NB Charts: Team Obama

.During the course of trading today, I had a lot of questions. My questions concerned recent events in Team Obama, The Corporate Bond Market, Commodities and Hedge Funds.

It looks like something big is going on behind the scenes with the Government and they will be printing a lot more money to buy Toxic Debt off the Books of the Banks. There may end up being huge fireworks on Thursday regarding The Stress Test, TARP, TALF and PPIP. Any time I see that alphabet soup, by wallet feels lighter…

It All Starts and Ends with Team ObamaObama announces that he will work to shrink the size of Wall Street and force banks to decrease their leverage. But at the same time, he is bailing out every bank in sight, when these banks should be consolidating and laying off redundant, inefficient business units. He is also allowing banks to keep their massive leverage and forcing the Federal Reserve to become massively leveraged.

It took a while for the pieces to all fall into place, but what Obama is going to do it use his powers to eliminate Hedge Funds and the leverage they maintain, while at the same time backstop the Debt Securitization Machine that is Wall Street and Large US Banks, as well as the conventional Money Management Industry (like Mutual Funds) - no Securitization and a market for them (Mutual Funds), no reflation in asset prices.

Another reason the banks are being protected is that they are all interconnected – Banks own each others’ Debt and Preferred Stock, so the default of one may set up a chain reaction of defaults of others. That is why the Government refused to Nationalize the Big 4 Banks in March, because their demise would have whipped out an entire level of medium size and smaller banks – and their stock and bond holders. It needed to happen and now we just setting up a bigger bubble to pop down the road…

Also, the Large Banks are already under Government control, via TARP, so they can be controlled. Obama is protecting the Unions of Chrysler and trying to rob the Senior Bond Holders (their word, not mine). The Hedge Funds have taken zero TARP Money and asked for zero Bailouts, so they are not beholden to the Government - they are sticking to the ridiculous idea that they have a Fiduciary Responsibility to their clients, and are trying to negotiate the best deal possible for these clients with bankrupt companies like Chrysler and GM.

Hedge Funds, Unions and Chrysler
Obama wants the guys first in line to claim the assets of bankrupt companies, to voluntarily step down the collection ladder and give free money to those subordinate to them in the debt food chain. Who the heck is going to lend money? What is going to happen to all Senior Debt? How is it going to price if there is no benefit to being Senior? What’s going to happen to the Corporate Bond Market?

Obama (via Geithner) wants the American Public to step down the food chain and convert their Preferred Stock into Common Stock. This is Geithner’s shell game to make it appear that Banks have more Capital than they really do. All this does is move Taxpayers to the back of the line in a bankruptcy proceeding. Oh yeah, it also forfeits for us the 8% annual dividend on these securities. So maybe there won’t be any more bankruptcy proceedings in Financials…

PIMCO on The “Stress Test”
“Bank Tests We Should Be Stressed About” by Mohamed El-Erian

“The stress tests will accelerate the redefinition of the financial landscape, with a meaningful impact on future economic growth and welfare. However, whether the impact is for good or ill depends on how the results of the tests, and policies that flow from them, are pursued.
Rightly or wrongly, the February stress-test announcement was interpreted by markets as signaling a comprehensive process through which the government would evaluate the soundness of banks and decide on sustainable solutions for the sector – a sector critical to the economy’s prospects.
In particular, the tests suggested a concrete way to differentiate between the solid institutions that can raise private capital, and those that will (and must) feel a heavy government hand. They could also lead to a way to reconcile the multiple initiatives designed to stabilize a highly disrupted sector that is contaminating many sources of job creation, nationally and internationally.
The U.S. government now has to deliver on those expectations; and it will not be easy.”

(Now I am just going to guess that the Bank Stocks rallied 10% today because the Government will announce a method for using Taxpayer Money to buy Toxic Assets that will greatly benefit Bank Shareholders. I can’t wait to see what the unintended consequences of this policy will be.)

There are 5 issues the Stress Tests must factor in –

1. “(T)ransparency is key” (I’m going to guess right off the bat that this one is an epic failure)

2. “(T)he results of the stress tests must be part of a comprehensive, forward-looking package to resolve problems at banks.” (Not only must winner and losers must be identified, but a systematic methodology fixing the broken banks must be established. No more Trillion Dollar Mickey Mouse, patchwork solutions)

3. Lower funding costs (a 0.25% Fed Funds Rate isn’t cheap enough for Mohamed…) and figure out how to screw the Taxpayer by getting the maximum amount of Toxic Waste off the books of the banks and enrich the Bank Shareholders (sorry, I am paraphrasing here…).

4. The Government “must work hard to resist the temptation to override contracts, to undermine the sanctity of the capital structure and treat differently stakeholders with similar rights.” (ask the Chrysler Senior Debt Holders about this one) I’ll paraphrase again here – the Government should not overtly steal from Senior Bond Holders, rather it should focus on robbing the taxpayer, because that has been very lucrative for PIMCO…

5. Set up a Global Government to oversee and International version of Alphabet Soup

I own Keycorp and a small bank called Citizens Republic. KEY was up 19%+ today and CRBC was up about 14%. I would not be buying them here. I would not recommend anybody buy anything on this blog. This is for informational purposes only… I will most likely be selling my Bank Stocks into Thursday.
Junk Bonds
The Government is rewriting the rules and this will have consequences on asset prices. I figured that this Recession/Depression would see huge default rates in Corporate Bonds. I was right. Historically, Junk Bonds have over 20% default rates and their yields spike up to as high as 12% above Treasury Yields. This time around, the default rates on Junk Bonds may be as high at 52% (not a typo) and the yields are over 10% greater than Treasuries.

I really wanted to own this Asset Class as the Economy recovered. But now, with all of the intervention by Washington in the Financial Markets, I am not sure if Corporate Bonds can be owned.

Banks are a big component of the Corporate Bond Market. If any more of them go under, then you see significant selling the Junk Bonds.

Building a Middle Class
Obama wants to raise taxes on corporations and make it harder for them to shelter net income generated off shore. All that is going to do is force companies to sell their profitable off-shore businesses. It will not force those companies to repatriate all of the jobs they shipped overseas. Maybe phase two will be the Government offering incentives to these same Corporations to create those same jobs domestically.

I hope and pray that happens, because we need a Middle Class and we need to bring those jobs back.

All of these policies will slow economic activity and lower Corporate Earnings. They may lead to a massive buyout wave of American Companies by Foreign Companies. They may also lead to significant Capital outflows from the US Markets (low growth / high taxes) to International Markets that offer better growth and tax treatment.

None of this does anything to get rid of the mountain of Debt and Entitlements we will face in the not so distant future. Inflation is coming.

More money being printed would be good for the Euro, Gold, Silver and Bonds and bad for The US Dollar.

The Japanese Yen
The Yen ($XJY) broke out of a 10-year base and has now pulled back into support. The question I have for myself is why should I buy The Yen? I’ll let you know if I figure out an answer.

The Inverse of The US Dollar
I flipped the chart of The US Dollar ($USD) to show you a chart that if it were a stock, I would be all over. I see a chart that broke out of an 11-year base and has now pulled back into support.
The fundamentals are also favorable, as you know that Helicopter Ben will continue to carpet bomb the World with freshly-printed Dollars.

The Euro
The Euro ($XEU) is the anti-Dollar. See how it trades almost perfectly with the inverse of the US Dollar? When somebody (China?) wants to hold a Currency and wants to hold something other than the US Dollar, he will most likely hold The Euro.

The Euro has retraced about 50% of its 2001 – 2008 rally. If you believe that the US will print more money than the EU will, then you want to own the Euro. I am 5% invested in The Euro. I anticipate that number going up substantially this year. Be aware though, that the EU meets this week and may announce their own version of Quantitative Easing (QE). If they do so, then the Euro could get trashed over the next few days. Nothing is easy in this market, when the actions of Government dictate which assets to own…

Gold
Gold is for all intents and purposes the anti-Paper Currency (Fiat Currency). Gold is in a 21-month base. It has pulled back to support at 879 and a break above $1,000 would be a MAJOR breakout. Failure here sets up a 2-year Double Top, so tight stops are required.

Silver
Silver ($SILVER), like Gold, is a precious metal / anti Fiat Currency. However, Silver also has significant commercial applications, so it is more of an Industrial Commodity, rather than a pure Precious Metal. So Silver got crushed in the economic slowdown.

Silver crashed, then rallied up into resistance and has been sitting around for 4 months, consolidating the late-2008 rally (at some point, stocks will do the same thing).