Thursday, January 29, 2009

One day of selling and we are back on the edge of the abyss again.

So what happened today? Mortgages got killed today.
On December 16, 2008 I wrote the following about Mortgages and the Fed’s $500 Billion Mortgage Purchase Program –

"Buy Mortgage Backed Securities
On 11/25, the Fed announced a $500 billion program to buy Mortgage-Backed Securities issued by the US Government Agencies, Freddie Mac and Fannie Mae. The Fed already started buying these securities, weeks before today’s announcement.

The purchase program has brought up a couple of concerns. The primary concern is that if these mortgages are written by US Agencies and carry the “implicit guarantee” of the US Government, then why does the Fed have to print $500 billion in new money to buy some of them?

The answer is two fold. First, if the government completely takes over Freddie and Fannie and issues an “explicit guarantee” for their paper, then the US Government has to move the debt of Freddie and Fannie onto the Balance Sheet of the US Treasury, forcing the US Government to add over $5 trillion to that year’s deficit and over $5 trillion to the US Government Debt total (off balance sheet accounting).

The other concern is that the move is designed to raise the prices on all $5 trillion of the bonds, while they are only threatening to buy $500 billion of them. This is the old “Fractional Banking System Game”, where you act like you have enough money to cover anybody who wants to sell today, but in fact you only have a fraction of the total amount on hand and are really just bluffing.

The concern is then what happens to the prices of mortgages when the Fed spends the $500 billion? About 80% of PIMCO’s flagship mutual fund is invested in US Agency mortgages. Don’t you think they will want to sell a bunch of that junk at a fat premium to the Fed? I know that Foreign Governments are unloading that stuff at a rate of over $20 billion a month. China alone has well in excess of $500 billion in Agency paper."

The Markets are simply calling the Fed’s bluff. The Fed will have to pony up another chunk of dough very quickly.

Today we also had Meredith Whitney telling us how bad of an ideal the “Bad Bank” is. The “Bad Bank” is now estimated to cost the Taxpayer an additional $2 to $4 Trillion. I’ve got an idea – give the Shareholders the “Bad Bank” and the Taxpayers the “Good Bank”.

The numbers of Dollars that the US Government is going to end up printing to buy all of the toxic mortgages off of the balance sheets of US Banks and Foreign Central Banks is truly staggering.

Now back to the Markets
Most Indexes pulled back into the breakout points of yesterday. That is normal and is Bullish if those breakout levels hold. It is obviously Bearish if they fail to hold.

Let’s see what the next few days bring. The Fed has done a lot of big things over the weekends. I’m sure that they will be busy at work this weekend too, hammering out a “Bad Bank” model to force feed to the taxpayer.

That said, there is zero leadership right now and if all this rally turns out to be is 300 Dow points, then a new leg down may be very near.

Wednesday, January 28, 2009

See Why I Am So Reluctant to Short?

Every time the Dow breaks 8,000 points, the US Government transfers a couple $100 billion from taxpayer to shareholder and we get a 1,000 point rally. I saw this coming and positioned some money for the inevitable rally. I will soon reposition money for inevitable crash.

Today Was No Different
The markets are rallying on the belief that the US Government is going to buy up to a Trillion Dollars of toxic mortgages from banks. The issue is that the Government will overpay for these assets. They could end up paying 50% to 70% too much for these holdings, thus losing the taxpayer $500 to $700 Billion, thereby giving the shareholders and bondholders of banks a gift of the same amount.

Financials stocks rallied, because if the Fed does over-pay for assets, then the banks will be able to realize “gains” on these transactions and “beat earnings”. The accounting games are never-ending.

A History Lesson
In 1933, the US was in the depths of The Great Depression. The economy was broken and getting worse by the day. Citizens were rioting and there was a real possibility of a populist revolt that would have meant the end to the US Government as we now know it.

So what did FDR do to “save” the Republic?
He stole everybody’s Gold and used the funds to finance The New Deal. That is what is happening today. But today’s politicians are far too crafty to overtly steal money from some to finance the expenses of the many. I do not think an outright confiscation of Gold (ala FDR) or Land (ala Zimbabwe) would be acceptable in today’s America.

Instead, they game the numbers
Clinton did it when he altered the Cost of Living Adjustments (COLA) formula for Entitlement Programs. Have you ever noticed how the Government Consumer Price Index (CPI) statistics always seem to trail the reality of the actual increase in prices that you see in your everyday purchases? Clinton altered CPI by removing the cost of Fuel and Real Estate from the formula. That has effectively knocked 5% per year off of COLA. So retirees getting hosed, but the taxpayer is getting a break.

Here is what Bernanke said about the FDR Gold Confiscation of 1993 –

“Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934. The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market.”

The definition of Confiscation for Bernanke is “a program of gold purchases”. That is what he thinks of the property rights of citizens.

Did you notice this line at the end “and by the way, 1934 was one of the best years of the century for the stock market.” So in his mind, the end justifies the means. Again, Asset Price Appreciation has become a policy tool to mask the damage done to the economy as the corporations have gutted the Middle Class and driven the jobs off shore to India and China.

Bernanke wants to “Increase Aggregate Demand” at all costs. He is willing to let the criminals go unpunished and willing to throw away the Constitution in order to “save the free markets”. What a d*ck (my editorial opinion).

All that is going on now is the politicians are robbing future taxpayers to buy the bad debt out of the banks. It is theft from those who have no say.

I think the Government is now focusing on creating a new Asset Bubble. I think the Bubble will be in Stocks. Stocks are marginable, easy to trade (liquid), easy to manipulate and you can gin up a lot of greed as you ramp the prices into the stratosphere. Moreover, you have this amazing propaganda machine already in place (CNBC, Barron’s, magazines…) to drive prices higher.

Before the financial crisis is over, the Government will most likely own shares of stock of Banks, Insurance Companies, Homebuilders, Commercial Real Estate Owners, Automakers, Credit Card Companies and whoever else they can bail out. They will then have a vested interest in ramping up the stock prices.

Money = Power
Increasing Stock Prices = Money
Therefore, Increasing Stock Prices = Increasing Power.

The politicians will not be able to help themselves.

Many speculate that the Bubble will be in Commodities, Gold and US Treasuries. That may be the case, but you will be fighting the Fed in Commodities and Gold and with rates near all-time lows, there will be little upside in Bonds.

I’m going to state this as simply as I can
You will need to participate in the Great Stock Market Bubble. It will be your only real hedge against Inflation and a falling Dollar. You will also need to get out before it all crashes down, because the aftermath of that crash will be truly devastating.

Sorry to ruin your evening. I think this plays out over the next 5 to 7 years.

If the markets change, then I will change. But that is my operating thesis going forward.

Tuesday, January 27, 2009

Did I Mention That I Was Bullish (for today at least)?

I sent the following email to blog readers yesterday evening –

“I am about as Bullish as I have been in the last 12 months. If they can't take it down, then they may just have to pop it higher. I started buying the Dow, the NASDAQ and Nat Gas today. On Friday I bought some Materials companies and Crude Oil.

I may get stopped out of everything tomorrow, or it may run for a week or two. I have no clue. But the setup this there for a Big, Fast move and I need to put some money at risk to try and participate.”

“In the mean time, this weekend, Pelosi talked about the government buying Common Stock in banks. That is a radical shift from any previous solution. It is a desperate attempt to not have to nationalize the banks outright. I hope it works.

One more thing - I would not be surprised to see Gold peak this week.”

There are three patterns right now –
1. Tight Consolidations
2. Holding the Lows
3. Rising Wedges

Tight Consolidations
If you have been reading my posts for any period of time, then you know that markets move in fits and starts. They tend to sit around for a long time and then make a big move over a very short period of time. These big moves are where you make the majority of your investment returns.

Dow Jones Industrial Average
Here is the hourly chart of the Dow Jones tracking stock, DIA (DIA = Dow Jones Average / 10). DIA has been stuck between 80 and 90 for almost 4 months. That means that the Dow has been trading between 8,000 and 9,000.

At some point, the Dow will rapidly move out of this trading range by launching or crashing. Remember, the Dow sat in a trading range like this for a year after the 1987 Crash.

Several other major Indexes look like the Dow and will probably move in unison with the Dow. I will use the Dow as a proxy for the market.

Holding the Lows (so far)
Transports (IYT)
Transports have been holding the lows of November 24 (Green Circle and Line). If IYT can break above 55, then it could make a stab higher. There is a lot to clear in the 58 – 60 range. I stopped into IYT today in the $52.80 range.

Failed Leadership
Airlines ($XAL)
Airlines have broken and were pounded today (-6.91%). They now run the risk of retesting the July 2007 lows. Keep in mind that Airlines got crushed today, even though Oil was down -9% today! Airlines normally move inverse to Oil, so this development is not good for the Airlines.

School Stocks
Devry (DV)
has failed on its latest breakout attempt and been sold hard the last 2 days on heavy volume. DV is down another couple bucks in the aftermarket on their earnings release. STRA looks a lot like DV. Another day like today and this group is toast!

And that’s it for leadership. I’m serious. Nothing else has shown up. Big money is not breaking out stocks and sectors on high volume and committing money as these stocks break to new highs. Until big money shows up to support new leadership, we remain in a Bear Market and I remain a Trader.

Rising Wedges

The charts of the metals scare me. I look at Silver (SLV) and I see a rising wedge (Blue Lines) on diminishing volume (Red Line and Arrow). That is the stuff of crashes, not the stuff of Bull markets. At some point soon (tomorrow), I will enter stop orders to short Silver.

Gold (GLD = the price of Gold / 10) looks like Silver on steroids! That may turn out to be “The Mother of All Wedges”. Time will tell, but I think it very improbable for Gold to continue to go vertical without some sort of pullback. If I am wrong, I am wrong. I will only commit money when I am confident in the set up. Buying Gold here is insane. Risk management right here is impossible.

US Dollar ($USD)
The Dollar looks like it is putting up a big top and I hope to be able to short a retest of 88.

Back To The US Government
Pelosi has told you that the goal of the Government is to own stocks. Stocks will be the next Bubble. They are liquid, they are marginable, they are easily manipulated and a parabolic advance can lead to euphoria that strips reality from all reality (also called GREED).

The US Government will announce their new version of “recapitalizing” the insolvent beast that is the US Banking System. It will most likely come in the form of a “Bad Bank” where the US Taxpayer will overpay for a bunch of toxic waste and get over-value Stock in return.

This is the Asset Class that may most directly benefit from the “Bad Bank” model. I have started to buy Preferreds via JNK and will be looking to add via HYG if they show a strong bid tomorrow.

Remember – STOP LOSSES ON ALL TRADES. I am not telling you to do anything with your money, any more than a heart surgeon would tell you how to operate on yourself. I’m just going through my though process for how I commit capital. That was the whole purpose of creating the blog.

Monday, January 26, 2009

Obama’s Form of Nationalization

Over the weekend, Obama and his Economic Advisors had a closed-door meeting in the White House. I’m sure it went something like this –

Did you see that the Government of Iceland was just got thrown out of office by an angry mob of citizens who saw their lifesavings wiped out because the banks were allowed to get so highly leveraged that they bankrupt the entire country?

Yes. I’m not giving up my perks. We need to start buying bank stocks.

That was the conversation. Pelosi so much as stated that TARP Round 3 will focus on buying the Common Stocks of Banks. They haven’t even started spending the 2nd Round of TARP (the next $350 Billion) and they are already telling us that they will need more money to “recapitalize” the Banks (and the Mortgage Agencies and the Automakers and the Insurance Companies and the Home Builders and the Commercial Real Estate Owners and whoever else gives them enough extortion kickbacks, I mean political contributions…)

That’s right, the Federal Government is getting into the business of BUYING STOCK! No more phantom “President’s Working Group” or “Plunge Protection Team” conspiracy theories, Pelosi flat out stated that they are considering buying stock. They will buy stock. How long do you think it will be before they realize that they can increase the amount of money they can spend (power) by artificially inflating stock prices?

Buying over-priced Common Stock of insolvent banks with somebody else’s (the taxpayers’) money. That is Obama’s version of “Change”. It is “change”, because Bush chose to buy over-priced Preferred Stock of insolvent banks with somebody else’s money…

Why They Have to Do It
Do you remember what happened last year when Freddie and Fannie were on the brink?
Lots of bank stocks nose dived, because everybody figured out that the banks had loaded up their balance sheets with the Preferred Stocks of Freddie and Fannie. They did so, because the Fed told that these shares were “safe” and could be used as collateral for lending.

Then Freddie and Fannie became insolvent and were pseudo-nationalized and the prices of their Preferred Stocks plummeted. This was a very bad day for Banks and little old ladies.

If the Government decides that it is time to nationalize the large banks with massive derivative exposure, then they will have to price the Preferred Stock of those banks at zero. That would wipe out the remaining equity of a huge swath of the rest of the banks in the banking system and the Fed would have to nationalize them as well.

The other issue is that the US Treasury (via the Federal Reserve Bank of New York, under the watchful eye of now Treasury Secretary Geithner) has recently bought upwards of $400 Billion in Preferred Stock from Banks, Freddie, Fannie and AIG (remember them).

Do you think that the government wants to take a $300+ Billion loss just a few months after they spent the first $350 of TARP, have just as they are accessing the second $350 Billion of TARP, the $200 Billion they promised Freddie and the $200 Billion they promised Fannie?

We the Taxpayer are at the mercy of the idiots. Yet again…