Friday, July 10, 2009


UBS says that it is bound by Swiss law to not divulge the names of some 52,000 US Tax Cheats.

“Oswald J. GrĂ¼bel, the chief executive of UBS, sent a memorandum to the bank’s top executives on Thursday saying that turning over the names “would require UBS to violate Swiss criminal law, and we simply cannot comply,” according to a copy of the document.”

The Swiss Government says that it will confiscate the list of names before it allows UBS to turn them over.

So What Do The Swiss Banks Do?
They hire a bunch of lobbyist and start carpet bombing Washington with bribes, er “Campaign Contributions” – the American Way! These Swiss guys learn fast…

They also are threatening the very Stability of the Banking System itself - “financial instability could be threatened. A big bank with a severe problem will hurt the stability of the financial markets and the global economy…” These Swiss learn fast… Maybe they hired Paulson to be a lobbyist.

The Swiss are calling Team Obama’s bluff. Now, the Judge presiding over the case is asking them point blank, how far are they willing to take this?

“Alan Gold, the US district judge presiding over the case, late on Wednesday gave the US government until midday US time on Sunday to clarify whether it might go as far as seizing assets of the bank’s US operations, or forcing them into receivership, should the court rule against UBS and the bank not comply.”

It should be a fun (and profitable) weekend on K Street.

California Goes QE (Quantitative Easing)

It’s official, the SEC has declared California IOUs to be “Securities”. In effect, California has created a new currency. You can use IOUs to pay for goods and services, as well as to pay for your fees and taxes owed to the State of California.

We’re hosed. Now these guys never have to pass a budget. They can just keep printing “money” and spending like a drunken sailor. Think about it. If the State is short a few Billion, all they have to do is crank up the IOU Printing Press and poof, no more shortfall. Holy cow…

Wait until Spain, Italy and Ireland figure out this trick to get around the restrictions on the Euro!

The Downside to CA QE
As California prints more IOUs, its Credit Rating will continue to fall. Fitch already has California rated at the last level above Junk. So it won’t take the printing of much more money to move California General Obligation Debt (GO Bonds) to the status of Junk.

A lot of Institutional Investors are unable to hold Junk Debt, so when California GO Bonds are downgraded to Junk, these holders will be forced to sell. In September of last year, the bonds of many banks were on the brink of being downgraded and their bonds got blasted as investors sold them with abandon.

I looked at the Franklin Cal Tax Free Income Fund (FKTFX) and read that it normally invests 80% of its holdings in “Investment Grade” bonds. I looked through the fund’s top holdings and there is a lot of CA GO Bonds. If these guys are forced to sell, by mandate of their prospectus, then who will be around to buy the bonds?

Proposition 98
There are two sacred cows in California – Education and repaying Municipal Bond Interest and Principal. Did you see where California is trying to figure out how to get around Prop 98? Prop 98 mandates that about 40% of the California State Budget goes to education. California now has the lawyers trying to figure out some new math to get them out of Prop 98.

So where does that leave sacred cow #2?

When in Doubt, Don’t Actually Do Something Constructive, Go to Court
There is now a lawsuit to try and remove the 2/3 vote to pass to new taxes. Just stop spending so much damn money and you won’t have to go to court to supersede the will of the people!

Wednesday, July 8, 2009

Is There Any Wonder Why I Left the Wirehouse Scene?

Morgan Stanley
Morgan Stanley is taking junk CDO paper, splicing it up and is trying to sell a trunch of it as AAA paper...

This is the same securitization game that blew up the economy. But thanks to a Team Obama replete with Wall Street hacks, they are trying to get Humpty Dumpty back on the fence again.

UBS - Paine Webber
The IRS and the Swiss Government are in a duel over the release of Swiss Bank Account data to help the USA prosecute tax cheats.

The US Justice Department wants info on UBS clients and the Swiss Government is threatening to confiscate the data.

The logical end game is for the US to simply pull the banking license from UBS to prevent them from doing business here. If you have an account at UBS/Paine Webber, you should be a little uneasy right now...

Rassmussen On The” Stimulus”

Stimulus 1.0
45% say that the unspent money should be cancelled
31% said it helped the economy, 30% said it hurt the economy
76% say there is waste and fraud

Stimulus 2.0
60% of voters oppose it
45% of Democrats favor it

Democrats rule Washington, so that may make passage of Stimulus 2.0 easier than it seems. However, in order to sway public opinion, it may take a nasty financial shock (stocks prices tanking, California hitting the wall with reality, a major bank going under…)

Full Court Press 2.0
Paul McCulley (PIMCO) is now for it –

Steny Hoyer (#2 House Democrat) likes it –

Obama likes it

Tuesday, July 7, 2009

Tops and Bottoms...

Here are Charts of 2002-2003 and Today
Early last year, I went to the companies whose 401k’s I manage and I told the participants that the Stock Market charts looked eerily similar to the way they did back in late 2000 (I even used the Neon-Green Boxes to illustrate what I thought would play out). I was not expecting the collapse to occur as quickly as it did, but I figured that the lows of 2002 could be revisited.

Now the chart looks a lot like it did in the 2002-2003 bottoming process (Dark Green Boxes). The markets could be replaying the Bear Market bounce of late 2001 (Purple Box), but I don’t think that is what is occurring. Mostly I mention this, because the 800 level (Black Line) is such significant support. Granted, Team Obama could use a break of 800 as a method for causing enough panic to get another “Stimulus” Bill passed, so nothing will surprise me.

Let’s see how this plays out. I am very interested in buying this latest correction – as I was very interested in selling the early 2008 rally.

The S&P 500 looks like it is going to bottom like it did in 2002-2003. I have compressed the current market chart to compare the timeframes of the bottoming processes.

The 2002-2003 Bottom had three distinct dives down. The current potential bottom has had 2 dives down and looks to be setting up for number 3.

Digging a little deeper, the market broke support (Blue Line and Black Arrow) and then sold off hard for another 8 weeks. That set up the final low, which was bought on very large volume

For a clue that a bottom of consequence was in place, the Bullish Percent Indicator put in higher bottoms as price bottomed (Purple Line).

Today’s market looks very similar, with support being breached today. You can see how the Bullish Percent also cracked today (Black Arrow) – fewer stocks are working and more are pulling the markets lower. 8 weeks from now puts you in early September – the worst month of the year.

How far can the markets fall?
A buddy of mine told me the other day that he expected the markets to revisit the 600’s. I told him that I did not think that would occur with all of the money being printed. We’ll see who’s right.

I emailed the following on 6/18 –
“The 2nd Quarter ends in a few weeks, and if you remember the ramp they did in the last 4 minutes of May, then you know that the big boys will try and defend their gains into month-end and possibly the July 4th weekend.

I am going to watch the Bullish Percent very closely to see if this rally narrows - with fewer and fewer companies carrying the markets higher, or if money rotates and new leadership shows up (Biotech?).

The NYSE has gone basically nowhere for 7 weeks. Something will have to give soon.”

I posted this on 6/23
“Lots of areas and stocks have already broken down. So you are starting to see the Bullish Percent Indicator fall, as fewer stocks remain in uptrends. That weakening of the internals of the market is what leads to corrections – or worse.

I still think that this retest is the final retest of the Bear Market lows and the next leg up will be driven by Commodities and anti-Dollar trades. I expect to be able to buy and hold for an extended period on any weakness this Summer and Fall. If things change, I will let you know.”

So what I was looking for was a retest of the early-June highs on deteriorating Market Internals and then for the markets to roll over.

The New York Stock Exchange ($NYA)
In the middle of June, NYA broke below its 20-day (Green Line and Green Arrow) for the first time since early March. On the back of the Quarter-end price manipulation, NYA wedged back up into the 20-day (Black Arrow). It then failed over the first few days of July and now the 20-day is crossing below the 50-day (Blue Arrow).

NYA can rally at any time, but the complexion of the market has changed – rallies are now failing into declining moving averages and price is now putting in low highs and lower lows. None of this is good for you if you own stocks. The May/June trading range is now looking like a top.

I would expect the pullback to carry into the 5,000 – 5,200 range and will be looking to buy reversals up out of that price range if they materialize. 4,200 can still be retested.

Retail broke support today. Again, May and June now look like a top.

Energy has completely broken down and I have been stopped out of it. It was a classic wedge into resistance in the last few days of June and then price just collapsed. This goes for XLE, OIH and XOP.

The Bullish Percent for Energy is now at 17 (Green Arrow)! Look at HES if you want to see a really ugly chart. XOM and CVX look ugly too.

Basic Materials (IYM) broke support today. Look at how the boys ramped IYM into the end of June. What a scam. IYM is now down about 10% in 3 days.

I actually saw Chris Cox (former SEC Chairman) on Friday. He lives in my neighborhood. I had to hold my tongue… My friend asked me why I don’t like the guy and if I could illustrate my frustration with the regulators it would be this chart of IYM. There is simply no enforcement of the rules and that has led to massive fraud and corruption – which has cost Taxpayers several Trillion Dollars. Cox could have prosecuted literally hundreds of these scumbags and he chose not to. That makes him a less than honorable individual in my book. If he takes a job at a Wall Street firm that he was supposed to regulate and didn't, that will make him infinifely more contemptable in my eyes.

Freeport McMoran (FCX) was the leader for commodity stocks and I have told you on several occasions that when it goes, the group may soon follow. FCX is now in a classic topping pattern and has the potential to fail and fall hard from here. Let’s see if the sellers show up.

Many other parts of the Materials and Commodities groups are failing or in serious trouble. Remember, these areas have been the leaders. That is not a good sign, as money is not rotating to other groups! Look at the charts of RTP, BHP, CLF, CNX and MEE for some other trainwrecks.

Look at how Agriculture (DBA) was just trashed today! Notice the ramp into the last day of May…

The NASDAQ 100 (NDX) has been another leader. Today it broke the 50-day (Black Line) for the first time since mid-March. The Bullish Percent for NDX is now at its lowest level since early-April. Normally the Bullish Percent will hang around and then plunge over the last few weeks of any correction, as the leaders play catch up to the downside with the rest of the Markets. I will be watching this closely.

The bottom line is this – I expected the bottoming of the Bear Market to be a process that would be a series of rallies and retest. I have been reluctant to buy much, because history has told me that there is high probability for a scary retest of the March 2009/December 2008 lows. I expect that selloff to be aggressively bought by the Big Boys, with Team Obama printing money until there is no more Green Ink…

New Stimulus Full Court Press

First Krugman, then Biden and now one of Obama’s advisors is now calling for another stimulus –

Here is why in one picture –

You don't get reelected with unemployment going vertical.

I don't think the Public will go for another "Stimulus" unless the markets tank to scare the heck out of people. Either that, or the politicians will tell the voters to take a hike and vote for another stimulus regardless of the concerns of voters.

From Reuters – Who Gets California IOUs and Who Gets Cash

If you ever really wondered who’s side they are on…

NY Times Backs Principal Reductions

Last year I suggested that the way to solve the housing problem was to reduce the Principal amounts on Mortgages to get them more in line with the prices of the houses on which the loans were written.

The solution was a part of a bank nationalization wave that would remove the mortgage portfolios from the books of banks and then have the government modify the mortgages in those portfolios. It would have cost a lot of money, but it would have stabilized the housing market 8 months ago…

Principal Reduction is a simple concept
If somebody owes more than they can afford to repay and the amount is substantially higher than the current value of the house (Negative Equity), then you need to reduce the amount of the loan, or the homeowner will walk away. I posted on Negative Equity last week and it is pretty clear that the problem is now too big to ignore.

Team Obama’s Master Plan
The plan for Obama was to stabilize the Banks with Trillion of Dollars from the Taxpayer and changes to the Rules of Accounting and then artificially cap Interest Rates so that homeowners could refinance their variable rate mortgages at historically low long term interest rates. This was their “Humpty Dumpty” moment, when they tried to put the Securitization Market back together again – PIMCO’s “Shadow Banking System” bs.

The only entity to be harmed by this would be the US Taxpayer, as they would be stuck with Trillions of Dollars – and who in Washington cares about them when there is not an Election at stake. Wall Street and Bank Stock and Bond holders were the primary beneficiaries of Obama’s plan.

Obama’s “solution” was doomed to fail
It relied on Homeowners being willing to pay more to live in their newly-refinanced house than it would cost them to rent the house next door

It relied on Banks to let Homeowners off the hook on Mortgages that paid lots of Interest to the Banks

It required the International US Treasury Investor to look beyond the reality of US Economic Fundamentals and buy Long Term Bonds at 3% yields

It required the printing of so much money (Quantitative Easing) that gas prices rose to a high enough level to choke off the economy (it only took 3 months to get there)

And now it is all unraveling
An Op Ed from the NY Times on July 4th banks Principal Reduction as a new policy –

“Unless substantially more relief is forthcoming, Moody’s projects that some seven million homes will fall into foreclosure this year and next. Of those, nearly 4.5 million will result in distress sales, prolonging the recession by adding to the downward pull on house prices, home equity and household wealth. And those dire projections may prove too optimistic.
Reducing principal is a better idea because it restores equity to borrowers, which gives them more of an incentive to keep paying their loans and makes re-default less likely. Banks generally loathe principal reductions, in part because they result in upfront losses, and the administration has not championed the idea.
The president and his aides must be prepared to rethink their position.
Done correctly, a loan modification should benefit everyone. For a troubled borrower, it is a chance to stay in the home. For lenders, it means that they will make more money than they would make from a foreclosure. For taxpayers, the cost of subsidizing the right sort of modifications will be far less than the damage to the economy from millions of more foreclosures.”

Where was the NY Times on this in September/October 2008 – several Trillion Dollars ago? (Your personal rant here)

I think Team Obama’s biggest fear is that Principal Reduction will by definition lower the value of the Mortgages Backed Securities that the banks currently hold on their books at artificially high prices. That means that the banks will have to raise still more money to remain “solvent”.

The only way out of this in a timely fashion is to nationalize the insolvent banks, strip their loans portfolios out, refinance the bad debt, recapitalize the banks and sell them in a few years for a profit to pay for all the losses they taxpayer will be hit with when they write down all the bad loans.

If we are lucky, this will become the main issue of the 2010 Election. My fear is that the Asset Price Appreciation policy wonks will win the day and inflate us into a bigger bubble later next decade.

Sunday, July 5, 2009

Stress Test 2.0

The "Stress Test" had a "more adverse" assumption for Unemployment in 2009 at 8.9%
The most recent reading for Unemployment is 9.5% - up from 9.1% in May
Therefore, shouldn't the Fed rerun the "Stress Test" with this new even more "more adverse" fact?

Mor On California 2.0

I wrote the following on June 29th –

“The bottom line is this – California can issue a lot of new bonds any time it wants. It will simply have to offer the bonds at interest rates substantially above where they are now. The Fed is artificially holding rates down by printing money, because nobody in their right mind is willing to buy bonds at these current interest rates. Just something to consider if you own a lot of Muni Bonds…”

California IOU’s will have a coupon of 3.75%. I believe that these IOU’s have 3-month maturities. A California Tax Free Muni with a 3-month maturity currently has a yield of about 1.2%. The income will be classified as a Municipal Debt, making it Exempt from Federal and State Income Taxes.

It will be interesting to see how this impacts the pricing of short term California Muni’s over the next few weeks…

Here is a link to Craigslist showing bids for California IOUs –

Is A New Stimulus Coming? 2.0

“"The truth is, we and everyone else misread the economy" – Joe Biden today on a Sunday talk show (ABC?)

Nobody missed anything. The purpose of the “stimulus” was to robe the Taxpayer of $800 billion and transfer it to Democratic political hacks – period.

Now, not only is the economy sucking, and over 400k new people getting pink slips last month, but the Dollar imploded, driving Gas to over $3 a gallon.

Plenty of people saw this coming.

Now, those same smart people know what will follow – a real “stimulus” package of at least $1 trillion, designed to actually get people working again. This package may be loaded with protectionist policies, designed to start the process of unwinding NAFTA and getting Middle Class manufacturing jobs back to America.

It will also lead to some pretty substantial inflation – which will lead to Asset Price Inflation, making the likes of Obama, Greenspan and Bernanke happy.

I’m looking forward to all of the trading of Gold Coins that will start to occur on Craigslist, as people will want to anonymous purchase Gold, without the transaction being tracked by the Government (think 1933 and the Roosevelt Hoarding over-reach).