Wednesday, April 8, 2009

We Got a Pullback – Now What?

The move off of the March bottom was very sharp and did not offer any entry points with decent stop loss points.

We appear to be in the transition phase from Bear to Bull. It may take another few months before we get a sustained rally, or it may just gather strength from here. Only time will tell on that.

I see more setups than I have seen since 2006.

The good is focused in Technology, Commodities/Energy and Commodity-based Economies. That is where I am focusing.

New Bull Markets have ALWAYS been led by Semiconductors, Materials and Financials.

New Bull Markets ALWAYS begin when the news is terrible, just as Bull top on the best of news.

Here are some decent looking charts –
Semiconductors (SMH)
Even though price is still where it was in October, the SMH has had over 5 months to repair the damage of the Bear Market.
There is a ton of volume now directly below the current price (Green Line and Arrows) and the 50-day is now curling up (Black Line), offing support to price.
There is very little volume between here and $27. That means there are few people who will be getting back to even and looking to sell on a rally.

Applied Material (AMAT), Intel (INTC), Lam Research (LRCX), Varian Semi (VSEA), MEMC (WFR) and Atheros (ATHR) all look the same as SMH

Nvidia (NVDA) and Sandisk (SNDK) look better, with the 50 day and the 200 day about to cross (that is the definition of a Bull Market

Texas Instruments (TXN), National Semi (NSM), and Maxim Integrated Circuits (MXIM) are very close to breaking out

This is the first time in a long time that so many members of the group have looked so potentially bullish. This setup may still require a few more months, but I am getting to the point where I am considering scaling into positions a little at a time for the next few months.

Software (SWH) looks similar

Internet Stocks look even better (HHH)

Materials (the raw materials that go into a building)
Steel (SLX) looks a lot like SMH

So do Oil Service companies (OIH)

And so do Commodity-Based Economies (ILF)

Asia Ex-Japan and China look similar

At some point, Big Money is going to come in and either rip this stuff to the upside on massive volume, or tank it again on massive volume.

I will use Long Term Relative Strength charts to keep me in lock step with Big Money and what they are buying.

I will show you Relative Strength in my next post.

TARP Oversight Report

What is Treasury's Strategy? Liquidate, Subsidize or Nationalize

Liquidate - Transfer depositors to other banks, fire managers and nuke shareholders
Clear and decisive, but politically tough

Nationalize - Take over, re-capitalize and reorganize - The Swedish Model
Return to private hands quickly

Subsidies - The Japan "Lost Decade" - buy bad loans with taxpayer money at inflated prices
May be open-ended, propping up banks indefinitely

Success required ALL of the above -
1. Transparency - Insist on the trust about what assets are worth
2. Assertiveness - Take decisive action to address failure - close what can't be saved
3. Accountability - Hold management accountable - replace and prosecute
4. Clarity - a clearly defined government response - full disclosure of all assistance and clear reasons for spending Taxpayer Dollars

How has Treasury done the last 6 months?
Subsidies have "failed to provide Transparency, Accountability AND Clarity."

PPIP could remove bad assets, but the complexity of the program could hurt the taxpayer and greatly benefit a few large banks.

$590 Billion of TARP spent. $1.3 trillion from Federal Reserve. Has it worked?

So far, Treasury has focused only on subsidies. Treasury thinks that the crisis is temporary. If it is not, then you have to consider "alternate approaches".

We all now know what has transpired. I think the real issue is that at some point, the amount of money being forced into the system will overtake the amount of money leaving the system (via deleveraging). At that point, we will get an economic recovery. We most likely crossed that threshold 4 weeks ago.

You can read the report here -

The New Math that is PPIP

Since January 1, 2008, the FDIC has held auctions to sell 312 Commercial and Residential Real Estate Loans that were owned by the banks taken over by the FDIC.
The average sale price for each loan was 56.3 Cents on the Dollar
There were another 348 Commercial Loans that had stopped performing (paying no interest). They sold for an average of 32 Cents on the Dollar
Some loans sold for as little as .02 Cents on the Dollar

Banks are pricing this stuff at an average of 96 Cents on the Dollar. And even at that price, banks run the risk of being declared immediately insolvent.

Under the Geithner PPIP Plan, the Government assumes that this stuff is worth 84 Cents on the Dollar.

To date, there are ZERO bidders who want to participate in PPIP. Why would you risk any money where you are buying something at 84 that is worth 32 or 56 or 2?

If you are a Bank, then why would you sell at 84 when the Government lets you invent the price at 96 or higher? You know that you are insolvent the second you price this stuff at 84. Then you get fired and maybe prosecuted. So instead, you lie about the price and try and milk a few more years of comp as the CEO. Then you leave with some massive severance package and leave cleaning up the toxic waste to somebody else. They should rename TARP “Superfund II”…

These guys live in Fantasy Land. There is no way that the banks are solvent. There is no way that they will lend and there is no way that Obama has the guts to do what is right and protect the taxpayer and get the economy moving forward again.

We are stuck until these guys stop lying and start trying to fix the problem.

Municipal Bonds and Pensions

Today Moody’s downgraded the ENTIRE US Municipal Bond market. That’s right, every single municipality and state in is now on credit downgrade watch. Holy smokes!

Maybe this the buy signal… Maybe news has gotten so bad that it can get no worse. Maybe tonight, Cramer will get on CNBC and tell you how you have to buy muni bonds…lol

The issue for municipalities is that tax revenues are way down and the promised pensions to public employees are massively under-funded.

The average Pension was down 38% last year and is now at approximately 50% of the asset level needed to pay for all of their promised pension obligations. Sounds like Social Security to me.

The key is what just occurred in Vallejo, CA. Vallejo filed for Chapter 9 bankruptcy to all them to go to court and have the judge break their old pension contracts and renegotiate them to a more realistic level.

Since 1937, more that 564 municipalities have filed for Chapter 9 protection, and a judge in California just declared it to be a legal procedure for breaking and renegotiating pension obligations.

So I have to think that many municipalities are looking at this option, because at some point you have to determine who to rescue – the taxpayer, their kids or the public employees. You know at some point there is a tax revolt and the public employee gets thrown under the bus. So they will have to either cut their benefits or contribute a lot more of their current income to future pension obligation.

It should be an interesting summer as 2011 budgets are debated. With the Vallejo ruling as a precedent, municipalities will be able to force concession from labor or they will go Chapter 9. That will put a tremendous amount of stress on the Muni Bond Market.

People will be retiring a lot later and a lot poorer than they thought they would.

Insurance Companies Now to Get TARP $$

You knew this was coming...

The insurance industry used investors' money to buy lots of toxic assets and get lots of fees by insuring the toxic assets bought by the rest of the banking industry. Their balance sheets are disasters. It was only a matter of time before their was a run on the industry.

So, congratulations Mister Taxpayer, you are now the proud owner of a bunch of insurance companies at a much too high price. But, sadly, the alternative is far worse.

Geithner's Long Weekend

The weekend started out for the Obama/Geithner Plan and only got worse –

On Friday night, William Black (a former big wig in prosecuting the Savings & Loan Crisis) was interviewed on PBS by Bill Moyers. It is a fascinating interview. You should watch it and send the link to your friends. Here are some excerpts -

BILL MOYERS: Is that what you're saying here, that it was in the boardrooms and the CEO offices where this fraud began?
WILLIAM K. BLACK: Absolutely.
BILL MOYERS: How did they do it? What do you mean?
WILLIAM K. BLACK: Well, the way that you do it is to make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you're a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there's going to be a disaster down the road.

WILLIAM K. BLACK: Liars' loans mean that we don't check. You tell us what your income is. You tell us what your job is. You tell us what your assets are, and we agree to believe you. We won't check on any of those things. And by the way, you get a better deal if you inflate your income and your job history and your assets.
BILL MOYERS: Is it possible that these complex instruments were deliberately created so swindlers could exploit them?
WILLIAM K. BLACK: Oh, absolutely. This stuff, the exotic stuff that you're talking about was created out of things like liars' loans, that were known to be extraordinarily bad. And now it was getting triple-A ratings. Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant (risk), it has crushing risk. That's why it's toxic. And you create this fiction that it has zero risk. That itself, of course, is a fraudulent exercise. And again, there was nobody looking, during the Bush years. So finally, only a year ago, we started to have a Congressional investigation of some of these rating agencies, and it's scandalous what came out. What we know now is that the rating agencies never looked at a single loan file. When they finally did look, after the markets had completely collapsed, they found, and I'm quoting Fitch, the smallest of the rating agencies, "the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined."

BILL MOYERS: So if your assumption is correct, your evidence is sound, the bank, the lending company, created a fraud. And the ratings agency that is supposed to test the value of these assets knowingly entered into the fraud. Both parties are committing fraud by intention.
WILLIAM K. BLACK: Right, and the investment banker that — we call it pooling — puts together these bad mortgages, these liars' loans, and creates the toxic waste of these derivatives. All of them do that. And then they sell it to the world and the world just thinks because it has a triple-A rating it must actually be safe. Well, instead, there are 60 and 80 percent losses on these things, because of course they, in reality, are toxic waste.

BILL MOYERS: What did AIG contribute? What did they do wrong?
WILLIAM K. BLACK: They made bad loans. Their type of loan was to sell a guarantee, right? And they charged a lot of fees up front. So, they booked a lot of income. Paid enormous bonuses. The bonuses we're thinking about now, they're much smaller than these bonuses that were also the product of accounting fraud. And they got very, very rich. But, of course, then they had guaranteed this toxic waste. These liars' loans. Well, we've just gone through why those toxic waste, those liars' loans, are going to have enormous losses. And so, you have to pay the guarantee on those enormous losses. And you go bankrupt. Except that you don't in the modern world, because you've come to the United States, and the taxpayers play the fool.

BILL MOYERS: Why are they firing the president of G.M. and not firing the head of all these banks that are involved?
WILLIAM K. BLACK: … But the other element of your question is we don't want to change the bankers, because if we do, if we put honest people in, who didn't cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up.
BILL MOYERS: The cover up?
WILLIAM K. BLACK: Sure. The cover up.
BILL MOYERS: That's a serious charge.
WILLIAM K. BLACK: Of course.
BILL MOYERS: Who's covering up?
WILLIAM K. BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have masses losses, and that they're fine.

WILLIAM K. BLACK: Until you get the facts, it's harder to blow all this up. And, of course, the entire strategy is to keep people from getting the facts.
BILL MOYERS: What facts?
WILLIAM K. BLACK: The facts about how bad the condition of the banks is. So, as long as I keep the old CEO who caused the problems, is he going to go vigorously around finding the problems? Finding the frauds?
BILL MOYERS: …Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?
WILLIAM K. BLACK: Absolutely.
WILLIAM K. BLACK: Absolutely, because they are scared to death. All right? They're scared to death of a collapse. They're afraid that if they admit the truth, that many of the large banks are insolvent. They think Americans are a bunch of cowards, and that we'll run screaming to the exits. And we won't rely on deposit insurance. And, by the way, you can rely on deposit insurance. And it's foolishness. All right? Now, it may be worse than that. You can impute more cynical motives. But I think they are sincerely just panicked about, "We just can't let the big banks fail." That's wrong.

BILL MOYERS: But what might happen, at this point, if in fact they keep from us the true health of the banks?
WILLIAM K. BLACK: Well, then the banks will, as they did in Japan, either stay enormously weak, or Treasury will be forced to increasingly absurd giveaways of taxpayer money. We've seen how horrific AIG -- and remember, they kept secrets from everyone.
WILLIAM K. BLACK: … The Bush administration and now the Obama administration kept secret from us what was being done with AIG. AIG was being used secretly to bail out favored banks like UBS and like Goldman Sachs. Secretary Paulson's firm, that he had come from being CEO. It got the largest amount of money. $12.9 billion. And they didn't want us to know that. And it was only Congressional pressure, and not Congressional pressure, by the way, on Geithner, but Congressional pressure on AIG.
Where Congress said, "We will not give you a single penny more unless we know who received the money." And, you know, when he was Treasury Secretary, Paulson created a recommendation group to tell Treasury what they ought to do with AIG. And he put Goldman Sachs on it.
BILL MOYERS: Even though Goldman Sachs had a big vested stake.
WILLIAM K. BLACK: Massive stake. And even though he had just been CEO of Goldman Sachs before becoming Treasury Secretary. Now, in most stages in American history, that would be a scandal of such proportions that he wouldn't be allowed in civilized society.
BILL MOYERS: Yeah, like a conflict of interest, it seems.
WILLIAM K. BLACK: Massive conflict of interests.
BILL MOYERS: So, how did he get away with it?
WILLIAM K. BLACK: I don't know whether we've lost our capability of outrage. Or whether the cover up has been so successful that people just don't have the facts to react to it.

After this wonderful interview, an article appeared in The Guardian newspaper in the UK, discussing how the loses in TARP have increased from $189 billion to $356 billion in two months. The article goes on to say that the chief watchdog for TARP, Elizabeth Warren, will issue a Congressional Report this week that will call Geithner’s Plan a failure, will advise firing the key executives at the biggest recipients of TARP funds and will advise these banks be nationalized and their shareholders wiped out. Otherwise, we become Japan.

On Sunday Morning, Geithner went on CBS and told the world that he would consider firing the CEOs of banks who received NEW money, thus implying that everybody who already received money was safe...

All the stuff I have been ranting about is, sadly, being validated. The crooks are running the show, squandering trillion in Taxpayer money to prop up insolvent banks that will not be able to lend for years. The shareholders and bond holders win, but the taxpayer gets ripped off and the economy stagnates.

This afternoon, it was announced that an investigation of the AIG money laundering program would be investigated by the TARP Inspector General. Congress is forcing his hand.

Daily Stuff

Royal bank of Scotland did stock offering today to existing shareholders and 0.7% of the offered shares were bought.
The UK Treasury currently owns 70.3% of RBS and will buy the remaining 99.3% of the shares of this offering.
RBS rallied over 30% last week when it declared that it passed the UK version of the “stress test”. If anybody believed RBS were solvent, then they probably would have bought some shares here. But they voted with their wallets and chose to buy no more stock.
I think the UK “stress test” is a bunch of bs and so is ours.

This week Kimco Realty did a stock offering for $700 million thorough Merrill Lynch.
The day before the offering, the analyst at Merrill raised his rating on Kimco.
All of the proceeds from the offering were used to pay Merrill Fees and to repay Kimco’s line of credit to Merrill.

That has to be illegal, but if the FDIC can break the law, then why can’t a company like Merrill?

TALF is not working as planned
TALF was supposed to jump start securitization lending, by allowing lenders a place to sell new loans. So far, it has only had to buy a few Billion in new loans.

So maybe the real crisis right now is that people aren’t borrowing. That would make this a crisis of Demand and not a crisis of Credit. The problem is that most of the efforts of the Government have been designed to increase the availability of Credit (Supply), when the facts are starting to show that the efforts should be focused on increasing Demand.

This tells me that you can try and bail out the automakers, but it won’t help. The reality is that there is too much capacity and until you mothball a lot of factories and a lot of workers, Supply will be too big for Demand and they will lose money.

PPIP an Epic Failure

With the end of Marked to Market, banks know they can lie about the price of the bonds they hold, so they don’t need to sell them to the Government. Moreover, they won’t want to sell them for fear of raising eyebrows about how high they are pricing these assets.

So removing Marked to Market rules saved the taxpayer a $1 trillion (thanks FASB), but has done nothing to change the real problem of banks not being solvent enough to make new loans.

Barron’s has its doubts

The FDIC is funding the TALF so that they Obama Administration doesn’t have to go back to Congress and beg for more money.
The NY Times shows how this is beyond the mandate of the FDIC – it is illegal.

Special Drawing Rights
Thanks to last week’s G20 Meeting, we now have a de facto Global Currency – Special Drawing Rights (SDR).

The G20 promised to print $250 Billion of this new currency. Expect this to be the first of many rounds of printing.

It is actually a brilliant move, because it allows the G20 countries to cause inflation without getting into a situation of competitive devaluation – where countries are forced to print money because other countries are printing money.

It is actually not a bright move because it is worthless paper, not directly backed by a specific country. It also has the potential to be overused and will be hard to unravel when inflation gets rolling again.