The markets rallied at the open and then got crushed all day long.
I thought the markets would bounce, so I bought a little FAS (+300% the Financial Index) for me at $4.65. It was the classic setup – the markets were testing a low, CNBC had another leak via Gasparino and Obama was set to speak in 10 minutes. So I bought FAS near the lows for the day. FAS rallied hard for about 20 minutes and then rolled over hard. I got stopped out at $4.87.
The Markets were crushed, because the government insists upon playing financial accounting games, rather than fix the obvious problems.
Tangible Common Equity
This is the new “Stress Test” that the Government will use to determine which banks are solvent and which banks are insolvent. The idea is that the value of the Common Equity (Stock) must be worth at least 3% of the Total Assets held by the bank.
Let me explain what the Government is trying to pull with Citigroup to get them in compliance with this definition, so that they can get more handouts from the Government.
Under TARP, the Government invested $45 billion in Citigroup, by buying Preferred Stock. Preferred Stock is basically a bond, so it is classified as Debt. The Government is looking to convert their $45 Billion in Preferred Stock into a pile of Common Stock worth 40% of Citigroup. The total value of Citigroup stock is now worth about $11 Billion. So the Government would get $4.4 Billion worth of stock.
Nice trade!!
The reason why they want to book this $40.6 Billion loss for the taxpayers is as follows. Converting the Preferred Stock into Common Stock increases Citigroup’s “Tangible Common Equity” ratio to a level high enough to justify the Government throwing more Taxpayer money into the sink hole that is Citigroup.
Even better, the Preferred Stock would have paid the US Government $2.5 Billion a year in Dividends. The conversion of Preferred to Common benefits nobody but the Shareholders of Citigroup.
Yesterday I wrote the following –
“No doubt there will be another round of leaks about how the banks will not be nationalized and how Timmy Geithner will invent some new math to prove that banks are indeed solvent and don’t need to be taken over or stuffed full of another $2 trillion to be able to keep their doors open under their current ownership.”
I had no clue that this was their version of “New Math”. The market crashed today, because the Big Boys know that these accounting games do not fix the real problem.
More
In his Press Conference today, President Obama told us how his Administration would focus on Financial Responsibility. A week after he wasted $800 Billion in Taxpayer Money, Obama told us that his new Budget would be structured under the “Pay-Go” principle, where you pay as you go. Where was his fiscal conscience last week?
The markets are sick of the hypocrites. They will keep crashing until the Government takes actions to solve the real problem – Insolvent Banks Are Not Lending Money. That has paralyzed the economy and we are now in Depression, with imploding economic activity and imploding pricing.
Is this a retest of the November Lows?
Maybe.
Remember how much time I spent late last year telling you not to get antsy, because I never saw a Bear Market end without a retest of the first lows? This may “The Retest” of “The Bottom” or we may just get a bounce.
Was that 100 point rally before the open all we will see for the bounce from oversold conditions? Are the Big Boys just running for the hills at any price?? Today, the gap up Open was sold hard. That is not a good sign.
I thought the markets would bounce, so I bought a little FAS (+300% the Financial Index) for me at $4.65. It was the classic setup – the markets were testing a low, CNBC had another leak via Gasparino and Obama was set to speak in 10 minutes. So I bought FAS near the lows for the day. FAS rallied hard for about 20 minutes and then rolled over hard. I got stopped out at $4.87.
The Markets were crushed, because the government insists upon playing financial accounting games, rather than fix the obvious problems.
Tangible Common Equity
This is the new “Stress Test” that the Government will use to determine which banks are solvent and which banks are insolvent. The idea is that the value of the Common Equity (Stock) must be worth at least 3% of the Total Assets held by the bank.
Let me explain what the Government is trying to pull with Citigroup to get them in compliance with this definition, so that they can get more handouts from the Government.
Under TARP, the Government invested $45 billion in Citigroup, by buying Preferred Stock. Preferred Stock is basically a bond, so it is classified as Debt. The Government is looking to convert their $45 Billion in Preferred Stock into a pile of Common Stock worth 40% of Citigroup. The total value of Citigroup stock is now worth about $11 Billion. So the Government would get $4.4 Billion worth of stock.
Nice trade!!
The reason why they want to book this $40.6 Billion loss for the taxpayers is as follows. Converting the Preferred Stock into Common Stock increases Citigroup’s “Tangible Common Equity” ratio to a level high enough to justify the Government throwing more Taxpayer money into the sink hole that is Citigroup.
Even better, the Preferred Stock would have paid the US Government $2.5 Billion a year in Dividends. The conversion of Preferred to Common benefits nobody but the Shareholders of Citigroup.
Yesterday I wrote the following –
“No doubt there will be another round of leaks about how the banks will not be nationalized and how Timmy Geithner will invent some new math to prove that banks are indeed solvent and don’t need to be taken over or stuffed full of another $2 trillion to be able to keep their doors open under their current ownership.”
I had no clue that this was their version of “New Math”. The market crashed today, because the Big Boys know that these accounting games do not fix the real problem.
More
In his Press Conference today, President Obama told us how his Administration would focus on Financial Responsibility. A week after he wasted $800 Billion in Taxpayer Money, Obama told us that his new Budget would be structured under the “Pay-Go” principle, where you pay as you go. Where was his fiscal conscience last week?
The markets are sick of the hypocrites. They will keep crashing until the Government takes actions to solve the real problem – Insolvent Banks Are Not Lending Money. That has paralyzed the economy and we are now in Depression, with imploding economic activity and imploding pricing.
Is this a retest of the November Lows?
Maybe.
Remember how much time I spent late last year telling you not to get antsy, because I never saw a Bear Market end without a retest of the first lows? This may “The Retest” of “The Bottom” or we may just get a bounce.Was that 100 point rally before the open all we will see for the bounce from oversold conditions? Are the Big Boys just running for the hills at any price?? Today, the gap up Open was sold hard. That is not a good sign.
I figured that 2009 would be a difficult year to make money. Because I know full well that there will be a lot of potential set ups that must be played, but only the last one will pay off in a big way.
The problem is that nobody knows which one will work. So I will buy small probing positions at logical places, with tight stop loses. This is another one of those high-probability setups. So I need to nibble a little, just in case this is a meaningful low. I bought a little SSO today (200% the S&P 500).
If the November lows fail, then potential support for the S&P 500 lies at 710, 660 and 609. It would be a selling capitulation if we reached those numbers. I will be looking to nibble there too if the set ups occur.
The problem is that nobody knows which one will work. So I will buy small probing positions at logical places, with tight stop loses. This is another one of those high-probability setups. So I need to nibble a little, just in case this is a meaningful low. I bought a little SSO today (200% the S&P 500).
If the November lows fail, then potential support for the S&P 500 lies at 710, 660 and 609. It would be a selling capitulation if we reached those numbers. I will be looking to nibble there too if the set ups occur.
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