Tuesday, July 14, 2009

Eliot Spitzer

I was originally going to cover all of the TV personalities telling Goldman to go to h*ll for using Tax Payer Money to re-lever and front run client trades and then pay out record bonuses, but Spitzer has been on a roll this week and his works are sufficient to cover Goldman and California!

Spitzer on Goldman

“The issue in my mind is not whether they will announce enormous earnings today – I think everybody knows that - the question is, what does it mean both politically and what does it mean outside the context of Wall Street?

Because I think we have a division here – Wall Street is beginning to come back, because the Government has pumped an unbelievable amount of money into Wall Street… there’s no question we, as taxpayers, have put billions, in fact trillions of dollars into The Street.

The question is does that generate jobs - which is the word we haven’t heard anything about – out in the real economy?”

You are on to something, Eliot.

“(Goldman’s) Proprietary Trading, in a volatile Market, where their Cost of Capital was driven to virtually nothing, because we, as taxpayers, gave them access to Capital. They made a bloody fortune. Now the question is, is that good for us as taxpayers? Is it good for the Economy? Does that generate jobs? Where is their Capital going?

If all they are doing is going back to proprietary trading, buying bonds and selling them in this volatility, taking advantage of spreads that were really quite remarkable… If that is their business model, but that’s all they are doing, then as policy makers, the folks in DC – Geithner and Summers and the President – need to say ‘wait a minute, this isn’t going to create jobs for the future in Biotech, in New Energy’ – (The banks) job should be, from a macroeconomic perspective, to raise Capital and put it into those sectors that will create jobs.

If they are not getting that done, then why are we supporting them the way we have been?”

Is Spitzer talking about Goldman and the Banks, or Team Obama? Wall Street used to be the place where companies would seek money to invest back into their business. Shareholders would buy a part of the company and hope to build long term value as the company grew. Now it is a bunch of Quant Models front-running client trades at the Great Wall Street Casino…

“This is the division… we have seen over the past decade a confusion between Financial Services and the Economy at large. The Bubble masked what in my view was the fundamental transformation - a dangerous transformation – where we were losing the entirety of our Manufacturing Sector, we created paper profits in financial services that collapsed when asset values – which were dependent upon intense leverage – collapsed.

And we are not going to recreate that and over the course of this decade we lost the capacity to produce and hence we are now importing virtually everything… As we became more dependent upon foreign manufacturing, the core of our economy dissipated. That is the real risk we face.”
Amen. Somebody finally mentioned the 800-pound gorilla. We have no Manufacturing Base – therefore, we have no Middle Class. Building a Middle Class is the “Change” people wanted him to initiate. He has failed. There will come a time over the next decade where America again commits to building a manufacturing Base – that will be the long-term buy and hold Investment Cycle that makes investors rich over the course of an entire Generation.

“This could be a political explosion. When members of Congress say ‘we have just given money to Goldman Sachs and their employees are making $700,000 (average comp per employee) and I’ve got Auto Workers, I’ve got people who serve coffee in the Diner out of work because there’s no money in the Economy - Unemployment hitting 10% soon, Job Losses last month 467,000’… numbers we haven’t seen since The Depression. “

“In this case the public is right in saying ‘wait a minute, we bailed out the people who created the problem (and now they are making their bonuses again), we haven’t address the underlying problem – whether it’s Healthcare, Energy Efficiency, Smart policy to Create a Manufacturing Base… And somehow the public is saying there’s something amiss right here. And they don’t see anything changing in Policy to give them comfort.”

I left the Big Bank because I could not live with myself, knowing that I worked for a company that used Taxpayer Money to mask its mistakes and then took that money and used it to enrich the fat cat executives by selling the Taxpayer a bunch of crap Debt, at artificially inflated prices. The backlash is coming and it will be severe.

“The Regulatory Agencies already had the power to do everything they needed to do. They just affirmatively chose not to do it. The Fed has always been a systemic Regulator. The SEC has always had the capacity to look at the books of every bank out there. The New York Fed in particular, failed to do what it should have been doing – to look into the Capital and the Leverage Ratios of the various Banks…

You don’t need new regulations, you just need the will to do what they were supposed to do.”

“(The SEC) missed the largest transformation in the Market Place – which was that Middle American, we invited Middle Americans into the Marketplace and said ‘put your Capital into this Market’, but we then did not create the protections for the Small Investor to prevent them from being taken advantage of by the Major Firms. And that was the real crisis.”

The rich get richer and the little guy gets the bill. The Regulators chose to not regulate, because they knew they could get jobs at the banks after they let the banks lie, cheat and steal for a few years. The Regulators were promised future wealth to look the other way.

Spitzer on California and State Budget Deficits

“What a perfect metaphor for our economic circumstances! California is literally drowning in red ink and political gridlock, with deficit figures that are staggering and portend worse news for the future at the same time that a bailed-out Wall Street is profiting from a new, and essentially useless, trading vehicle.”

Instead of the Federal Government taking action to bail out California, the SEC declares California IOUS to be “securities” and Wall Street sets up a trading market for them…

“Where does this leave us? The Obama administration's first stimulus package offered a Band-Aid for state budgets. As the recession worsens and states face California-like catastrophes, more fundamental thinking is going to be needed.

Two critical areas must be addressed. First, public pension liabilities have to be restructured. Since many state constitutions prohibit retrospective realignments—that is, lowering pensions that have already been guaranteed—states will need to lower guarantees for new employees radically, shifting from defined benefit plans to defined contribution plans. Second, and more fundamentally, states will need to shift more funding of health care and education to the federal government. In health care, where Medicaid is the primary state expenditure item, there currently exists a federal-state burden sharing arrangement. As the health care reform process continues in D.C., Washington must recognize that requiring greater state expenditures is simply not realistic at this time.”

Are you starting to see how the effort to nationalize Healthcare is more a function of saving the Pensions of Public Employees and Union Workers, rather than fixing a “broken” system?

Monday, July 13, 2009

Today's Interesting Move

One of the trading services I take posted the following chart on Thursday, with this commentary -

“The market hit the (Short Term – Oversold) condition zone yesterday … so the odds favor a bounce no later than next Wednesday. It is just a question of whether the SPX hits that 846 zone first before a bounce, but either way it will correct to at least the 846 level, and most likely lower than that."

This is from one smart dude. We are now in bounce mode and have gone from oversold to overbought in about 3 hours of trading.

I wanted to go into a few of the games played today to get the markets higher before what should be more selling. Here is a chart of the SPX Futures –

On Sunday night, the SPX was trading below critical support at 866. Then you had an analyst upgrade carpet bombing orgy – Meredith Whitney upgraded Goldman and B of A and everything else that wasn’t named CIT. Tech saw upgrades in Microsoft and Apple and Intel and Novellus…

I didn’t see much for Retail or Energy, but the fuse had been lit for the short squeeze. SPX Futures rallied 2% premarket and opened up a few points. Over the next hour, it got sold pretty hard. Then, at around 11am EDT, out of nowhere, SPX rallied 19 points (2%) in 55 minutes.

The rally was expected, so it didn’t phase me. SPX was Short-Term stretched (2.5 Standard Deviations from the 20-day) (Green Arrow), so a reversal was expected. The reversal was expected to take price back to the Blue Line (20-day EMA), which it basically did in 55 minutes…

Now SPX near overbought (Red Arrow)
Do you see how the Blue Line held as support for price during the entire rally? Do you see how it is now pointing downward? Do you see how price has now rallied into it and failed 3 times? Things have changed – rallies are being sold, rather than pullbacks being bought.

I will look for lower prices until the market proves it can go up again. I will look to buy into obvious support, with tight stops and will look for the major breakout off of this low on what should be humungous volume.

Look At How Easy the Market Are to Move Right Now
Here are the percentage weightings of the largest holdings in the NASDAQ 100 (QQQQ) and how they traded today –

I notice a couple of things –

Apple, Qualcomm, Microsoft and Google are now 20% of the NASDAQ, so just ramp them and forget about the rest of the stocks if you want to move the Index higher.

RIMM is toast. It barely made it back to even today. You can always identify weakness on a strong day and RIMM sucked today. I am also no weary of Oracle and Cisco.

Apple now represents 13.60% of the NASDAQ 100 ETF (QQQQ)? Are you kidding me? Talk about “over-owned” and “over-loved”! I know what I want to short come NASDAQ 100 rebalancing time near Year End…

Relative Strength Update

My goal is to focus investment capital in the areas that are working best. Sometimes working best means losing the least, so from early 2008 until recently, I have been enamored with Cash and Short Term US Treasuries.

Now I believe that we are replaying the 2002-2003 bottoming process (no surprise, since the same guys who caused the Clinton Bubble and the Bush Bubble are still in charge and setting in motion the Obama Bubble). So I am looking closely at what is leading, because new leaders tend to lead for the entire course of the next Bull Market.

Trends of outperformance and underperformance tend to run in five to seven year cycles. Large and Growth led from 1994 – 2000, Small and Value led from 2000 – 2006 and now Growth and Large appear to be setting up to lead again.

Large and Small are in lockstep, but this is where Large Bottomed Last Time

Growth is leading Value

Domestic is marginally beating International, but may be putting in a big Double Bottom

You can see the Percentage Returns of the different asset classes. Which one would you rather have owned?

Large Cap (Red) vs Small Cap (Blue)

Growth (Red) vs Value (Blue)

Domestic (Red) vs International (Blue)

These charts show you not only the importance of knowing what to buy, but they show you that you need to know what to sell – and when to do it! That is why I spend so many hours each week looking at the charts. I am already considering what the next Top will look like…

Arnold Looks Serious

I think this is the third time Arnold has tried to play tough with the California Budget, and the previous two times the people have told him to "take a hike" and kick the can down the road.

Now he looks serious. The failure of the spending increases in the last Special Election gives him the political cover to play hardball.

Arnold has a video and a website -


I think he means business this time around to save his legacy and we may be in for one mother of a political showdown later this year. Or he wilts like he always has and our kids get stuck with a still larger bill and we get stuck with an ever-larger tax burden...

Sunday, July 12, 2009

Prop 98 To Be Suspended?


First, California spent $56 billion on education last year. $56 billion! That is a ridiculously large sum of money.

This would be the 3rd time that Prop 98 is suspended. The last time, the Education Lobby was bought off with pension concessions... Kick the can down the road and don't bother solving anything today.

I don't hink the public will go for increased Pension and Health Care benefits this time around. They want Sacramento to fix the problem - that means that somebody will have to make some sacrifices.

If the Sacred Cow of Education is being punked, then you have to wonder if there is some sort of accounting gimmick coming for Muni Bonds.


I love it when a newspaper guy reaffirms my thoughts (He even uses my language). From the Sacramento Bee -


"For years, the opposing ideological armies have flirted with a final confrontation over whether to expand the state's revenue structure to support its superstructure of educational, social, health and penal services, or shrink spending to match revenues.

Each time the apocalyptic moment appeared nigh, however, those involved would avoid a decisive battle with some new set of accounting gimmicks or loans that postponed the day of fiscal reckoning and left the underlying ideological conflicts unresolved."

"Now, with time running out on his governorship and with the state's budget crisis worse than ever, Schwarzenegger appears to savor a conclusive confrontation.

"This is the year we have to stop promising people things we can't deliver," he said last week.

Meanwhile, Democrats are just as determined to dodge the bullet Schwarzenegger wants to fire. They clearly want to increase taxes again, but barring that, they want temporary fixes that will leave the safety net of social services intact, hoping that an improved economy and/or a new governor will make them whole again.

"We're not cutting deeper," Senate President Pro Tem Darrell Steinberg said during one debate. "The price is too high," he said on another occasion.

If he sticks to his guns – and that's always uncertain with Schwarzenegger – the governor is playing a stronger hand. He clearly wants a legacy of having tamed the budget monster as promised, and he's a lame duck who won't be seeking office in California again, so he has nothing to lose politically.

The state is already issuing IOUs to some creditors and in another couple of months will be unable to pay any of its bills unless it floats some short-term cash flow loans, thus forcing a decision of some kind to satisfy lenders."