesterday produced more gains and more higher highs and higher lows albeit with narrow ranges but the S&P 500, both Nasdaq indices, and the SOX ‘gapped up’ on the open. For the Nasdaq 100 that was the second time in two sessions…the gaps are narrow and could easily be refilled though as did the Composite on Friday afternoon.

Certainly one of the reasons for yesterday’s ebullience was the surprise announcement by Kraft of a hostile bid (they didn’t consider it one) for Cadbury which gapped up by 16 points on the open and closed up 14 and is now near it’s 5/27/08 high of %48.30 and its 10/30/07 high of 58.97! From it’s March 3 low it is up 88% too! Now that is one fine stock! In addition, even after the rally it still pays a dividend of 1.5%. No problems there!

It is becoming increasingly clear that we…meaning our elected officials blew it by listening to the Ayn Rand/Milton Friedman/Alan Greenspan credo that if you want it done right trust the capitalists and distrust the government. It has come all the way around to bite us in the derriere. Now we are foundering with a government that was bought and paid for by those very same capitalists and elected officials more than willing to do their bidding. Meanwhile the cornerstone of the theory: that businesses are managed for the long run is simply no longer true…unless you consider 1-2 years as long run or until the CEO’s time has run out. See economic theory holds that businesses will run in such a way as to maximize profits…and they still do…for the current management. Deal with it!

More than a decade ago TB was discussing the market with a friend and former colleague and used the trite expression: it’s a zero sum game. His friend shook his head and said no it isn’t if you include derivatives. TB didn’t see it that way…but now we have a derivatives market run amok by ‘quant’ types, eager to put their mathematical prowess to work and showing how good it is by ‘backtesting’ their models in a sterile environment. That is one of the areas where they went wrong since the growth of derivatives was not encapsulated in the historical data and if ten or twenty or more are doing the same thing eventually they become the market…until it goes bust. Oh, but they had those glorious risk models…all merely tweaks of VaR (Value at Risk), so everyone was watching the value of their investments rise while the risk wasn’t growing…but then we had the sub-prime collapse which took all those hedging vehicles with them. Even those might have worked if it hadn’t been for the way the market was structured where insurance (sic) became just another way to maximize your bets…buy it from one party…sell it to another…until your hedge now amounts to market risk which cannot be diversified away.

So as TB has been saying we entered…and are still enmeshed in…the greatest deleveraging in the history of mankind and it is truly painful…and will continue to be so. Like deflation, where the only cure is in-flation, the only way to grow an economy is to convert deleveraging to ‘re-leveraging’ but we have already exhausted the resources of everyone including the federal government to do so…and worse it isn’t just a U.S. problem…although we started it and then exported it globally…aren’t we something special? Where were all the gray-hairs who were supposed to be running the store? Too busy counting their money to pay attention to what the 20-30 somethings were doing and asking if it was sound…hell, they didn’t understand it…couldn’t comprehend it but if other firms were doing it well by golly they weren’t going to be left in the dust!…and they weren’t. Meanwhile the government was so busy in reinforcing the Reagan induced ‘too big to fail’ to everyone but small, medium, and large companies…reserving it for only the biggest…the best and brightest??? (sic).

TB  ran across an interesting story in Barron’s this week on how a local chamber of commerce in a Hudson Valley community was treated by a ‘too big to fail’ bank that absorbed a ‘too big to fail’ broker, and bought a community bank in the valley. The bank was JPMorganChase who after buying the bank did not renew their chamber of commerce membership. The head of the chamber called to find out why and was told that the bank (JPM) had evaluated how their money was being spent and decided not to support any chamber of commerce and divert the funds to more lucrative channels (paraphrased). Now remember all that keeps small businesses afloat is credit cards and community banks! So what happened their and is happening everywhere is local deposits are being upstreamed to the big bank to be more efficiently invested! All of this is with the blessing of the Fed, the FDIC, and the Treasury…bigger is better! NO! Bigger is what got us in this mess…exempting them from regulation while the smaller institutions are forced to compete for lower and lower spreads and thus got themselves into trouble – without the derivatives that got the big boys on trouble. TB has long said that the problem began when Wall Street converted from partnerships to public companies…taking the ‘skin’ out of the game. Other people’s money is great…until you have used it all up! Is it any coincidence that the most successful broker…er bank (sic) still around is Goldman Sachs (besides their government connections)? Merrill was the first to go public or one of them…they were the last and have varying classes of stock so that the partners remain in control of the show.

TB has been told by friends to ‘follow the liquidity’ but where is that liquidity??? Is it in the money market funds…mainly reduced to government-only funds? Is it the banks that are lending to one another in the Libor market at all time record lows of 0.245% for one-month and 0.299% for three months? This as their loan losses continue to mount and may even accelerate with commercial real estate loans and more mortgage and credit card losses.

So is it ‘follow the liquidity’ or follow the apparent liquidity?…that is the kind that is there until it isn’t, hence the market will rally until it doesn’t.

Since August 20^th the average volume of the NYSE has been just 1.1 billion shares with just three days above the long term average of about 1.4 billion shares. Also, since that date the average daily volume of Citigroup (C) has been 1 billion shares total…the bulk of that traded on the Electronic Trading Networks (ETN’s), but still comprising perhaps 25% of NYSE volume alone…is this a market? …or a casino? Keynes would choose the latter as does TB. As for the bulls, they are money managers who have a vested interest in talking up the market:

1. They saw their revenues decline by 40% along with the market while their fixed costs remained the same.

2. Clients began to question fees which some were forced to reduce.

3. A rising market raises fees, ergo buy stocks…but note the biggest gainers have been the weakest stocks…along with tech in anticipation of huge business investment…uh huh.

This is not a criticism…it is human nature…but that can only take a market so far…so how far is too far? You decide…but trees to not grow to the sky…only ego’s do!

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More on healthcare: isn’t it sad that the great investigative stories are not coming from Forbes, Fortune, Time or Newsweek? Perhaps the last great story by one of these was Bethany McLean’s story on Enron…now more than a decade ago! While the Economist does a good job, did you ever imagine that the best stories would be coming from Vanity Fair or Rolling Stone? …a pretty sad commentary if you ask TB.

Matt Tabibi who wrote that scathing expose on Goldman Sachs (somewhat embellished and certainly full of expletives but hey, it’s Rolling Stone), is back with another one on healthcare reform…or lack thereof…in the latest issue of Rolling Stone. Once again the lobbyists for healthcare are hard at work and are not only taking down the Democrats led by Nancy Pelosi, but Obama as well. A band-aid will be put on the problem and it will all go away along with the only chance to cut healthcare costs as a percentage of income and GDP…so the unregulated capitalism is better theme continues. It is an interesting and well-researched article that left TB feeling…well…ill, but glad he is going to be eligible for Medicare…tough luck for the rest of you who believe what you hear…either from the far right GOP who are pronouncing doomsday if it goes thru or from the left who talk a good line but the teeth have been taken out of it.

One key is the requirement by Obama (one of his few signs of leadership in the entire process), that companies provide ‘real’ healthcare programs not just the bare minimum. The problem is that companies are ‘grandfathered’ in. So WalMart, which offers their more than 34 hour a week full time employees bare-bones insurance can continue to do so further ‘unevening’ the playing field by holding their costs down. The other thing is that if you don’t like your employers plan you can go to the government…but hidden in the legislation it states that if you decline the employer’s insurance you are not eligible for insurance by the government…and worse the IRS will levy a tax on you for not having insurance….this is incredibly Hellerish (Catch 22)! Who is helping to back this and why did Obama cave on the public option? Because the pharma lobby pledged $250 million to pass the legislation if there was no public option…so something is better than nothing…unless it isn’t. Forget the paperwork elimination which would save $350 billion a year…it is not in the cards. TB has oversimplified here so you owe it to yourself to read the article…not that anything can be done about it…except cry. William Jennings Brian would probably say:  man should not be crucified on a cross of healthcare.

Have a great day!

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 9, 2009.