Thursday, April 2, 2009

G20

Who would have thought that the end of Marked to Market Accounting would be the boring news of the day…

The 810 Short Squeeze
Financial Ninja (a blog) did a piece yesterday on the importance of 810 on the S&P 500.
It was a critical resistance level and another point at which shorts would have stop losses on their trades. 810 held at the close on Wednesday, but the Futures rallied sharply overnight and opened in at 830. No doubt this causes a pretty nasty short squeeze as their stop loss – buy orders were triggered, adding fuel to today’s early rally.

http://benbittrolff.blogspot.com/2009/04/s-500-trend-is-down.html

That is how the game is played these days. It will be equally violent and merciless when it rolls over and retests the March 6 lows. Buyer beware here… I will be buying the retest.

The IMF agreed to print $750 billion of new money (via donations of newly printed money from G20 Governments). This is pretty brilliant, as it allows countries to all Quantitatively Easing (QE) together, thus avoiding another round of competitive currency devaluation.

At some point, the Money being created by Central Banks would surpass the money leaving the Financial System as investors decreased their leverage. We appear to be at that point. That is very bullish for stocks and commodities.

Gold Is The Enemy
The real brilliance of today’s announcement was that the IMF would sell its $104 billion in Gold to finance this latest bailout of 2nd and 3rd World economies. You see, Gold is the enemy to QE, because it offers an alternative to paper money (Fiat Currencies).

The G20 will try and artificially cap the appreciation of Gold for as long as they can, much as the Fed will artificially cap Interest Rates (The Fed buying US Treasuries). They will do so by continuing to threaten massive sales of Gold by the IMF and Central Banks. This will allow them to temporarily mask the true Inflationary damage their policies will bring to the purchasing power of their citizens.

While other Commodities rallied 7% today, Gold was down -2%. I am long Gold and will stop out if it breaks key support. That would put in a massive, one-year Double Top on Gold and may spell the end of the Gold Bull for several years. Stay focused if you own Gold.

I wrote the following on 1/07/2009 -“We now either face massive inflation, higher taxes or a default on national debt. There are no other options. I'm not being cranky. There are no other options, short of asset confiscation (like when FDR stole everybody's Gold in 1932). My job the next few years is to participate in any market appreciation, while paying attention to protecting capital from inflation and Dollar devaluation.

The powers that be will try and inflate one last Asset Bubble, first in US Treasury Debt and then in Real Assets like Gold and Commodities. But in the end, there will be nobody large enough to bail out the Treasury, when all of those rotten assets they bought turn out to be worth pennies on the dollar of what was paid to buy them (thanks PIMCO, Blackrock, et al).

Do you see why I am so reluctant to buy stocks right now? I just do my homework and then figure out how to position money. When the Big Boys start buying again, then I will hold my nose and start buying again too. But I will be a nervous buyer with one foot out the door for as long as the last great Asset Bubble carries us.”

It is playing out just as I feared. The end of Marked to Market will now allow banks to reprice their worthless assets at ridiculously high prices, allowing them to announce enormous profits in April. They will then sell this worthless junk to the Taxpayer (via TALF and PPIP) at near Par and walk away from their crimes and the consequences of their actions - RICH.

Here is an interesting letter from one of the World’s largest Hedge Fund managers. He is refusing to participate in the TALF/PPIP, because he thinks the whole thing is illegal and he is afraid of ruining his reputation when the public finds out how badly it got screwed –

“ …the plan isn't straightforward. Essentially it is to let private investors (PIMCO and Blackrock) buy these assets cheaply and to simultaneously let the banks sell them at high prices at the expense of the taxpayer.”

“We don't like the political/profile risks. If this plan gets scrutinized, which seems likely, there's a lot about it that could cause controversy. Maybe we are misunderstanding it, but from what we seem to understand, given all of these issues, it looks to us like the sort of thing that the S.E.C. and other regulators wouldn't allow if those of us in the private sector did it.”

http://www.businessinsider.com/henry-blodget-ray-dalio-why-bridgewater-wont-be-playing-tim-geithners-ppip-2009-4

Whalen on AIG
I don’t know if you have ever heard of Chris Whalen, but he is not some random blogger (like me), he is a very important player in the world of financial institution risk analysis.

His piece today is pretty insightful –

“In fact, our investigation suggests that by the time AIG had entered the CDS fray in a serious way more than five years ago, the firm was already doomed. No longer able to prop up its earnings using reinsurance because of growing scrutiny from state insurance regulators and federal law enforcement agencies, AIG's foray into CDS was really the grand finale. AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks. No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.”

http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=351

Oil and Semiconductors
I looked at a lot of charts after yesterday’s close and wanted to buy Semis and Energy if they broke some obvious resistance levels today. Unfortunately, both sectors popped over 4.5% at the open, so there was no way to buy them and still manage risk. These will be key areas of focus as the Bull Market gets cooking later this Spring.

Dry Ships (DRYS)
This stock is the poster child for what the markets have become. Here is the hourly chart of the last few days of trading. It has either gapped up or down (Green Boxes) at least 3.5% each of the last 11 days –

Wednesday, April 1, 2009

AIG Goes to Washington

The Government Accounting Office is now investigating possible felonies related to the AIG CDO theft -
“Mr Barofsky also said he was to prepare an audit of the decision to repay in full counterparties of AIG, the insurance group bailed out with $173bn of government aid.
The Government Accountability Office on Tuesday recommended the Treasury should demand “concessions” from AIG’s counterparties and executives “including seeking to renegotiate existing contracts”.”
www.ft.com/cms/s/0/275f67ba-1e31-11de-830b-00144feabdc0.html?nclick_check=1

Congress has been looking into it since 3/26 –

http://www.washingtonsblog.com/2009/04/congressional-committee-on-financial.html

Nobel Prize Winner calls Geithner’s Plan “Robbery” -

http://www.businessinsider.com/henry-blodget-nobel-laureate-stiglitz-geithners-plan-is-robbery-2009-4

“How’s side are you on” CNBC?

Faber admits that he knew the banks were padding their earnings numbers by having AIG over-pay for their bond portfolios –

http://market-ticker.org/archives/920-Hoh-Hoh-CNBC-Admission!.html

When you get Government intervention, you get inefficiencies in the system Government’s desire to make housing affordable to low-income citizens led to lax lending standards and incredible corruption at Freddie, Fannie, Coutrywide and the like. The system created thrived on an environment of massive leverage.

Now we are seeing the consequences of the Bailouts and easy-money from the Fed –

GM Bondholders are refusing to make concessions to the Government, so the Government is threatening to put GM into bankruptcy. The banks are calling Obama’s bluff, because they already went out and bought CDS (insurance) on the GM bonds they hold and the banks who sold it to them did so, because they know they will get bailed out via AIG or the TARP/TALF/PPIP!

So the guys who hold the GM bonds will be made whole, the banks who wrote the CDS will be made whole and the taxpayer will pick up the tab!!

Why do you think Derivates held at banks INCREASED by $24 trillion last quarter? Because they are worth their weight in gold with Obama/Geithner/Summers/Bernanke holding the checkbook.

http://www.creditwritedowns.com/2009/04/us-banks-derivatives-exposure-explodes-to-200-trillion.html

Goldman’s exposure to derivatives is now over 10 to 1 –

http://4.bp.blogspot.com/_H2DePAZe2gA/SdJv1tF5bsI/AAAAAAAAIxs/Pt6t2LqGIV8/s1600-h/derivativesbanks.jpg

We continue to sink deeper into the abyss…

The Populist Banking Backlash Has Begun

This is my fear -

http://www.alternet.org/workplace/134392/pissed_off_at_the_corporate_banking_industry_here%27s_an_easy_way_you_can_hurt_them/

To get tarred and feathered for the actions of the crooks.

I didn't start this stuff, I didn't cause this stuff, I managed money and risk properly and avoided the pain of the Bear Market. I will deal with this too...

I knew the public backlash would start and I figured that it would intensify as the level of theft at AIG became public knowledge. The AIG stuff is now going mainstream (Barron's, CNBC).

The AIG Death Threats really concern me! Non-TARP banks will be the only safe haven.

Tuesday, March 31, 2009

"Tape Painting"

I figured that they would try and pad their stats for the quarter.
The Dow was up 200 for a while and then got crushed into the close on decent volume –

The markets are also getting smacked around over night -

More overt manipulation and the Government couldn’t care less if the average investor gets hurt.

Monday, March 30, 2009

Watch the Insurers

http://www.bloomberg.com/apps/news?pid=20601103&sid=azkrwz39ygKo&refer=news

Lincoln Financial (LNC)
Lincoln blew up today after it announced that it does not qualify for the program allowing banks to issue bonds with FDIC insurance.

LNC was down over -38% today on all-time record volume! That is the Big Boys unloading – after the stock is down from $70 to $10.

Financials (XLF) lost almost -9% today. Insurance (KIE) lost almost -9%.

I figure that they will need to finance TARP 2.0 soon and the only way they will be able to ram it through Congress is to cause another panic. It would make since to use the Insurance companies as the excuse, instead of the banks everybody is so angry with.

Intel (INTC)
Intel is apparently trying to raise $1 billion by selling stock at half of last year’s high.

Commodities
So many of these stocks fell between -7 and -10% today. How can anybody in their right mind be buying anything right now, with that type of risk inherent to nearly all stock holdings?

Remember how they ran the Dow +300 points in one hour and nine minutes last week? Well, tomorrow is the end of the 1st Quarter, so expect prices to ramp up in Asia to juice prices higher for the benefit of mutual fund statements. The Dow was up 100 points in the last hour today. Let’s see how it plays out.

The weaker the rally, the less inclined the Big Boys are to hold any of the stuff they bought the last few weeks. In the mean time, we are in this no-mans-land when there is light volume and massive volatility. As prices fall, we need to see real buyers show up.

Sunday, March 29, 2009

AIG Stealing Taxpayer Money Explained

Read about how AIG was used as a conduit for passing cash from the US Taxpayer to major banks -

zerohedge.blogspot.com/2009/03/exclusive-aig-was-responsible-for-banks.html

The tar and feathers cannot be far behind...

Thanks Barron's...

http://online.barrons.com/article/SB123819638720161459.html?page=sp
“ONE OF THE BEDROCKS OF modern investing has been the surety that stocks outperform bonds over long periods. Stocks' risk premium, or excess return over bonds, has become gospel for financial advisers, brokers and pension consultants, among others.
A new research paper, however, urges investors to beware of that assumption, because stocks can trail bonds for very long stretches, as was the case in the market rout that began in October 2007.”

No fooling…It would have been nice for them to have printed something about how risky equities can be when the market was topping in late 2007. But they were writing stories about how great stocks were and how you could get rich holding real estate.

Stories like this are why I put the blog together. You need to know what to own and when to own it. You can’t get that by picking up a paper every Saturday. You need to put in effort each and every day and have a methodology and a strategy for how/when to make money and how/when to protect money.

The Vanguard S&P 500 Index Fund
Do you remember how easy it was to make money in this thing from 1994 - 2000?
I ran a hypothetical to illustrate how poorly stocks have performed over the last 10 years.

Assumptions –You invested $10,000 into the Vanguard fund on 2/28/1999
You reinvested all interest and dividends
You paid taxes on the interest and dividends each year

Your $10,000 was worth $6,996 on 2/28/2009
That is an annual return of -4.08%
You paid several hundred dollars in taxes
I ran this report, because I was doing the cost basis information for a client who was selling some mutual funds that he had held for 10 or 12 years and I was amazed to discover that he lost money. That is after he paid a ton of money in taxes on the gains each year. And we sold these funds in March 2008 and May 2008!

Very simply put – there are times to own risky assets and times to horde cash. I know when to be buying and when to be selling. I am obsessed with studying the markets.

Taking past performance and extrapolating it into future rates of return is dangerous. Here is the 100-year Dow Jones Chart from "The Big Picture".
We are in one of the red zone and may be there for another decade. So you had better know how to manage money or get somebody who does.