Unemployment Numbers Are Badder Than Bad

I took a look at the Unemployment Numbers released today and they are staggering!

http://www.bls.gov/news.release/pdf/metro.pdf

California
The unemployment rate is now 11.5% - That is not a misprint
That is measuring just the ones who are still bothering to look for work. There are a lot of others who aren’t working and have thrown in the towel on the whole job search thing (shadowstats.com estimates that the Government data is 5 to 7% below reality, thus making a real unemployment rate for California of 16% – 18%).

Here are some of the numbers released today for county and city unemployment rates –

Los Angeles – Glendale – Long Beach 11.3%
Oakland – Fremont – Hayward 10.2%
Bakersfield 15.9%
Fresno 17%
Merced 20.4%
Stockton 16.4%

Other notables –

Yuma, AZ 15.3%
Indiana 10.6%
Kentucky 10.3%
Michigan 13.4%
Detroit, MI 14.9%
Flint, MI 15.3%
Nevada 10.5%
Ocean City, NJ 15.0%
North Carolina 10.9%
Charlotte, NC 11.4%
Ohio 10.1%
Oregon 12.9%
Bend, OR 17%
Providence, RI 11.4%
South Carolina 11.2%
Longview, WA 14.8%
Puerto Rico 14.7%

Holy cow! That’s like Depression Era data…

There are clearly some major tectonic shifts coming for our economy. . We have off-shored manufacturing, engineering and resource production. Companies, executives and banks have gotten rich, but there is effectively no middle class left. We are not using the natural resources we have as a country to employee people. We’d rather be green and on entitlements than slightly dusty and gainfully employed…

Obama was elected by a generation of young adults who see their future as working at Wal-Mart and sleeping on their parents’ couch. We are now also faced with a growing number of retirees who are faced with the prospects of gutted pensions, 401k accounts that have been cut in half and massive tax increases on both incomes and sales. Their kids should start making up the couches for Mom and Dad to crash on…

But hey, the stock market is up for 6 weeks and all it cost us was $3 trillion in new government guarantees to the crooks who gutted the country and got 10% of its citizens idled. I consider unemployed people to be excess labor capacity.

Take a look at the Capacity Utilization Rate at Factories. It is at an all time low –

The Fed’s answer to solve the imploding economy is to try and put Humpty Dumpty back together again and rev up the Securitization market - via massive, government-sponsored leverage. How’d that work after the 2003-2007 securitization bubble popped? Great for a few years, but the underlying problems were only masked and not fixed. We are now in a whole lot worse shape than if we had fixed things in 2001.

Excess cash reserves held at banks have gone vertical. This is supposed to put the banks in a position to lend more money –

But banks are not lending money, so all these excess reserves do is sit on the books of the Fed and earn the banks a 0.25% interest rate. This is how the Fed is trying to “recapitalize” the banking system.

The real driver for the economy is when people borrow these excess reserves and then buy stuff. A dollar is borrowed and buys a good. The vendor then takes that dollar and buys new inventory. The next guy also uses the dollar and so on… The number of times that dollar is used becomes what is call the “Velocity of Money” – the more active in the economy, the higher the Velocity of Money.

The Velocity is falling as people have maxed out their credit, run out of home equity and lost their jobs. So the actions of the Fed to pump several trillion in new money into the system has failed in that sense.
But maybe the actions of the Fed were never designed to increase economic activity over the short run. Maybe they were simply designed to make money cheap (thus driving inflation) and buy stuff off the books of the banks, real estate firms and insurance companies.

Judging from the fact that so many companies (and executives) are selling shares into this rally, it is clear that Financial and Materials companies are simply building up cash reserves to buy themselves time – the time it takes for the economy to truly heal and finally recover.

I’m always trying to figure out how to make money on this information and the Capacity Utilization chart reminds me of the vicious trading range in stocks from 1966 -1982. When I compared the Capacity utilization chart with the S&P 500, I see these crashes in utilization are followed by strong stock market rallies. Actually, the market tends to bottom before Capacity Utilization picks up again.

The big picture is that the economy will have to go through a multi-year period of consumption adjustment. That will lead to a diminished need for production. Plants will close and over time, the economy will set a new equilibrium for consumption financed by savings and not credit.

It will take time – a lot more time if so many are unemployed. Assets within the economy will have to be reallocated. That is why I am so incensed with all the money going to bail out the banks. America has a finite amount of investment capital and a finite capacity to borrow. Under Paulson and Geithner, we have squandered trillions of that capital and will not only have less to finance the new round of investments, but will also be burdened with all the interest payments on that new debt.

Obama hallucinates that building a “green power grid” is the answer. It is an expensive answer we may not be able to finance. The real answer will lay in the natural resources currently possessed by America – coal, wind, water, timber. I hope these clowns don’t bankrupt us before they figure it out.

With 10% of America unemployed and $100 billion in new debt generated each month, they will soon run out of time.

CDS and The Rally

Here is a great post recapping what I have been posting about the last few weeks –
thin liquidity, Quant Fund leveraged bets, a rally led by the weakest of the weak. Insiders are selling and companies are issuing new shares (selling) into the rally. Both are doing so to bolster their own cash positions to get through what is coming. That is not bullish.

The real question is who is writing the new round of CDS insurance on this rally? Somebody is doing it – and they are going to get crushed on any selling. The (un)intended consequence of all the government bailouts is that banks now know they can write infinite CDS, thus generating enormous income off of this leverage, and be bailed out by the government when the who thing blows up. Good stuff Geithner…

http://debtsofanation.blogspot.com/2009/04/debts-of-spenders-bear-market-rally.html

Renting Versus Owning

Price to Rent Ratios
The cost of owning versus the cost of renting becomes a very important factor when one is deciding whether or not to buy property. In the bubble, you could rationalize over-paying for a house because you thought that the house would appreciate and that would offset the additional cost of owning versus renting.

I sold my house in November 2005, because the numbers just didn’t justify owning any more. It was simply too cheap to rent for me to want to risk several hundred grand in home equity. I cashed out – tax free – and the rest is a history lesson.

Now that housing prices have imploded, prices are more in line with rents. They will probably overshoot some and fall into the 0.8 or 0.9 range, because owning a house or being a land lord is a pain in the neck and is expensive – property taxes, upkeep, insurance… But housing prices may stabilize soon.

The issue right now is that the only way the average person can afford a house is via historically low interest rates. What will happen to prices when the Fed finally stops buying bonds to artificially hold rates low? The obvious answer is that the cost of owning a home will sky rocket and prices will take another leg down.

So the only solution may be for the Fed to cap interest rates for an extended period (several years). This will allow them to ramp inflation up and make the real cost of home ownership fall, even as prices stay flat. The method for the Fed to cap interest rates is for the Fed to buy US Treasuries. So I would assume that the Fed will announce another commitment of several hundred billion dollars today to buy more Treasuries on the open market.

Not only does this hold interest rates down, it also pumps investment capital into the system, thus supporting stock prices. The policy is obviously to increase asset prices and hold down interest rates.

Expect the next big policy decision to be the extention of TALF to buy 5-year paper, instead of the current 3-year limit.

More Business as Usual

Citigroup is for all intents and purposes bankrupt and owned by the US Taxpayer. The decisions of management made it so. Now a unit of Citi wants the Government to allow it to pay its executives massive bonuses.

http://www.businessinsider.com/henry-blodget-citi-begging-geithner-for-permission-to-pay-massive-bonuses-2009-4

This is at the same time that stories are circulating that Citi will need to raise even more money ASAP, because it failed the un-failable “Stress Test”.

http://www.ft.com/cms/s/0/f1bcd8f0-341e-11de-9eea-00144feabdc0.html?nclick_check=1

“How is this possible” you ask? It is possible because Wall Street has bought Washington. News just came out that Barney Frank’s former top staffer will now be the chief lobbyist for Goldman Sachs. Does anything surprise you about this?

http://www.washingtonexaminer.com/opinion/blogs/beltway-confidential/Former-Barney-Frank-staffer-now-top-Goldman-Sachs-lobbyist-43914907.html

Fed Day Tomorrow

I have played a lot of poker in my life and one of the things I have learned is that I will only play cards that allow me to make strong bets throughout the course of the entire hand. Otherwise, it is too easy for me to get shaken out of a potential winner.

That is some of what has occurred the last few days. I committed money into legitimate setups into strong stocks and strong sectors, but was easily shaken out of those trades via tight stops, because I am concerned that the markets need to correct and will most likely do so very soon. Oh, and there is massive intra-day volatility, which moves some positions 8 to 10 percent in a matter of an hour or two…

Besides, volume has been very light and until it shows up, this rally is extremely suspect.

The Fed is meeting today and Wednesday, so expect the usual fireworks at 11:15 am PDT tomorrow. Believe it or not, but rates now sit higher than they were when the Fed announced that they would buy $300 billion of US Treasuries. There are clearly too many sellers and too much new debt being issued by the Treasury each week for the Fed to be able to cap interest rates with only $300 billion. I think the Treasury will borrow about $390 billion this quarter. We are now just printing money…

I will continue to focus on the areas that historically lead new Bull Markets – Semiconductors (Technology), Financials (less so here, because their numbers are fraudulent), Retail, Energy and Materials (Raw Materials for building stuff). My intention is to build positions in these areas and hold these positions for several Months or Quarters – normally I would say years, but I am not sure that is possible over the next Decade or so. The reality is that it is very difficult to not get shaken out of holdings at these levels. A pullback will offer much better entry points.

Semiconductors (SMH)
SMH broke out of a 4-month trading range as it broke above $19 (Green Line). It now needs to pullback into the mid-$18 range to make it comfortable for me to be able to buy it and hold it.

Maybe the market goes up 500 points tomorrow on the Fed committing to buy another $300 billion in US Treasuries… If that happens, then maybe I am looking for a pullback on SMH to $21. That will be fine with me. I want to make money, while risking as little as possible. Even with this recent rally, I am still over 40% ahead of the market since late 2007.

Technology (XLK) is extremely extended and due for a 10 – 20% pullback. That would set up a chance to buy it.

The same goes for Retail (RTH), Materials (IYM) and Large Cap Growth (IVW).



Energy
Crude Oil (USO) has already had a nasty pullback into support over the last 22 days. It has given back 62% of the recent rally. It is now a buy on a pullback to $26 or a breakout above $29 – hint, everybody else can see this on the chart, so expect to be whipsawed about if you enter this thing. A move above $32 would confirm the Feb 19 low and would force a hell of a lot of money to flow into USO in a very short period of time. The Commodity ETF (DBC) has a similar chart pattern.

I expect the stock Market to play out like USO is playing out – a high, followed by a shakeout, setting up the potential for a major breakout that forces a lot of money in from the sidelines.

Regardless of what sectors do in the short run, I do not expect to feel comfortable committing money until the Market has a correction of this rally.

Oh, Where To Begin...

Late last year I wrote a lot about two issues –

1. The markets were pivoting above and below SPX 852
2. There was violent trading on very light volume

I figured that 852 was the target at which the Government wanted to keep the markets. I suggested that they would lie, cheat and steal in an effort to hold prices at this level until fundamentals caught up to price as the economy ultimately recovered.

Price is now at 856, and all the Government had to do to keep prices here was spend $3 trillion on worthless bank holdings and stocks, promise to spend another $3 trillion buying a bunch of worthless paper at an artificially high price and break a series of securities laws designed to protect the public from lies and the hiding of price discovery.

The only way that you can have such violent price moves is if prices are at levels at which nobody is willing to hold onto shares overnight. It will require prices to fall or fundamentals to rise before real investors step in and start buying in a meaningful magnitude. That is our new reality – until further notice…

Merrill Lynch and Bank of America
Bank of America CEO, Ken Lewis, recently testified under oath that he was told to lie about the value of Merrill Lynch to his company’s (Bank of America) public investors. This was during a panic phase in late 2008, when the markets were crashing because everybody knew Merrill was worthless – thus creating a run on Merrill as institutions pulled their money out of Merrill (a Run on their Commercial Bank).

This Run on Merrill could have led to a situation many orders of magnitude larger than the bankruptcy of Lehman Brothers. The Fed knew this, and also knew that it did not want have to manage Merrill, so it forced Bank of America to absorb Merrill – much along the lines of how it forced Bank of America to absorb Countrywide (it gave them $10 billion up front, so don’t feel too bad for B of A). In return, Bank of America received over $100 billion in loan loss guarantees from you and me - the US Taxpayer…

Lewis told investigators that none other than Hank Paulson and Ben Bernanke told him to lie about how bad of shape Merrill was in or he would get fired. That is illegal if anything ever were, don’t you think?????

Everybody and their brother (Barron’s, NY Times, Bloomberg, CNBC) has now written about this travesty, however (of course) nobody is being prosecuted and no bonuses will have to be repaid.

Obama received over $800k from Goldman Sachs. Have you heard him say a peep about repaying any of that money? How about Dodd and all the money he received from Bank of America/Countrywide – do you think he will even give back a cent of that blood money? F***ing scumbags… $1 million in bribes gets you $100 billion in taxpayer handouts. That is a 1,000 percent return on your lobbying investment! I’m in the wrong business and our Politicians aren’t charging enough for their bribes…

From Bloomberg today –
“That leaves you and me, the American public, with the uncomfortable realization that we are slipping toward a state of lawlessness in this country, all in the name of saving our financial system by creating even bigger banks out of combinations of banks that were dangerously too big already. This doesn’t inspire confidence. It destroys it.”

www.bloomberg.com/apps/news?pid=20601039&refer=columnist_weil&sid=aXHVu97lAGjs

So What Does Merrill Do for an Encore?
Merrill has their analyst upgrade a Real Estate Investment Trust (a REIT) the day before they do underwrite a stock offering for that REIT. Even better, the REIT then uses 100% percent of the proceeds of that offering to pay Merrill its underwriting fees and to repay Merrill for a business line of credit. You can’t make this stuff up –

The deal was for KIMCO Realty, a shopping center specialist. How do you think they are doing right now in the recession? Definitely worthy of an upgrade…

news.moneycentral.msn.com/ticker/article.aspx?symbol=US:MER&feed=AP&date=20090402&id=9756675

Remember, banks are buried up to their necks in Commercial Real Estate Loans and will do anything to sell their holdings at higher prices to somebody else. Morgan Stanley has the most exposure to this stuff. It leads you to ask the question – who are the idiots that are buying this stuff?

Zerohedge does a nice job analyzing that question. My Cliff Notes version is that Bank A buys an offering from Bank B, who levers up the new capital 30 to 1 and buys the offerings of Banks A, C, D and E…

In the end, the loser is the average investor who buys the company believing the analyst and the numbers coming out of the Government.

zerohedge.blogspot.com/2009/04/is-there-reit-reverse-inquiry.html

Why Has the Government Been Doing This?
Because Benanke has said all along that his goal is to offer time to allow the Financial Industry to delever (that’s Banks, Insurance Companies and REITS). Under Geithner, it is clear that the US Taxpayer will be left holding the bag for the majority of this leveraged junk.

Have you noticed how these Financial companies are lobbying the Governemnt to extend the terms of what can be bought in TALF and PPIP from paper with 3-year maturities to paper with 5-year maturities? That is because there is a massive block of Commercial Real Estate debt maturing over the next 5 years. These companies want that toxic stuff off of their books ASAP, and can only unload all of it if they can sell up to the 2014 paper. Again, the US Taxpayer will overpay and the shareholders, bondholders and greased politicians will walk away rich…

The Current Rally
The current rally has propped up the prices of the crappy stocks - Banks, Real Estate Investors (REITS) and Insurance Companies – to allow them to sell shares and raise capital.

Northern Trust (NTRS) is the latest to announce a capital raise and will sell $750 million in new shares and debt this week.

Companies like Merrill Lynch (now Bank of America) will make a fortune in fees as they take 3% of all the money raised as underwriting fees. Other banks will have bad loans with questionable companies repaid as shares are purchased. Do you think that any of the Mutual Funds that Merrill Lynch manages will be buying any of the stock being sold buy Merrill Lynch underwriting clients? Even if it is illegal, do you think the Fed gives a damn?

Insiders Are Selling Shares at an 8 to 1 Ratio!
Why are Insiders selling if we are in a new Bull Market? Maybe they aren’t so certain about where things are going and they want out. The ratios of Selling versus Buying are pretty staggering -

Where Is the Volume?
The rallies of 2008 and 2009 are rivaled only by the Bear Market rallies of 2001 and 2002 in terms of the percentage move and the enormous fall off in volume. The lack of volume allows for the incredible intra-day and inter-day price moves. We are in no-mans’-land where investors are absent and traders accelerate directional price moves at the push of a button.

The 2008 and 2009 rallies have had the biggest fall off in volume of any rallies in history.

Throw in a little Government assisted Futures pops and some Short Squeezes on a few huge Quant Funds via JPMorgan and you actually get prices going UP as Selling Volume reaches its daily MAXIMUM. Welcome to the Efficient Market, brought to you by the US Government. If I weren’t already sick, I’d be sick…

zerohedge.blogspot.com/2009/04/nyse-updown-volume-update.html

The Fed Is Now Levered 48 to 1 (Citi would be proud...)

So the Fed is now leveraged up 48 to 1 – most of this leverage a result of the Toxic Waste that it has either been bought from or taken over from banks. That is the “Expand the Balance Sheet” component of QE in action…

www.federalreserve.gov/releases/h41/Current/

I told you this would happen when the US Government refused to do what was difficult but right - force the Shareholders and Bondholders of the Banks to eat the loses via Default and Nationalization. Now, instead of the same crooks that created this mess losing their money, the US Taxpayer will lose his money.

The issue we will soon face (2012? 2014?) is that the US Government/Economy will choke on this debt and there will not be an entity large enough to “bail out” the Fed.

Here are your choices for getting rid of your debt –

1. Pay off your debt
2. Default and don’t pay it
3. Inflate the real value of the debt away

Choices #1 and #2 are unrealistic, because they would both result in the government no longer being able to spend – and that is all governments know how to do.

So, choice #3 is the only reasonable answer. That will mean either - rising inflation and a sharp rise in interest rates or rising inflation and a crashing US Dollar. Neither sounds very appealing to me, but when you elect a government that is incapable of making tough choices or is outright on the take from the criminals, you are forced to endure a lot of bad consequences resulting from the actions of the crooks.