More of Why I Don't Short

Today we had yet another goal line save on the back of yet another leaked policy proposal from the Obama Administration.

The leak was that the US Government will now start paying people’s mortgages. I am not making this up.

It is clear that each policy leak is but one more desperate stab at propping up the stock markets for just one day longer…

Look at how the markets reversed from key support levels on this “news”.

The NASDAQ 100 ($NDX) traded right down to the 50-day average (Blue Dotted Line) and then bounced 3%+ in the last hour of trading. Notice how NDX traded down to and held the 50% retracement level (Black Line) of the Jan 21 – Feb 9 Rally.
No rumor and the rally is over for the NASDAQ.
Look at how the S&P 500 had broken key support (Green Line) and the uptrend from the Bear Market Low of December 23 (Red Line). The markets were toast today, until the rumor came out in the last hour.
But the rumor came out, and the traders on CNBC cheered and the trendlines were recaptured and all was well on the CBS Evening news, as they could report that the Dow only closed down about 6 points.


Do you see why I’m not shorting stocks any more?

Gaming RIMM

I want to show you how Research In Motion (RIMM – The Blackberry maker) has traded the last few days, because it is a lesson in how Wall Street tries to take your money.

RIMM
RIMM had a sharp rally and then spent days in a trading range (Green and Blue Lines). That is normal. I’ve told you ad nausea that stocks make sharp moves, then consolidate and then make another sharp move in the direction of the previous move.

That is what RIMM appeared to be setting up to do. So the ideal trade would be to put a Stop Buy Order in above the recent consolidation, so that if Big Money showed up and started to buy, you would get stopped in and go along for the ride.

Everyone and their brother saw this obvious setup, but nobody was coming in with enough volume to break RIMM out of its trading range.

Analyst Upgrade
So what does Wall Street do to get things going? You guessed it. They have an Analyst upgrade the stock overnight. This allows the stock to trade higher, triggering all the Stop Buy Orders, which moves the stock even higher, which draws in the Momentum Trades and you get a nice pop.

The problem for the buyer is that the stock usually begins trading the following morning at a price well above where is closed the previous afternoon (Red Arrow). This makes risk management difficult, because you end up buying a much higher price than you wanted to. The other issue is that there was a reason why money was not being committed to break RIMM out of its trading range!

Earnings Release
RIMM announced bad numbers last night and the stock cratered at the open today (Black Arrows).
Conclusion
I know that the markets are highly gamed right now and I don’t want any part of them.

I saw the setup on RIMM and elected to not enter a Stop Buy Order.

Do you think that the Analyst will be investigated by the SEC? Do you think he had clients who were looking to unload RIMM shares ahead of their Earnings?

These are dangerous times and you need an advocate to watch your back, because Wall Street and the US Government are out to rob you of your money.

Executing Money Management
Anybody can go to Yahoo Finance and run a Financial Planning Model showing how much money they need to make each year to finance their goals, but few have the skills to execute the day-to-day money management required to achieve the desired returns.

To put things into perspective, here is what one of the Hedge Fund guys I follow wrote yesterday –

“It is nice to be in a Secular Bull market and just sit back and Buy & Hold, but unfortunately we are in a Secular Bear market until probably 2017, and the bull and bear cycles will be more like the 1970's, so market timing takes precedence for all but the young.”

The Market Voted (F---)

I watched Tim Geithner today and all I could think of was Alex P Keaton…
A young ideologue leading the economy to ruin. He inspired zero “confidence”.
I can’t wait to watch Jon Stewart tonight…

Everybody knows that the banks are insolvent. Even the lightweights on CNBC are admitting it.
So the market asked the obvious question today – If everybody knows that the banks are insolvent, then why aren’t the regulators doing anything about it? The FDIC should step in immediately and start protecting depositors against failing institutions.

Obama is 300 Dow points away from being a lame duck. Incredible. I supported the guy, knowing that he was probably an empty suit. But man, it didn’t take long to expose him, did it?

Geithner is Paulson Version 2.0
Today he called for the Fed to loan the NY Fed $100 billion, so that the NY Fed can lever up the money 10 to 1 and buy $1 trillion in stuff nobody wants, with money we don’t have and at prices nobody is willing to pay.

Does that make sense to anybody? Paulson spoke of this as a potential plan in the weeks before Bush left office. Geithner is all about stealing from the taxpayer to bail out the shareholder. I knew this would happen when he was nominated. I hope that Volcker is in the White House reading Obama the riot act right now!

Who Will Resign First?
Geithner, Summers or Bernanke

One More Thing
If I want to attack the US, I do it right now. I do it while the public has zero faith in its leaders. That would maximize the impact of the attack on the psyche of the public and magnify the economic damage done by the attack.

Where Are We Now and How Did We Get Here

How many times do you think we will hear the word “confidence” over the next two days?

I want to do a comprehensive post today, because tomorrow should be a pretty meaningful day.

Where Are We Now?
According to Bloomberg, so far the US Government has spent or committed $9.7 Trillion stabilizing the stock and bond markets and the Banking System. That is not a typo. $8 trillion is money that has been committed without a single vote by a single elected official. And the Government won’t tell us how they have spent most of this money.

http://www.bloomberg.com/apps/news?pid=washingtonstory&sid=aGq2B3XeGKok

I did a post a while back showing how each time the markets started to break support, the Government would announce a new plan to spend $300 billion or so and the markets would bounce for several hundred points and remain in their trading ranges. This game continues.

http://nbcharts.blogspot.com/2008/12/2008-busy-year.html

Why Are We Here?
Because the Banking System was allowed to get too over-leveraged and is now insolvent. The repeal of Glass-Steagall in 1999 allowed Investment Banks to own Banks. That meant that the creators of Risk now were coupled with the creators of Capital (via increasing Debt). So, by definition, if you prevent additional Debt creation, then you prevent bank revenue. Therefore, banks have an incentive to reduce risk management and increase Debt issuance. Banks increase Leverage until they either are stopped by the Government or their hand is forced by falling asset prices.

Investment Banks created a massive Debt Bubble (via this process), which popped and broke the back of the Economy in 1929. So the Government enacted Glass-Steagall in 1933 to separate the creators of Risk from the creators of Capital (via Debt). Those who fail to learn from the past are doomed to repeat in…

There is another big round of Mortgage Writedowns coming in the very near future. Moody's just downgraded several AAA Prime Mortgage traunces to Junk. The Banks know that they will soon have to mark down the pricing of this debt on their balance sheets and they want to sell it to a sucker while they still can. That sucker is the US Taxpayer. Thanks for changing things, Obama!

How Close Did We Get to Oblivion?
If you get five minutes, then watch this CSPAN clip with Rep. Paul Kanjorski (D – Penn). After the woman is done ranting, Kanjorski tells us all how close the system was to total collapse.

http://www.liveleak.com/view?i=ca2_1234032281

The bottom line is that there was a Run on the Money Market System on Sept 15, 2008 and by the end of the day, $5.5 Trillion would have been withdrawn from the system and the World Economic System would have collapsed overnight (It really would have occurred).

Moreover, he says that the UK does not have the money to buy out all the bad assets on the books of their banks. So they bought stock in the banks to buy time. He then says that if the US buys all the bad assets out of out banks, then in it will cost $3 to $4 Trillion. We bought stock in Banks via the TARP and that money is now gone, as banks have taken further losses on bad debts that are currently on their books.

His closing comments of “we are not geniuses’ (regarding economics) and “we don’t know (regarding how to solve the crisis) are not comforting.

That brings us to where we are now.

The Stock Market
According to the NY Times, the S&P 500 has posted its worst 10-year return (Inflation Adjusted) since at least 1930. Just wait until the end of this quarter, when the Mutual Fund Industry starts to publish 10-year returns on their funds and they are NEGATIVE!

http://www.nytimes.com/imagepages/2009/02/06/business/20090207_CHARTS_graphic.html

The Bond Market
Bernanke has promised to use the resources of the Fed to buy Bonds and thus cap Interest Rates. He has threatened to do this with Mortgages and with US Treasuries. But the Markets are calling his bluff. The Markets know that the Fed does not have enough money to buy all the Bonds that current holders want to sell. Therefore, rates are ramping higher again.

The Fed is buying $500 billion in mortgages to cap Interest Rates, but the market is selling off, because the market knows that the Fed will have to buy at least $5.5 trillion in order to keep rates down.

China is selling long term bonds (Treasuries and Mortgages) and is buying 3 month and 3-year treasuries. The taxpayer is on the hook for the refinancing of the debt held by the Central Bank of China, Japan et al.

China has sold $190 billion in bonds in the last 15 weeks.

$TNX is the Yield on the 10-Year US Treasury times 10 (so $TNX at 30 = 3% yield in the 10-year Treasury). What is this thing pricing in? It has gone from 2.1% to 3.1% in a few weeks!

Remember, the Bond Market is also in a Bubble which started in 1982. When it pops, there will be yet another round of Bank Failures.

Conclusion 1
So the stuff we have tried thus far has not worked. We have spent or committed to spend $9.7 Trillion and all we have to show for it is a stabilized stock market, stuck in a trading range. Oh, and the Wall Street Bankers have realized about $100 billion in bonuses at Taxpayer expense… But the Banks are still insolvent and the Credit Markets are frozen.

Mis-priced Assets
The big issue facing the Banking System right now is that Banks are lying about the value of the Bonds they currently hold on their Balance Sheets. Very simply, if the Banks were forced to accurately value the assets they hold, then they would be insolvent.

Rep Brad Miller (D – NC) stated the obvious last week, saying “If we had regulators go in an examine the books like we did at Fannie Mae and Freddie Mac a great number of our systemically important financial institutions could be insolvent."

Banks have been allowed to play this accounting game where they move assets from Level I (where pricing is transparent) to Levels II and III (where pricing is opaque), or from their Real Balance Sheets to “Off Balance Sheet Vehicles” (like SIVs), because once the assets are moved to these areas, they banks can market up the prices artificially high and declare “gains” and keep themselves looking solvent for at least one more quarter.

When Hedge Funds figured this out and started shorting banks and blogging about why they were doing so, the SEC outlawed Short Selling, instead of making the banks divulge all of their holdings and list them on their balance sheets at their real prices. The SEC made short selling illegal, refused to prosecute the criminals who were lying on their SEC Filings and then let these same criminals get huge bonuses (at taxpayer expense).

Here is a good primer on the topic –

http://www.nakedcapitalism.com/2009/02/john-paulson-attacks-fellow-hedge-funds.html

The New Bailout Plan
This plan will be announced Tuesday and will be a compromise of some sort, because there are two significant power struggles going on in Washington.

The NY Fed vs The FDIC
Will all of this Capital focused on Wall Street, the NY Fed is extremely powerful. So it has a vested interest to make sure that the Large Banks are not Nationalized, with their assets split up and sold to Regional Banks around the country.

The FDIC will benefit if these Large Banks are nationalized, as the FDIC would become the manager of the Bad Assets and the distributor of the Good Assets. How would you like to have the power to distributed $5 trillion of assets and $120 trillion of derivatives?

From what I am hearing, there is an internal battle within the Obama Administration, with Treasury Secretary Geithner (Former Head of the NY Fed) and Larry Summers on the side of the NY Fed and Wall Street and FDIC Head Sheila Bair and former Fed Head Paul Volcker on the side of the Taxpayer.

The US Taxpayer vs The Bank Bondholders and Shareholders
Who will pay to bail out the banks? It is clear that private industry has no desire to buy the assets off the books of the banks at their current prices. So the Government wants to force the taxpayer to buy this junk at the artificially high prices at which they currently are valued on the books of the banks.

Some people are now referring to this as the “PIMCO Bailout”. This is a reference to how the Government has been putting the Bondholder and Wall Street in front of the taxpayer. There are a couple reasons for this.

First, politicians are terrified of having another Lehman Meltdown. The bankruptcy of Lehman caused all of their debt to lose 91% of its value overnight and caused several Money Market Funds to fall below $1 per share. This led to the Run on Money Markets cited above.

Second, Bank Bonds make up a considerable percentage of the Corporate Bond market. The nationalization (de facto bankruptcy) of several large banks would cause significant harm to the portfolios of Pension, 401ks, Hedge Funds and the balance sheets of other Banks. The fear is that this would probably lead to yet another leg down in asset prices.

Third, the TARP bought a lot (about $300 billion) of Bank Preferred Stocks and the FDIC is insuring a lot of bank debt, so if you nationalize those banks, then the Fed loses all of that money overnight. Try explaining that in the next election…

Boxed Into a Corner
So the policy makers have painted themselves into a corner. They will either have to overtly harm the taxpayer via a massive bank bailout (Cost $3 – 4 Trillion) or admit to the taxpayer that they wasted $500+ Billion on the TARP and FDIC Guarantees.

The good news is that if they do have to nationalize (they do), then the consequences will not be so bad. This is because the Fed has taken steps to backstop Money Market Funds and has significantly increased levels of FDIC Insurance.

The bottom line is that Taxpayers, Stockholders and Bondholders will all have to pay to solve the problem of insolvent banks and insolvent consumers. On Tuesday, Geithner will tell us who gets hurt the most.

If it is a “Bad Bank”, where the Taxpayer gets none of the Good Assets and All of the Bad Debt, then the plan is nothing more than a several Trillion Dollar wealth transfer from Taxpayer to Bond/Stockholder.

If it is Nationalization, then the Bond/Shareholders lose and the Good Assets of the banks are used to help the Taxpayer to absorb the losses they will get stuck with as they take over the FDIC obligations of these failed banks.

I expect the Geithner Plan to be significantly weighted against the Taxpayer and in favor of his buddies at the Banks. We’ll see.