Friday, May 8, 2009

25 to 1 Is Reduced Leverage?

The Stress Test used a leverage ratio of 25:1 when determining the ability of a Bank to withstand bad economic times. That 25:1 ratio only takes into consideration the assets that the banks on “on the books” and does not consider the toxic assets the hold “off the books” (SIVs and other Enron-like accounting tricks).

The rule before 2004 was that banks needed to have a maximum ratio of leverage at 12:1.

The Fed wants the banks to “earn their way out” of the overhang of their toxic assets. There are only three ways to do this – economic expansion, inflation and steepening the Yield Curve (make short term rates low versus long term rates). The Stress Test only looks out two years, so if there is weak growth, then the banks will be forced to beg for new Capital.

The bottom line is that banks still have no capital and can’t lend. All the Geithner new speak has done for banks is buy them time in the graveyard before they get buried. Geithner knew that he could not go back to Congress to get enough new money (via TARP 2.0) to recapitalize the banks and he knew he could not generate enough political capital to Nationalize the insolvent banks. So he punted and chose Government-assisted inflationary growth over short-term economic hardship and future growth.

While banks take a number of years to slowly write off their bad debt, the creator of credit and lending will be Uncle Sam. How fast do you think the economy will grow with the Government making decisions about how to deploy a scare asset like Risk Capital?

The bankers won (does that surprise anybody with all of the money they threw at the politicians). That will mean if they turn things around, then the banks win big and if they fail, then the Taxpayer will lose again (TARP 2.0). Maybe that installs a Put Option on Bank Debt. I will have to think about that one…

Increase Aggregate Demand
The words of Bernanke echo in my mind. The words mean use Inflation to drive up the nominal numbers like Income, Consumption, Spending and Savings, while understanding that Real Income, Savings and Spending will at best stagnate or worse.

That leads me to Commodities, Commodity-Based Economies and Currencies, Metals and Foreign Currencies. But again, from a risk management standpoint, I have to wait before I enter these areas with new money – Impatiently Patient. I would rather buy a little higher and avoid a 1 or 2-day 7% pullback than buy now and hope things don’t pull back on Monday. I am note sure what other sectors actually get strong enough economic growth to justify owning them…

Again, look for the Fed to increase their allocation for US Treasury purchases in the very near term. That should help Gold and The Euro.

Thursday, May 7, 2009

Stress Test

I will only make one mention of the "Stress Test" tonight.

After the results were released, Morgan Stanley and Wells Fargo announced that they would sell stock tomorrow morning to raise money.

If you have any doubts that the entire "Stress Test" circus / short squeeze was done to do anything other than jack up prices to allow Banks, Insurance Companies and REITS to sell stocks to the public at higher prices, then you haven't been paying attention.

What really irritates me is the fact that some poor slob bought Wells Fargo today at the opening price of $27.95 or its early morning high at $28.34 on the CNBC's Midnight Madness version of "Stress Test" reporting - "who's side on you on man?"...

Wells Fargo is to price their new stock tomorrow morning for $20.50 to $22.00 per share. That means that you could be down 28% in a day, because the Government rigged the system to bail out the banks. And you wonder why US Treasury Bonds are broken and the US Dollar is on the verge of tanking.

Thanks for the "Change You Can Believe In" Mr President...

On a political side note, Obama actually looked into the camera today and said that we will have a $3.4(ish) Trillion Budget ($1.5 Trillion or more borrowed from our kids), but man is he doing a good job of cutting out $17 billion of waste out of the "discretionary" part of the Budget. I've got news for you, it is all "discretionary" if you have the guts and the votes...

Just another two-bit con man.

Is The Rally Monkey Sick?

A friend of mine told me the other day that it was bold to try and predict the future movement of the stock market. If I could have thought fast enough, my reply would have been something like the following –

It is not an exercise in predicting where the Market will be – I am never going to say that the Market will be at (blank) at the end of the year. What I try to do is look at how money is being deployed by Institutions large enough to move Market prices up or down. You can see when they are selling and you can see when they are buying.

From there it is an exercise in looking at current circumstances and comparing stock performance from times in the past that had similar fundamentals. I do this by reviewing the markets literally every night.

Selling in Spring 2008 was the result of experiencing the Crash of 2000 – 2003 and understanding how markets top. They top sector by sector, until there are no longer enough names to hold the markets up. My homework saved clients millions of dollars.

Markets bottom in a similar fashion. You get more and more sectors hold their lows and begin to rally on strong volume. You get more and more stocks with expanding earnings go up on increasing volume. Eventually you get enough names going up to drag the indexes higher.

From a tactical standpoint, when markets go too far too fast, they need to revert back to the norm. They do this either by selling off back to the norm or sitting around, while the norm reverts up to prices. The number I use is for the norm is the 50-day moving average, because that is what the majority of Wall Street uses. The S&P 500 opened today 13.5% above its 50-day. That is the farthest above it has been since the peak in October 2007.

The Forest
Even with the rally of the last 8 weeks, the S&P 500 is still over 8% below the 1-year average. The markets need time to work through all of the damage caused in 2008.

Comparing 2009 to 2002 – 2003
Each rally in the NASDAQ 100 (NDX) failed at the 200-day (Blue Line and Arrows). Buying at the 200-day has proven to be very costly the last two Bear Markets.
After hugging the 200-day for 5 months, NDX was finally able to break above it in March 2003. It took that long for stocks to repair the damage of the 2000 - 2002 Crash. However, eventually Big Money showed up and the new Bull Market began.
The signal that it was okay to buy was a combination of price breaking out, accompanied by the percent of companies breaking above their 200-day breaking out (Red Arrow) and the New 52-week High List exploding from 100 to 418 in about 6 weeks.

Each rally of the 2007 – 2009 Bear Market failed around the 200-day (Blue Line and Arrows). You would expect this rally to pause of fail at this level. Remember, NDX is up 8 weeks in a row and that has only occurred 3% of the time since 1985. So a pullback seems to be eminent.
Stocks above their 200-day is now at 44%, about where it failed in January 2003. New Highs is at 10. 10! 10!! This market may still need more time.

Several leading sectors got hit today. They had moved too far too fast and gotten to levels at which you would expect to see prices pause or pull back.

Here is the 30-minute chart of NDX
Today is the first daily close below the trendline off of March 16th. NDX could easily implode to 1,282 or you could see the futures gang come in tomorrow and gap prices up above 1,400 the open, suck in a bunch of shorts who stop out and then hit a few buttons to pop prices above 1,425 before you can drink your first cup of coffee tomorrow morning. We’ll see, but topping will probably not be a one-day affair with a 100 point crash.

I use a business consultant to help me identify the needs of my clients. What he told me most people are looking for in 2009 is somebody with a strategy to help them recover from all of the damage they sustained the last 18 months. I don’t have to deal with repairing fortunes, because I did my homework and protected them. That allows me to be patient.

We are now either in a Bull Market, or in the transition from Bear to Bull. I preferred to have confirmation and the ability to buy with defined risk, before really loading up. That means a pullback or a lateral consolidation is required.

Many key sectors and stocks (that I want to own) are now stalling at their 200-day (a logical place to rest) – QQQQ (the NDX tracking stock) OIH, XLE, XME, SMH. Technology, Commodities and Commodity-Based Economies will no doubt lead.

I think the move off of the March 2009 low is similar to the first rally off the 2002 low. So a pullback will need to be bought. We should get a secondary buy point soon (next few weeks?). It will occur as people who hold these stocks get tired and want out (get shaken out as over-owned names are sold with abandon). Even the 1982 and 1984 moonshots (V-shaped bottoms) had 2-day -7.5% selloffs and sat around for a week or two before launching higher. Losing 7.5% in two days would give some of my clients (and me) heart attacks, so I am patient…

The NASDAQ has been a leader and it is stalling. NDX sits 12.5% above its 50-day. Either price will pullback to the 50-day or the 50-day will catch up to price. Either way, I will get much better risk-reward entry points.
The recent rally sure looks a lot like the March – early June rally of 2008 (Green Lines). I will have that in the back of my mind as I watch how the pullback unfolds. If volume is light and price holds up well, then I will be much more bullish than if prices plunge on huge volume.
Logical support for QQQQ is the breakout point near $32 (1,280 for the NDX, or about 38% of the recent rally).

QQQQ will likely, because its key components are stretched far above their 50-day averages –

AAPL is 17% above its 50-day
RIMM is 30% above
BIDU is 25% above
NTES is 18% above
GMCR is 33% above

Yikes. If the key components are extended and likely to pull back, then you figure that the Index has a high probability of doing the same thing.

Are you starting to see how this isn’t guessing or predicting? It is homework. It is massive preparation and study. It is a process of reviewing the components of the Market and determining if the components (Stocks and Sectors) of the Market are likely to rally or pull back in the near term. It is a process of reviewing where the Market stands in relation to past moves and determining if there is a high probability of a reversal or an extension of a move. It is a discipline of knowing when to commit money, while risking as little as possible. Yet it is imperfect and that is why God made Stop Losses…

Failing Leader
Netflix (a former leader) is failing on bad volume patterns. It held the 50-day the entire rally and has now broken it on big volume.

Bull Markets are by definition when price pulls back into moving averages and then launches to higher highs. NFLX pulled back toward the 50-day three times during its rally (Green Arrows). On this most recent time, it failed and broke the 50-day on heavy volume. If you are inclined to short, then you would be looking for the 50-day to roll over and you would look to short rallies into the now declining 50-day (a Bear Market by definition).

I am not advocating buying or selling/shorting NFLX. I’m just telling you how Bull and Bear Markets appear on charts.

In commodities, a similar bellwether would be FCX – if it breaks the 50-day on volume, then my perception of the health of commodities changes too. But I will worry about that if it occurs (I don’t think it will). See how FCX tried to rally during mid-2008, but the rallies failed near the 50-day (Red Arrows)?

They lead moves, but up and down. The sector is -5% today on what will be massive volume. That is a lot of people all heading for the doors at once. They will most likely sell off what they want to sell off, very violently over a few day or one/two week period.
What scares me is that the recent rally looks exactly like the early 2008 rally (Green Arrows). Both rallies had near-vertical moves into the 200-day (Red Lines and Blue Arrows).
All I can tell you is that the $16 area had better hold for SMH, or we are hosed!

Oil Service (OIH) is at its 200-day. It should be a leader for the first part of the Bull Market (if not the entire thing). I figured that it would pause here and debated selling it yesterday. I chose to hold it, just in case they ramp it higher, without looking back. My goal is to continue to add to it (not a recommendation, just my mind wondering).

Energy (XLE) hit its 200-day this morning and failed. OIH is outperforming XLE, so I will focus more money into OIH than XLE.

Metals (XME) are stalling right above the 200-day. XME is at the top of my buy list, and I am hoping for a pullback towards $30. XME is down -4.5% today.

Gold is in a 14-month base. The last base was 16 months and led to a 40% rally. I will be looking to commit large sums of money to Gold and leveraged Gold producers (but remember, Gold is highly manipulated by Central Banks, so the base could take longer and be more violent than you would expect it to be).

I have draw in what may end up being a massive Inverse Head and Shoulders pattern. A break above the $100 area for GLD ($1,000 an ounce for Gold) would be very Bullish.

China (FXI) has been a leader since late 2008 (sort of reminds me of Semiconductors). But I wanted to show you the size of the rally in relation to the magnitude of the Bear Market. FXI has only been able to recapture about one third of the crash.
I would like to buy a pullback into the old base, starting around $31.

US Treasury Bonds
They got slaughtered today on big volume. There is simply too many Bonds being created by the US Treasury for markets to be able to buy. The last $171 billion of auctioned Treasuries are now under water (sounds like the Real Estate market…). Investors are not willing to buy at these horribly low yields, so prices are falling hard (down -2.25% today!).

I circled the Quantitative Easing announcement (Green Circle) to show you how the Fed’s $300 billion commitment was quickly overwhelmed by the new supply coming on line each month as Obama spends an extra $2 trillion this year of money we don’t have to buy assets nobody wants, at prices nobody else is willing to pay and gives the rest to his political cronies and contributors.

The Fed may have to act soon. They dropped the ball when they did not expand the QE commitment at the last FOMC meeting. Gold and the Euro seem to be pricing that in. A surprise expansion of QE would also be great for Commodities and risky stocks. So it may take a few more days of selling before the Fed acts, because all they do seems to be designed to prop up stock prices…

So the setup is there for a pullback of undetermined time and price. The violence and volume of the pullback will help me determine how bullish to be about the rest of 2009. I’ll keep you posted.

Wednesday, May 6, 2009

Connect The Dots

Who Wrote The Most Mortgages

Who Made The Most Political Contributions

Who Received The Most Bribes (er, Contributions)

This is your list when you are looking for whom to hang when the Dollar crashes and they confiscate all of your Gold...

I think the biggest result of the “Stress Test” process has been the redefinition on how bank solvency is defined. We have moved from solvency being excess “Capital” to solvency being defined as excess “Equity”.

The key is that Capital can only be generated by adding new cash and Equity can be derived by converting Preferred Stock into Common Stock. Therefore, the Stress Test proved itself to be a bunch of accounting bulls**t. Did you expect anything less?

Moreover, the way the test was conducted, with banks lobbying regulators to get a better grade and each round of testing leaked to CNBC, WSJ and Bloomberg has made a mockery of Securities Laws and the tradition of an independent oversight system. Wall Street rules Washington and its politicians.

Dot Com Dow
This all reminds me of when I lived in The Silicon Valley in the late 1990’s. A buddy of mine ran a start up and he told me a story about taking his company public. He had a CFO who was used to doing things the right way – he wanted to take the company public after the company showed Earnings.

But the Market couldn’t have cared less about Earnings (profitability). There was simply a feeding frenzy, where IPOs were valued based on whether or not they were going up. In the end, they had the wrong CFO, because the rules had changed and the CFO hadn’t changed with them. Also in the end, worthless companies became worthless stocks and shareholders were left with massive losses.

Crony Socialism
I’m telling you right now – the old rules no longer apply. It is the Wild West of Socialism (Fascism?), where the Government, the Media, Corporate Leaders and Regulators are all in bed together. Some are trying to save the World (the end justifies the means) and others are just trying to get rich.

Larry Ellison and his buddies issued a fake IPO in 1999 called HeyIdiot.Com. He issued certificates and made fun of the fact that his bogus company had zero revenue, zero earnings and therefore should trade at $100 per share. Its only business was to sell its own shares – a “cash portal” (lol)…

Today’s market has become another Tech Bubble, where banks can create their own earnings with the blessing of the Government. Asset Price Appreciation is Obama’s (and Bushs’ and Clinton’s) greatest policy weapon and he will milk it for all he can.

Deja Vous All Over AgainThe point I am trying to get to is that we have seen this before where people blind themselves to economic reality, but look to buy high and sell to a greater fool at a higher price. That is how you got rich since 1994. I am afraid that we are once again into one of those cheap credit, speculation driven environments where fundamentals don’t matter – just buy what is going up, because it is going up (isn’t that what Cramer tells you to do)…

We were goofing on the idiocy of the Tech Bubble in early 1999, but you had to play to keep up with the Jones. We laughed at the part-time hairdresser who bought the million dollar house with 100% financing. Investors weren’t laughing in 2000 in San Jose or 2007 in Irvine. I know – I was there!

We will soon be goofing on the idiocy of Banks that make loans, yet have no Capital and how somebody is dumb enough to buy a 30-year US Treasury with a 5% Yield, when we all know that the Government CPI is 2%, but the real CPI is more like 10 or 12%. We will look in awe as some Commodity-based Stock Market rallies 600% in a few years, even though we know that the Fundamentals make the move impossible to sustain.

It has happened before and Obama is banking on the fact that he can invent enough Dollars to make it happen again. The same skill set that helped me avoid the disaster that was 2008 will also allow me to protect money when this US Treasury Bubble pops. My fear is that there is nobody big enough to bail out the Fed when it goes insolvent, sometime during Obama’s second term. This is the last Bubble.

Monday, May 4, 2009

S&P 500 Now UP on the Year!!

I can only imagine the antics of Cramer on TV today. You know that he called the bottom? All dozen of them...

Even though I have been minimally invested for the entire rally, I am underperforming by about 1% Year-To-Date. All of those sleepless nights I missed because I was in cash… The fact remains that the S&P 500 is only at 900 and has to get back to 1,550 to recover its old All-Time High.

My accounts are at or within a percent or two of their All-Time Highs. I can sit out the next 600 S&P points (a 67% gains from here) and still be ahead of the game –that is not going to happen, but illustrates how much catching up the markets have to do with those of us who know how to manage risk.

The NASDAQ is now up 8 weeks in a row. There have been 5 longer streaks since 1985 (3% of all sample sizes). I think that puts us 3 Standard Deviations away from the norm and that always leads to a nasty reversion back to reality.

Maybe this time is different (but it’s never different). It’s simply a question of when, not if.

One question I will ponder tonight is as bad as Massive Inflation would be, what if Deflation wins?

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 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), 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).

My goal is to build significant positions in Gold and Silver on breaks above resistance.<

Put on Your Rally Cap?

The markets hit obvious resistance on Friday and failed to break out - even with a 70 point ramp in the last few minutes of trading on the Dow.

I think people were afraid of commiting Capital ahead of the "news" of the "Stress Test" to be "released" on now Thursday (or will it be pushed back yet again). But the tests were never designed to do anything but provide cover for the FASB change of Marked to Market.

I never figured that a bank would actually a "fail" the "test", because the tests were designed and performed by the banks themselves, they used "worst-case-scenarios" that are actually better than the current economic data and they would allow banks to extrapolate their current (artificially inflated) quarter earnings as the baseline for future earnings. You can't make this stuff up...

On Friday, the word was that even with all of the flaws of the "test", Bank of America and Citigroup were still going to "fail" and need to raise Capital to stay solvent. Things really are that bad at these banks. But after a weekend of lobbying (and probably a few million in Campaign Contribution promises), these banks are now declaring that they need no more new capital.

And the markets are rallying. There is a reason why I wanted to short on friday but didn't... But the short setup will come soon enough.

The accounting bs does not change the fact that the banks are still insolvent and cannot lend. So where does the lending come from to move the economy forward?

Moreover, who wants to lend money (and thus own bonds) when Obama has made the Junior Creditors (The Unions) at Chrysler, more senior than the Senior Creditors (Private Investors)?

The Government continues to take over and foul things up. Each stupid policy decision has more painful future consequences. That will only crimp future growth, not increase it.

Sunday, May 3, 2009

Impatiently Patient

I mentioned a few months ago that my goal in this Bear Market was to try and figure out how to play the inevitable counter-trend Bear Market Rallies. They were sharp and exciting and if you could time things perfectly, you could make a fortune. Volatility made this too difficult of a plan to execute. This sure looks like a lot of Bear Rallies past.

This is the 4th moon-shot rally (Green Lines) into the 30-week moving average (Orange Line) of the Bear Market. The last Bear Market also had 4 of these sharp rallies.

If we replay the 2002 – 2003 Bottom, then this rally will fail soon and a retest of the March 2009 low will occur. I think that scenario is the most likely, so I am waiting before I commit capital – besides, the volatility intra-day scares the heck out of me.

What amazes me is that even after this incredible rally, the S&P 500 is still DOWN -2.85% on the year. Can you image going through that incredible selloff and then that incredible rally and still being down on the year? Yikes…

Liquidity In Pictures

I saw an interesting chart this weekend and I wanted to review it. It was described as “The Liquidity Ratio”.

The chart compares the 30-Year US Treasury with the 3-Month US Treasury. When the number is high, it means that the Fed has driven short term interest rates low in an effort to flood the system with cheap Capital and increase economic activity.

It also means that long-term interest rates are high relative to short-term rates. This is how banks make money – they borrow short-term money via CDs and Money Market Funds and make long-term loans like 30-year mortgages and 5-year Auto Loans. So when the number is high, banks are borrowing from you at near zero % and making loans at several percentage point higher rates.

Even better for the banks, when they are leveraged up 30 to 1, they can borrow $1 million at 0.25% and then loan out $30 million at say 5%. The complaint about the Federal Reserve has always been that it and the banks it blesses have an effective monopoly for creating money and charging for it. How do you not make money in that business? Oh, that’s right, you get too highly leveraged in junk and run out of capital when the losses hit your Balance Sheet.

Here is the chart -

is the 30-Year Treasury Yield
$IRX is the 3-Month Treasury Yield
$TYX:$IRX is the differential between the two

When the number is rising, $IRX is falling away from $TYX. For the majority of the last 50-years (if not more, that is where my data stops) this ratio has been between 0.5 and 1.5. It spiked to 2.5 in 1992 when Clinton came into office and needed to finance his tax increases, thus leading to Greenspan’s “Irrational Exuberance” speech later in the decade. Maybe a little more action (raising rates?) and little less talk would have been a better idea, eh Al…

After 9/11, the Fed hit the panic button and the ratio went to almost 6! Super-cheap money led to a bubble in Real Estate and a reflation of the Stock Market.

This time around, the Fed panicked in August 2008, driving short term rates to near zero.

In December 2008, the ratio actually got to over 500! The number going parabolic is the definition of massive liquidity being pumped into the system. I had to break the charts up into segments, because 500 is so high, that is skews the other data points.

Here is the chart of the Liquidity ratio with the S&P 500. Do you see how the ratio was ramped up to 6 when the markets crashed in 2002?

How scared do you think the Fed was when they ramped the ratio to over 500 in late 2008? Holy Cow!

What scares me most is that the Fed has done nothing to decrease the issue that caused the 2008 Panic – Massive Leverage in worthless securities. We enter this new potential recovery with several Trillion Dollars more Debt than we had when we entered the crisis. The new bubble is US Treasuries. We are toast…