Monday, February 23, 2009

All Hands On Deck

What the Fed, the Treasury and the Obama Administration have attempted is to bridle the bucking bronco that has become our capital markets. Although the markets have been under pressure as of late - it has been a direct result of premeditated ambiguity by various government officials towards the savage beast herself.

Now mind you this type of intervention could not work in most market conditions - i.e this fall. There was far too much selling pressure to be overcome by information and rhetoric. It was man verses nature and we all know who wins that battle. Where we are currently sitting is in the doldrums of the storm. The ship is in tatters, the crew is demoralized and looking for answers and leadership. Mass psychology now becomes either the crews downfall or secret weapon to survival. It is up to their captain to suspend the aroma of certain death and inspire a path towards safety. They just need to believe in the option of survival.

Let's see if Geithner can earn our respect and lead us to safer waters. I still believe this is an engineered test of the November lows. Time is of the essence to many businesses models from annuity to insurance companies and I believe the Treasury felt compelled to "induce" a weaker market in the short term to allow for a healthier market in the long term. No sustainable returns would be possible without a test of the markets lows from November.

I am drinking the cool-aid on deck with the belief that the world is not going to hell in a handbasket. From my perspective, and ironically - there are far to many idiots on that side of the fence right now.

Tuesday, February 17, 2009

Which Side Of The Mouth To Believe?

From the Financial Times today -

Bank nationalisation gains ground with Republicans

By Edward Luce and Krishna Guha
Published: February 17 2009 19:44 | Last updated: February 18 2009 01:07

Long regarded in the US as a folly of Europeans, nationalisation is gaining rapid acceptance among Washington opinion-formers – and not just with Alan Greenspan, former Federal Reserve chairman. Perhaps stranger still, many of those talking about nationalising banks are Republicans.

Lindsey Graham, the Republican senator for South Carolina, says that many of his colleagues, including John McCain, the defeated presidential candidate, agree with his view that nationalisation of some banks should be “on the table”.

Mr Graham says that people across the US accept his argument that it is untenable to keep throwing good money after bad into institutions such as Citigroup and Bank of America, which now have a lower net value than the amount of public funds they have received.

“You should not get caught up on a word [nationalisation],” he told the Financial Times in an interview. “I would argue that we cannot be ideologically a little bit pregnant. It doesn’t matter what you call it, but we can’t keep on funding these zombie banks [without gaining public control]. That’s what the Japanese did.”

Barack Obama, the president, who has tried to avoid panicking lawmakers and markets by entertaining the idea, has moved more towards what he calls the “Swedish model” – an approach backed strongly by Mr Graham. In the early 1990s Sweden nationalised its banking sector then auctioned banks having cleaned up balance sheets. “In limited circumstances the Swedish model makes sense for the US,” says Mr Graham.

Mr Obama last weekend made clear he was leaning more towards the Swedish model than to the piecemeal approach taken in Japan, which many would argue is the direction US public policy appears to be heading.

“They [the Japanese] sort of papered things over,” Mr Obama said. “They never really bit the bullet . . . and so you never got credit flowing the way it should have, and the bad assets in their system just corroded the economy for a long period of time.”

I would be weary of rhetoric and public discourse by government officials here. They may be setting the bear trap for the market on options expiration. This reminds me of September 2007 when Fed officials said one thing and sprang the trap on options expiration with "surprise" action. The market catapulted to new highs a few weeks later. Of course new highs are off the table - but I haven't given up on S&P 1000 before fresh lows.

From all angles this week smells like the scenario I have been expecting for some time. The administration holds a few powerful cards. Don't expect them to roll over and fall on their sword. Geithner knows how to play the market's game of bluff, empty rhetoric, ambiguity and trap doors. Too much depends on market stability here to deliver nationalization or tangible hints at it during a technically fragile trading environment. It would reintroduce systemic risk to the system at precisely the wrong time. Remember Lehman Brothers? Perhaps a few hundred points higher on the S&P would give the market cover to digest these enormous tasks- but not now - not during the retest. I do believe it would significantly reduce systemic risk in the long term - just not at this critical level of support.

Remember last week Obama had this to say about nationalization.

Obama: Nationalization "Wouldn't Make Sense"
By Zachary Roth - February 10, 2009, 6:57PM
In the wake of Tim Geithner's speech this morning, laying out the Treasury's plan, such as it is, for Bailout 3.0, most smart observers have concluded that the Obama administration has at least left the door open for a possible nationalization of failed banks at some point, if it decides circumstances warrant that step.

But in an interview with ABC News' Nighline, set to air tonight, the president seemed to all but rule out that idea. He told ABC:
[Sweden"] took over the banks, nationalized them, got rid of the bad assets, resold the banks and a couple years later, they were going again. So you'd think looking at it, Sweden looks like a good model. Here's the problem -- Sweden had like five banks," he said, laughing. "We've got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the, the problems in terms of managing and overseeing anything of that scale, I think, would -- our assessment was that it wouldn't make sense. And we also have different traditions in this country.

I think the last comment is closer to the truth for now. We shall see.

Monday, February 16, 2009

War Is Hell

For the last few weeks I have been feeling like a young infantry soldier that realizes only through the grizzly sights and acts of battle that the war so eager to be fought was far too horrific to witness, let alone desire. And just like in war there are far too many casualties to justify any semblance of righteousness for finding yourself on the "winning" side. Trust me, we will all pay reparations for this. There are statues of irony and sorrow in so many places that it is hard to imagine things ever resembling the normalcy many of us took for granted. I know things will improve and it will simply take the great revolver of time - but I am impatient. I am impatient in hearing those that feel the need to be righteous and lecture the oblivious, the ignorant or even the choir. I am impatient in those that feel the need to self-promote even in the face of such national and world crisis. I am impatient with human nature and all our inherent shortcomings. I am impatient with myself and all the irony of circumstance. But most of all I am impatient with the process - in realizing we have only started our collective journey down this broken road to our uncertain tomorrow.

"Cadets of the graduating class - Boys, I’ve been where you are now and I know just how you feel. It’s entirely natural that there should beat in the breast of every one of you a hope and desire that some day you can use the skill you have acquired here.

Suppress it! You don’t know the horrible aspects of war. I’ve been through two wars and I know. I’ve seen cities and homes in ashes. I’ve seen thousands of men lying on the ground, their dead faces looking up at the skies. I tell you, war is hell!" - General William Tecumseh Sherman addressing the graduating class of the Michigan Military Academy - 19 June 1879

Thursday, February 12, 2009

Stop Whining!

Man can you hear the whining around the trading pits tonight.

"Damn Obama sticking his nose in the markets. Socialism! How am I suppose to trade when they intervene every month!"

If you didn't see this coming or weren't prepared for a 3:30 news flash on a technical break day - you shouldn't be trading. Do you remember the Geithner announcement in November when we were sitting at the 2002 low? We aren't the only ones who read the charts. They know exactly where things stand and frankly they hold some serious cards at this point. Between the repeal of the uptick rule, the purposely ambiguous bank rescue plan to changes in mark-to-market accounting - get ready for some more whipsaw and stop your whining. There's no crying in baseball.

Perhaps these information catalysts will only have fleeting effects in supporting the markets - or perhaps they will turn the tide favorably away from these rocky shoals. At these levels with so much riding on the precarious technical framework of the market - you have to be prepared for it. Remember most technicians and elliot wave theorists were flabbergasted with the bull market that sprang from the 2002 lows. Greed seeps into bulls and bears alike and never discriminates.

Wednesday, February 11, 2009

Obama's Telling Posture?

Here is a little verbiage from Obama last night on Nightline.

Obama: Nationalization "Wouldn't Make Sense"
By Zachary Roth - February 10, 2009, 6:57PM
In the wake of Tim Geithner's speech this morning, laying out the Treasury's plan, such as it is, for Bailout 3.0, most smart observers have concluded that the Obama administration has at least left the door open for a possible nationalization of failed banks at some point, if it decides circumstances warrant that step.

But in an interview with ABC News' Nighline, set to air tonight, the president seemed to all but rule out that idea. He told ABC:
[Sweden"] took over the banks, nationalized them, got rid of the bad assets, resold the banks and a couple years later, they were going again. So you'd think looking at it, Sweden looks like a good model. Here's the problem -- Sweden had like five banks," he said, laughing. "We've got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the, the problems in terms of managing and overseeing anything of that scale, I think, would -- our assessment was that it wouldn't make sense. And we also have different traditions in this country.
True, Obama, like Geithner, has always seemed skeptical of nationalization. But his answer to ABC would appear to go further than he yet has in declaring that he'll avoid adopting any version of that approach.

Of course, things might look different once we get done with these "stress tests," and find out how many major banks are truly insolvent. But as of now, the president seems dead set against even short term nationalization.

At this point, with the Republic in ruins - take the hard road, it will lead to another term. His problem is in the Senate and the House and people like Dodd.

Poll shows Rell rates, Dodd down


HARTFORD — New Quinnipiac University polls show a growing distrust of Sen. Christopher J. Dodd but soaring popularity for Gov. M. Jodi Rell.

The poll reported that 54 percent of state voters aren't satisfied with Dodd's explanation of sweetheart loans he got from a failed mortgage lender. Worse, 51 percent of voters aren't inclined to vote to re-elect Dodd should the Democratic senator choose to run next year.

"The numbers are bad news for Senator Dodd. He is in real trouble. Clearly, he is vulnerable," said Douglas Schwartz, director of the Quinnipiac University poll.

Republicans in Connecticut and Washington, D.C. also see vulnerability and sense Dodd's time may be up after 28 years in the U.S. Senate.

Christopher Healy, state chairman of the Republican Party, declared that new Quinnipiac poll shows Dodd is on "life support."

A spokesman said Dodd is preparing for a vigorous re-election campaign. The senator continues to enjoy strong support among Democrats in this Democrat-leaning state.

Dodd doesn't appear to have helped himself concerning controversial allegations that he received special rates from Countrywide Financial Corp. when he refinanced two home loans in 2003.

Schwartz said Dodd's poll numbers have been steadily sliding since the mortgage controversy broke last June. The senator's job approval rating dropped 10 percentage points in the last year to 41 percent in the Quinnipiac poll and his disapproval rating increased 20 percentage points.

Healy said several Republicans are considering challenging Dodd and some others have been mentioned as possible candidates.

Meanwhile, the Quinnipiac poll suggests Rell has ideally positioned herself politically a little more than 18 months before the next election for governor. She isn't saying what her election plans are yet, but Healy said he expects Rell will seek a second full term in 2010.

Rell received an approval rating of 75 percent one week after she delivered a grim budget message to lawmakers. Even Democrats approve of their Republican governor, 67 percent to 26 percent.

Welcome to trading and investing through Washington. The center of the capital universe has moved a few hundred miles south of NYC. God help us all.

Monday, February 9, 2009

Cash In That Ticket

If you bought a few lottery tickets (bank stocks) a few days ago I would rush to cash them in before the bank goes bust. If you bought some of the more beaten down names such as Bank Of America and Wells Fargo - you probably pulled between 30 to 50%. Let's not get greedy. I think the market is trading the exact opposite as I had hoped for and may be telegraphing some tough love in the days and weeks to come.

The rumor stream has been a consistently slow bleed of various plans coming out of the Treasury and out of the Congress. By all measures the market is trading in a "buy the rumor sell the news scenario". This morning a pretty heavy hitter weighed in on the mark-to-market accounting rumor swirling around.

Feb. 9 (Bloomberg) -- Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein said the financial industry shouldn’t abandon the “mark-to-market” accounting rules that some banks blame for aggravating global economic woes.

The rules, which require banks to book profits or losses when asset values rise or fall, should be even more rigorous, Blankfein wrote in an op-ed piece published yesterday on the Financial Times’s Web site. New York-based Goldman’s adherence to the practice “was a key contributor to our decision to reduce risk relatively early” in the credit crisis, he wrote.

“This process can be difficult, and sometimes painful, but I believe it is a discipline that should define financial institutions,” wrote Blankfein, 54. “If more institutions had properly valued their positions and commitments at the outset, they would have been in a much better position to reduce their exposures.”

It's anyones guess as to which direction the Treasury will follow, but one thing is for certain the market is primed to be disappointed if they don't deliver ALL of the line items and rumors many on the Street were hoping for.

Tuesday, February 3, 2009

Step Inside The Casino

In these precarious and financially desolate times, if you happen to have some money lying under the couch cushion or between the car seats - you may want to buy bank stocks rather than that lotto ticket or pull of the slot machine. The hysteria over a possible bank nationalization plan is reaching its fever pitch. The crescendo always hits before the scene change. The idea that the overall market would benefit from the complete dilution of common equity holders in the banking sector is delusional at best - and in many cases, if you look under the hood of the grim messenger relaying these tales - they are only being fashioned to propagate their own positions, either in the market or in the media.

I am willing to wager that the mark-to-market accounting rules will be amended by the end of next week. You will also most likely see some other game changing initiatives to recapitalize the banks and to secure the market. Should these changes take place, that sucking sound we have been hearing for the last six months will be replaced with a sonic boom and a mad rush to buy the stock market. The rally may be fleeting, but then again it may be the start of something else.

I realize our economy and dependency on the markets is vastly different than Japan in the early 90's, but we should at least acknowledge at this point in the crisis that Japan avoided a Depression! Sure it was tough, heck it's still tough for them - but they avoided an even worst scenario. If we strictly stick to dogma things will inevitably get much worse. We need not cut off our noses to spite our face.

Thursday, January 22, 2009

Change Is Coming America

With SEC Chairman Cox stepping down yesterday and the new Chairwoman Maria Schapiro stepping in, some swift changes should accompany the appointment.

You will also most likely see changes to the mark-to-market accounting rules implemented last year. However appropriate in theory - they are killing any chances for the banks to re-capitalize. You could say it would be a necessary evil to end the viscous nature of the feedback cycle that is gripping the banks, and preventing them from lending throughout the crisis.

Sunday, January 18, 2009

The Facts

Just the facts please.

More of the same with my concentration on the banking sector index - the BKX. Some really interesting information has been coming out of that area of the market as of late. It is what turned me from overwhelmingly bearish to quite bullish in a matter of days. To make a long story short, the overall market (SPX) is significantly outperforming the BKX; and it appears as though the banking sector is on the verge of being completely washed out (as of Friday). The significance being that the market passed a very large test of the December and November lows last week. The banking sector, however, overshot the November 21st lows by roughly 9 percent. That's amazing relative strength for the overall indices.


It's rare for the overall market to hold up so well in the face of a crashing banking sector. However, this market appears at the moment to have exhausted the contagion of selling pressure that was overwhelmingly evident this fall. This geometry also squares nicely with the posture of the BKX:SPX ratio (see prior posts). From the standpoints of symmetry, the chart looks ready to swing the other way - and by extension, pull the market through some key overhead resistance.

To break things down further and shed some additional color to this thesis, let's look at the facts:

The BKX has crashed and rallied four times in the past year. The BKX, SPX and VIX changes are measured from 1 year prior to date of the low:

BKX Low      BKX/Change      SPX/Change      VIX/Change      BKX Retracement      Rally Trough to Peak

March 10             -34%                 -9%                      +109%                    +14%                             9 Days

July 15                  -58%                -21%                     +88%                      +41%                           19 Days

Nov 21                   -57%                -44%                    +191%                     +37%                             7 Days

Jan 16                    -60%                -36%                   +62%                          ?                                   ?

What's truly noteworthy is the diminished VIX readings accompanying the latest BKX low. The market appears to be saying it has digested the bulk of the financial crisis and is ready to stabilize. If the banking sector can begin to walk again; and more importantly, LEAD, the shorts will be forced to cover in mass.

From a technical standpoint, the BKX has reached its downside targets on both the weekly and P&L charts.

The VIX also looks vulnerable to a strong downside retracement.

The YEN and the USD look very similar as well. Japan's telegraphed intentions last month to intervene in their currency and equity markets could add gasoline to an otherwise combustible mixture.

The McClellan oscillator also appears to be oversold as well as extreme readings evident in the equity put/call ratios.

I am also quite aware of the rare historical parallels this market avails itself too. And quite frankly, the diminished nature of this retracement rally would be without precedent. In December I was in the camp of waiting for another low to reveal itself in the charts, but at this juncture in time with the overwhelming evidence pointing towards the contrary, I will give history the benefit of the doubt. In that instance, we should expect at the very least a 50% retracement of losses. A 60% retracement would also be within the realm of possibility as well.

To date, we have retraced only 19% of the losses that began last August. At the rally's high-point in early January, the market had retraced only 35% of the losses. I find it comforting that this latest weakness retraced on a closing basis 50% of the gains from the November 21st low. From a technical standpoint that is healthy and it appears to be setting the stage for the next leg up. We shall all have a front row seat.

Thursday, January 15, 2009

the Monster

I give you the banking sector index (BKX) : S&P 500 ratio.

The moment of truth is truly here...

I just can't get over the symmetry in these charts. It's breathtaking.

Never miss an opportunity to overanalyze, so here goes:

Looking at this chart it is blatantly obvious where all the volatility and fear was captured. If my interpretation is correct, the market will transition to a much quieter (comparitively) and stable trading range. You could say this week was the going away party for fear as we were coming in to test the July lows. Coming out of this test (as long as it holds...), the market should slowly creep higher. It will not be anything like this fall - so I would advise traders to adjust accordingly. This will be hard to get use to after working through chaos for the last six months or so.

Much like an adrenaline junkie reporter adjusting to life in the suburbs after living through a warzone, it will take some getting use to Pleasantville.

Sunday, January 4, 2009


Is jawboning and intervention in currency markets ever a constructive tool in the monetary policy arsenal? It may move markets in the short term, but eventually it unwinds itself as well as the creditability of the doctor administrating the "medicine". Looks like Japan is ready to make the same mistake it has for the last two decades.

Bloomberg News
Shirakawa Says BOJ May Consider Measures to Address Yen’s Rise

By Fumishige Asano and Masumi Suga

Jan. 4 (Bloomberg) -- The Bank of Japan may consider measures including monetary policy to counter the rising yen as the economy faces severe conditions in 2009, Governor Masaaki Shirakawa said.

“This year will be very tough for the economy,” Shirakawa told public broadcaster NHK today. “The strong yen at a time of rapid decline in the global economy has a big negative impact on our economy in the short term.”

His comments follow signals last month from Finance Minister Shoichi Nakagawa that Japan was ready to intervene in the foreign-exchange market for the first time in four years. With the nation’s economy already in recession along with the U.S. and Europe, the surging yen is adding to pressure on exporters including Japan Toyota Motor Corp., which expects its first operating loss in 71 years.

Technically speaking, they have picked a pretty good spot to jawbone. Whether it breaks the Yen out of the uptrend is up to the markets and up to the magnitude of jawboning and intervention.

Mr. Shedlock over at Mish's Global and Economic Trend Analysis has some excellent pieces on this already. See:

Japan Announces Currency and Stock Market Intervention

Countries are now playing a game of "Top This" to see who can do the dumbest things. Please consider the following: Japan plans to buy $227 billion in shares to boost market

Japan's government said Thursday it is submitting a bill to parliament allowing for the purchase of 20 trillion yen ($227 billion) in stock to help stabilize the Japanese stock market, Kyodo news reported. Under the bill, the Banks' Shareholding Acquisition Corporation, originally created in January 2002, would resume buying shares from banks and other entities, the Japanese news agency reported. The bill would be introduced early next month "with an eye to implementing the measure by the end of March," the report quoted lawmakers as saying.

The Liberal Democratic Party had initially considered just 10 trillion in stock purchases, but the size was roughly doubled to 20 trillion yen at the request of its ruling coalition partner, the New Komeito party, the report said.
If stocks are ready to go up they will. If not they won't. Intervention will accomplish nothing other than create an environment of suspicion that stocks need to be propped up or they would fall. When intervention starts, investors are deprived of normal market signals and will not know if share prices have really bottomed or not. This silliness by Japan is going to create massive mistrust, and massive mistrust is never good for the markets.

More Currency Intervention Madness

Not content with stock market lunacy alone, Nakagawa Says Japan May Take Currency Action
The yen fell against the euro on speculation the Bank of Japan will today lower borrowing costs and say it will buy commercial paper to combat a global recession.

The yen may also weaken for a second day against the dollar on speculation Japanese officials will intervene to stem its surge to a 13-year high. The dollar declined against the euro, heading for its biggest weekly loss since the 15-nation currency’s 1999 debut, after the Federal Reserve introduced near- zero interest rates and said it would focus on buying debt, a policy known as quantitative easing.

“It’s clear the BOJ has to respond with some combination of rate cuts and additional measures to improve liquidity,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “The alternative of doing nothing would be taken as tacit approval of sharp yen appreciation.”
It is absolutely not clear that Japan needs to do anything here. In fact, it is absolutely clear that Japan should not do a thing. It has been proven time and time again that currency intervention does not work.

Please consider Currency Intervention And Other Conspiracies.
.... Note those numbers. Japan spent hundreds of billions in 2003 starting in August, attempting to prop up the dollar.

Japan halted its currency intervention in March of 2004 according to the International Herald Tribune article EU officials soften stance on yen's weakness.

Yen vs. Japan's Intervention 2003-2004

click on chart for sharper image

If ever there was proof of the absurdity of currency interventions there it is. Ironically the Yen started plunging shortly after Japan stopped trying to force down the value of the Yen.
Japan is prepared to embark on a fool's mission twice. Once with the Yen and a second time with their stock market. Neither can possibly work and the latter will create massive mistrust. - Mike Shedlock (Mish)

Saturday, January 3, 2009

Deja Vu - Bear Market Psychology

Just as Warren Buffet and Jeremy Grantham were "early" to exit the bull market in 1998 and 1996, respectively, the same is happening now with wise and prudent bear fund managers. News that Bill Fleckenstein has closed his short only fund does not strike me as the bottom for this bear. You will hear the same thing from the likes of marque short managers such as Jim Chanos, Doug Kass and Steven Leuthold. This is the natural arc of money management. Those that were prescient and captured the initial explosive returns are prudent to pull their powder in for the next move. To me it indicates that the final capitulation has yet to arrive. Irrational exuberance, now irrational armageddon is appoaching. The psychology of the market always remains the same, we just happen to be on the dark side this time. Food for thought.


A repost from December 10th. Check that Dow corollary on the building.

I almost always arrive early. I suppose that's the gift of clairvoyance. One of these days I will figure out how to use it...

Sunday, December 28, 2008

Taking Stock

Wow am I exhausted. After countless trips around the Tri-State area we are back in town. A tremendous holiday for all - especially the little ones.

In any case, let me get back on the proverbial bike and start riding again - if not, the atrophy will take hold and it will be back to that blissful ignorance I remember so well as a child - or more truthfully, as a young man.

Over the course of the last month, the markets have been reseting their traps for another violent move. Who's to say it won't be that "equal and opposite reaction" - a bull charge of the likes we haven't seen since the early 1930's. It really does seem absurd to not be bullish on the markets in the short term. The bearish equivalent of greed perhaps? How much risk could possibly remain after being bisected in a matter of months? Isn't everyone tired of guessing the bottom? Hardly.

I can't say with any tangible description or reference; but I suppose the old phrase will apply - I will know it when I see (or hear) it. And frankly, there has been a bull market in bottom feeding and rather orderly markets (equity) considering the alternative to capitalism. Anecdotally, that doesn't help the markets in the near term. Here are a few things churning inside me.

I realize I keep coming back to the same reference points - but just as a trial lawyer methodically builds his case - I have been refining my perspective and trading thesis towards this market. The targets are always moving against sliding landscapes - the secret is to keep framing and observing the primary subject and its relationship and kinetic reaction to the current landscape at hand. I am not a pure technician. Far from it, I use technical analysis as a tool in the development of the thesis. Consider it my forensics lab. It isn't full proof - and it is still at the mercy of human error and misjudgement. If the detective only relied on the forensic report he would rarely be able to piece together a representable version of the story. Likewise, charts need to be placed within the broader context of market psychology, fundamentals and the intangible art of reading the Matrix. If it was a pure science the formula for success would be readily available and patented for sale at the neighborhood drug store - the smooth returns of Bernie Madoff would be legit! But as we all know, it isn't a pure science and just as much an interpretive art.

Here are some technicals that I am reading.

The Transports appear on the cusp - again. And just as I have mentioned in the past, the Transports have led us into every major market bottom. Those Dow Theorist really do deserve a merit badge. If I could be so brazen, it appear tomorrow will decide the near term fate of the Transports - and I suppose by extension, the overall market.

Although there appears to be two camps for interpreting the VIX - it has been cut in half in a rather timely fashion with very little benefit extended towards the equity markets. The same goes for the dollar's weakness as well.

Monday, December 22, 2008

Europe & Russia - More Munitions in The Dump

I keep coming back to this same article and wondering when the kaka is going to hit the fan:

excerpts from the UK Telegraph - October 28th, 2008

...“This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon. Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits."

My response: Deflation is like breaking a window on a commercial airliner - Anyone close to the break is going to be sucked through the bottle neck; and those that panic or are unable to get to an oxygen mask will die from the loss of cabin pressure.

..."America is the staid old lady in this drama."

My response: Jim Rogers eat your heart out.

..."Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect. They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles."

My response: And that was written when oil was at $60.

..."Russia too is in the eye of the storm, despite its energy wealth – or because of it. The cost of insuring Russian sovereign debt through credit default swaps (CDS) surged to 1,200 basis points last week, higher than Iceland’s debt before Götterdammerung struck Reykjavik. The markets no longer believe that the spending structure of the Russian state is viable as oil threatens to plunge below $60 a barrel. The foreign debt of the oligarchs ($530bn) has surpassed the country’s foreign reserves. Some $47bn has to be repaid over the next two months."

My response: Doesn't the phrase oligarchs remind you of the dark horsemen in the Lord of the Rings? Oh, and that was written when oil was at $60!

..."The threat to Britain lies in emerging Asia, where banks have lent $329bn, almost as much as the Americans and Japanese combined. Whether you realise it or not, your pension fund is sunk in Vietnamese bonds and loans to Indian steel magnates. Didn’t they tell you?"

My response: At least they didn't buy into the Euro!.

Saturday, December 20, 2008


Just as an EKG illustrates the indisputable artifact of a heart attack, the VIX displays the same for a market in severe distress. If we look back at the October 2002 lows and compared the print of the VIX then to the VIX now, we see remarkably similar emotions in the charts. See for yourself. I took the liberty of indicating where the November 13th and Nov 27th lows on the S&P would be on the 2002 VIX chart. As you can see, the final capitulation low on the S&P prints a lower VIX then the double tops.

To me it looks like the groundhog has seen his shadow and we may be in for six more weeks of winter.

Thursday, December 18, 2008

ZIRP - Helplessly Bernanke

I would like to preface this by saying I have the utmost respect for our Chairman. He's just in the wrong place at the wrong time.

With that said, some entertainment, courtesy of a version of Neil Young's Helpless, as seen through the eyes of Bernanke. A GuidePostings original production...

Wednesday, December 17, 2008

Some Perspective

The equity market's extremely weak under-performance compared to the Dollar weakness/Euro strength is quite bearish. If we are robbing from Peter to pay Paul, Paul is getting the shaft. Maybe it's a fund of funds thing... I can not really see much more strength in the Euro from here in the near term. Inquiring minds want to know.

Tuesday, December 16, 2008

Does This Look Like A Healthy Situation?

Talk about bait and switch. The pundits on CNBC high five one another while the equity markets go up a few percent and the dollar goes down the same. Robbing Peter to pay Paul. When our currency stabilizes and stops trading like a stock I will buy this market hand over fist. Until then, it's just a pink pong ball going down the stairs.

Sunday, December 14, 2008

Is Ben Bernanke Charles Ponzi's Lovechild?

All this talk about the greatest ponzi scheme of all time had me look up the real macoy - Charles Ponzi. After glancing at his mug shot for five seconds I realized who he strikingly resembled - Ben Bernanke. Granted, Mr. Bernanke is missing a few of the fuzzy traits, but the likeness is uncanny.

Where is this guy going with this you ask?

If we think that the Bernie Madoff ponzi scheme is big, just wait until the Fed and Treasury's redemptions (hello China, hello Japan, hello World) come knocking. All Bernie Madoff did was pull a page from the fiat monetary policy page book. As long as new suckers, I mean purchasers, continue to buy up our debt, the scheme, I mean American Dream, continues. When will the music stop? Go ask Chuckie Prince.

Friday, December 12, 2008

The Ghost Of Christmas Past - Circa 1990

I have been comparing the 1990-1991 Savings & Loan bear market as a navigation tool through the current bear. It isn't a perfect parallel, but the fact that it was driven by a severe banking crisis holds relevance to today. Think of it as a fender bender bear. The market we are currently experiencing is the highway collision bear. The dynamics and reflexes are similar, the severity of the collateral damage is worlds apart. The first two charts are of the two bear "financial accidents". Although the magnitudes of the declines are standard deviations away from one another, the trends are very similar. For clarity, you can see that the 1990 Bear carved out three separate lows over the fall crash cycle. The 1990 bear crash/liquidation cycle started almost two months earlier than the current crisis. Setting them on the same timeline, we will experience a third low next week or soon thereafter. To sound like a broken record, I have been following the gold/silver ratio as a barometer of risk appetite in this financial crisis. To further simplify, I have removed silver from the ratio and replaced it with the SPX. I then compared the two financial crises in this ratio. They trend with stunning similarity. You be the judge.

Thursday, December 11, 2008

A Christmas Carol

To date, this market has been visited by one ghost; the Ghost of Christmas Past. The Ghost's of Christmas Present and Future are approaching. And Just like Ebenezer, I am scared.

The powers that be, from the Fed to the ECB, to Macy's for that matter, would love for the Ghost's of Christmas Present and Future to remain there frozen in time. And just like Ebenezer, they are bound to follow the Spirit and witness the obvious truths. These are hard times. Strike that. These are dangerously hard times.

Let's not fool ourselves, the action in the futures market tonight and what's coming down the pike tomorrow morning was going to happen regardless of what was done in Congress. All Congress is doing is expediting it's delivery. For once they deliver. The irony is everywhere...

For those of you who were depending on this bailout to deliver a Christmas rally (they run the gamete of bulls and bears alike), shame on you. Does this feel and smell like a normal market? Christmas (curse tense), look what happened after the 700 billion dollar bailout was approved, the market's didn't exactly wake up to the upside and turn the corner, they imploded! Keep things simple. If you are not terrified at how this market has performed after receiving every hand-out imaginable, you need the phrase P O L L Y A N A (a synonym for Dennis Kneale?) tattooed to your forehead.

This is a Class-5 hurricane, throwing sandbags (the Fed, Congress, Interventionists) is inconsequential. The collective fear is the market's equivalent of Mother Nature. It will walk and romp where it wants. Follow the infrastructure in the charts, they show the GuidePosts along the way.

Wednesday, December 10, 2008

Dead Cat Bounce

Tuesday, December 9, 2008

Bull Trap...Again

When will they ever learn? If everyone is calling a bottom at the same place, what do you think will happen when the market doesn't provide that outcome? Meaningful bottoms occur when both the bears and the bulls are on the same page and the page is torn out. Katie bar the door. Remember the mini crash in February 2007? The electronic trading platforms could not keep up. We have not even seen sell orders of that magnitude yet. This market has been orderly, I expect things to get chaotic shortly. More later on.

Thursday, December 4, 2008

The Edge of The Abyss

Taking a step back from the nuisance and noise of the present day, one can fully appreciate the arc of violent dislocations transpiring across the global financial system. Over the course of the last decade, the world has experienced exogenous shock after shock; the Asian Financial Crisis (1997), the Russian Financial Crisis (1998), the Technology Bubble (2000), Enron and Worldcom (2002), the Housing Bubble (2006), the Credit Bubble (2007), the Emerging Markets and Commodities Bubble (2008) and coming to theaters near you, the Bond Bubble (2009). From the perspective of a former geologist, these were the initial tremors of friction.

Make no mistake about it, the financial markets are the dog, the political fall-out and massive global instability that arises after economies and governments collapse is the tail. I believe Nassim Taleb was correct in describing the present as perhaps the most dangerous episode in American history since the Revolution. 

The kinetic energy of these crises has always been maintained within the system. Each time a monetary policy or fiscal policy official tells the public the problem has been contained; it mutates, changes shape and shows up somewhere else. Nothing is resolved and no maladies are purged from the system. It is just like a doctor treating the symptoms, but never isolating the cause. Worse yet, the doctor seems to always prescribe steroids for these ailments, further masking the cause and pushing down the road the inevitable collapse of the patient.

As a cynical observer of these events, the present culmination of disruptive forces within the financial system is nothing less than poetic. Whether it is our current President's complete lack of political capital to affect any necessary change or Henry Paulson's impotence and maleficence to Treasury's (aka Goldman Sachs) role within the meltdown, the crisis has reached critical mass and will begin to act disorderly, or more succinctly, chaotic. Despite the tremendous volatility and downward pressures upon the system, the markets overall have been orderly and methodical. I believe we are about to cross that threshold.

Milton Friedman once said that he did not believe the Euro would survive it's first crisis. It appears that the crisis has arrived.

"The euro is going to be a big source of problems, not a source of help. The euro has no precedent. To the best of my knowledge, there has never been a monetary union, putting out a fiat currency, composed of independent states.

There have been unions based on gold or silver, but not on fiat money—money tempted to inflate—put out by politically independent entities...

Inflation is a monetary phenomenon. It is made by or stopped by the central bank. There has been no similar period in history like the last 15 years in which you’ve had little fluctuation in the price level. No matter what else happens, this will maintain as long as the US Federal Reserve maintains strict monetary policy and control of the money supply.

The same thing is true in Europe. The ECB (European Central Bank) has held down the rate of monetary growth. So there have been stable prices. The pressures in Europe, however, will be much stronger than in the US. The main pressure is to print money and be more expansive in order to promote employment.

What the ECB does really depends on whether Germany and France and Italy will back it. Italy may well be the main problem...

In this sense, the euro is good for Europe. But only if there is flexibility all around. The problem is that, in a world of floating exchange rates, as Italy was before the euro, if one country is subjected to a shock which requires it to cut wages, it cannot do so with a modern kind of control and regulation system. It is much easier to do it by letting the exchange rate change. Only one price has to change, instead of many.

But now, in the euro, that option is taken away. The only alternative if a state has to adjust to a shock is to let internal prices vary. It has to let wages go down, if necessary." - Milton Freidman 2006
Below is an article from the UK Telegraph that neatly sums up the gauntlet of moving parts now unfolding across the Atlantic. I would urge you to read the entire article. Anyone expecting (the Fed and ironically Jim Rogers) the US dollar to weaken and resume its decline will be greatly disappointed, or as the Telegraph puts it, "America is the staid old lady in this drama."

By Ambrose Evans-Pritchard
Last Updated: 10:52AM GMT 26 Oct 2008

The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump. Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992. “This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon. Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.

The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect. They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles.

Europe has already had its first foretaste of what this may mean. Iceland’s demise has left them nursing likely losses of $74bn (£47bn). The Germans have lost $22bn. Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become “the second epicentre of the global financial crisis”, this time unfolding in Europe rather than America. Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund. Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.

Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn) to what was once the US backyard. Hence the growing doubts about the health of Spain’s financial system – already under stress from its own property crash – as Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall.

Broadly speaking, the US and Japan sat out the emerging market credit boom. The lending spree has been a European play – often using dollar balance sheets, adding another ugly twist as global “deleveraging” causes the dollar to rocket. Nowhere has this been more extreme than in the ex-Soviet bloc.

The region has borrowed $1.6 trillion in dollars, euros, and Swiss francs. A few dare-devil homeowners in Hungary and Latvia took out mortgages in Japanese yen. They have just suffered a 40pc rise in their debt since July. Nobody warned them what happens when the Japanese carry trade goes into brutal reverse, as it does when the cycle turns.
The IMF’s experts drafted a report two years ago – Asia 1996 and Eastern Europe 2006 – Déjà vu all over again? – warning that the region exhibited the most dangerous excesses in the world. Inexplicably, the text was never published, though underground copies circulated. Little was done to cool credit growth, or to halt the fatal reliance on foreign capital. Last week, the silent authors had their moment of vindication as Eastern Europe went haywire. Hungary stunned the markets by raising rates 3pc to 11.5pc in a last-ditch attempt to defend the forint’s currency peg in the ERM.

It is just blood in the water for hedge funds sharks, eyeing a long line of currency kills. “The economy is not strong enough to take it, so you know it is unsustainable,” said Simon Derrick, currency strategist at the Bank of New York Mellon. Romania raised its overnight lending to 900pc to stem capital flight, recalling the near-crazed gestures by Scandinavia’s central banks in the final days of the 1992 ERM crisis – political moves that turned the Nordic banking crisis into a disaster.

Russia too is in the eye of the storm, despite its energy wealth – or because of it. The cost of insuring Russian sovereign debt through credit default swaps (CDS) surged to 1,200 basis points last week, higher than Iceland’s debt before Götterdammerung struck Reykjavik. The markets no longer believe that the spending structure of the Russian state is viable as oil threatens to plunge below $60 a barrel. The foreign debt of the oligarchs ($530bn) has surpassed the country’s foreign reserves. Some $47bn has to be repaid over the next two months.

Traders are paying close attention as contagion moves from the periphery of the eurozone into the core. They are tracking the yield spreads between Italian and German 10-year bonds, the stress barometer of monetary union. The spreads reached a post-EMU high of 93 last week. Nobody knows where the snapping point is, but anything above 100 would be viewed as a red alarm. The market took careful note on Friday that Portugal’s biggest banks, Millenium, BPI, and Banco Espirito Santo are preparing to take up the state’s emergency credit guarantees.
Hans Redeker, currency chief at BNP Paribas, says there is an imminent danger that East Europe’s currency pegs will be smashed unless the EU authorities wake up to the full gravity of the threat, and that in turn will trigger a dangerous crisis for EMU itself.

“The system is paralysed, and it is starting to look like Black Wednesday in 1992. I’m afraid this is going to have a very deflationary effect on the economy of Western Europe. It is almost guaranteed that euroland money supply is about to implode,” he said.

A grain of comfort for British readers: UK banks have almost no exposure to the ex-Communist bloc, except in Poland – one of the less vulnerable states. 
The threat to Britain lies in emerging Asia, where banks have lent $329bn, almost as much as the Americans and Japanese combined. Whether you realise it or not, your pension fund is sunk in Vietnamese bonds and loans to Indian steel magnates. Didn’t they tell you?

So what to expect over the coming year? Pretty much every major financial crisis that the world has experienced in chapters over the last decade rolled into one giant cannoli. Deflation has arrived. Can the world digest it?

Wednesday, December 3, 2008

The Thomas Friedman Top

It's easy for us to pick apart recent history and say all the information was there; tight credit spreads, an LBO buyout binge, a housing bubble, a commodities bubble, Goldman Sachs and Thomas L. Friedman. 

Yes, Thomas L. Friedman.

From Wikipedia:

"In the book, Friedman recounts a journey to Bangalore, India, when he realized globalization has changed core economic concepts. He suggests the world is "flat" in the sense that globalization has leveled the competitive playing fields between industrial and emerging market countries."

Could there be a more appropriate illustration of Friedman's captive audience or should we say the choir of advertising executives posing as free-market capitalist?

The World is Flat by Thomas Friedman Wins Financial Times and Goldman Sachs Business Book of the Year Award
November 22, 2005

Lionel Barber, editor, Financial Times said: 'We've had a wonderful set of entries for this prestigious prize. Thomas Friedman is a worthy winner. His book is compelling, hugely enjoyable and relevant to the most pressing issue on the minds of politicians and business people around the world.'

Lloyd C Blankfein, President and Chief Operating Officer, Goldman Sachs, said:

'Thomas Friedman has identified the most important economic and political theme of the early 21st century and has provided us with the vocabulary for debating its merits and challenges.'

Speaking from Washington DC, Thomas Friedman commented:

'I'm absolutely thrilled and honoured to be the first recipient of the Financial Times-Goldman Sachs business book award. I'm thrilled and honoured because these are two such classy organizations, who take business and business reporting seriously. I'm thrilled and honoured because the judges who made this award are such an esteemed group. And I'm thrilled and honoured because I think this Financial Times -Goldman Sachs award for business-financial writing is going to become a much sought-after prize, as more and more writers and publishers get to know about it in coming years. I'm sorry that my crazy travel schedule - I've been between Beijing and Jerusalem in the past few weeks - did not allow me to be in London.'

Where have I heard such confidence and illuminating insight before? Perhaps Alan Greenspan, circa 2004?

"Overall, the household sector seems to be in good shape," "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home."
It appears Friedman was as prescient to the strengths of globalization as Greenspan was to housing or more or less everything.

Fast forward a few years and here we are. The chart to the left illustrates just how bubblicious the concept of globalization became. From the ever worthy fellows at the Bespoke Investment Group:

"Just as it’s been a Black October for the equity markets, it’s been even worse for global commerce. The Baltic Dry Index, which is often cited as a barometer for global shipping rates, is now down fourteen days in a row and has declined on all but one day in October, with a month to date fall of 64.3%. Since its peak reading of 11,793 in May, the index is now down by 90.3%.

As shown, the Baltic Dry Index had a meteoric run since the start of the decade, as it became one of the key symbols of the ‘globalization’ trade. Many argued that globalization would work its way into every aspect of the economy, with some health care companies in the US even going so far as to send their patients to emerging countries for surgical procedures. Judging by the recent performance of the Baltic Dry Index as well as global currency markets, however, it now appears that like any ‘new thing,’ the globalization trade went too far. In fact, when compared to the bursting of prior bubbles, the decline in the Baltic Dry Index from its peak is greater than every single one."

One last excerpt from the book quoting Bill Gates. I can't dispute the man's genius, but I think he may have gotten a bit carried away here. Kind of like when he was CEO for a bit too long.
"Bill Gates explains the meaning of this transformation best. Thirty years ago, he tells Friedman, if you had to choose between being born a genius in Mumbai or Shanghai and an average person in Poughkeepsie, you would have chosen Poughkeepsie because your chances of living a prosperous and fulfilled life were much greater there. ''Now,'' Gates says, ''I would rather be a genius born in China than an average guy born in Poughkeepsie.'' - The World Is Flat

I'm not sure the people in Mumbai or Shanghai will feel the same way in the next decade. Just like the markets, they revert to the mean.

Going Lower

As Dennis Gartman often notes, a good trader "Trades like a mercenary guerrilla. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand." Dogma is a dangerous attitude to front in markets such as these.

With that said, I believe as traders we need to move even further out on the continuum of risk and frankly those that have been dogmatic (towards the downside) have been consistently rewarded. That paradigm will change for sure, but guessing that inflection point will be tremendously difficult. Based on my proprietary research, I believe the odds are growing that between now and the end of January the market will move another leg down, perhaps into the mid 600's on the S&P.
Some things I am looking at:

- The damage sustained to the BKX;

- The expanding gold/silver ratio;

- Weakness in the Euro, strength in the Dollar;

The velocity of these moves, both up and down, have sustained the dominant trend lower. Until the market can break out to the upside and consolidate in a narrow range, there will be no traction. These markets are hollow right now. Just look at SAP Capital or Picken's hedge fund. They are almost completely in cash and waiting. Perhaps you should too!

Monday, December 1, 2008

Oversold is a Relative Phrase

We are currently experiencing the practical application of the old adage "Markets can stay irrational, longer than you can stay solvent". Or perhaps today's version, "Markets can get oversold and remain oversold longer than you can remain solvent." Many of the traders in the past year have received a crash course in this axiom. Their guidposts that they follow on a daily and weekly basis have become the Bonneville salt flats. Wide open, barren, desolate, hard and fast if you find momentum.

I think traders looking for a sustained rally here may be asking for too much. Isn't everyone from Barton Biggs to Marc Faber waiting for that? Granted Barton Biggs has been saying that for no less than a year and a half, I firmly believe that on a longer term trading horizon (weeks and months) the carnage in the financial sector (BKX) foreshadows considerable downside to the overall market. The fact that this is a financial crisis of the likes there are few comparisons, and that the financials constitute the single largest (~16%) percentage of the S&P 500, it should be no surprise that the 2002 lows will be substantially violated; and I am not talking about 741 verses 768. We are talking about a possible 40% decline from the lows.

And for those of you glancing at the shocking depths of these rsi readings on the S&P 500 and speculating that the only move from here is up, check no further than the BKX chart. It has been in the red-zone (<30) for more or less a year. Comparatively, the S&P has only been in the red-zone since October.


The rapid deterioration of the equity markets this morning smells like something more than a retracement of recent gains. Furthermore, the gold silver ratio that has been an excellent forward looking barometer of risk seems to be pointing towards another spell of liquidation and perhaps a lower, low. Maybe it is just another test of the recent lows, or perhaps not.

For certain, weak hands are selling today. If we get down to 800 or slightly lower, we will see what mettle this rally holds.

Wednesday, November 26, 2008

The Intersection of Value & Contrarian Thought

Over the course of the last year, the most grizzly of bears have come down off the mountain, frolicked and pillaged in the market torrents and crossed the wild terrains in pursuit of the once in a generation pilgrimage to Pamplona. These grizzlies want to run with the bulls. Should we heed their transformations? By nature they are prudent beasts. Will they arrive early to the party just as they did with their warnings of an over-leveraged and frothy marketplace? Would they have been playing for the same team in 1873, 1874, 1875...1929, 1930, 1931? I realize these are moving targets, but do contrarians need to move even further out on the continuum of risk? These are some of the crosscurrents running through my brain these days.

Back in the summer of 2007 it was Richard Russell blaring the trumpets of a new bull market. The octogenarian investor/market pontificator was one of the few who picked to the day one of the great bear market bottoms of the 1970's. However, this time the usually bearish Russell seems to have been left flat footed and whipsawed by the market's bi-polar convulsions. Here he is in the summer of 2007:
"We are experiencing a global bull market of Titanic proportions. The central banks of the world now have the ability and the power to create fiat money at will." - August 30, 2007

The tragic irony of his untimely call was his continued bearish posture and skepticism throughout the 2003-2007 cyclical bull market. Even the great ones get it wrong from time to time. Today there is a bull market in the carcasses of former prescient investors and traders. To quote from Buffet once again, "It takes 20 years to build a reputation and five minutes to ruin it."

The list of financial luminaries below illustrates the depth and breath of typically conservative and tactically bearish investors that have begun buying this market.

Jeremy Grantham
"Most of the damage is behind us now and the US market is trading exactly at fair value." "We've probably stumbled into doing enough things right that the meltdown is finished," he says. "We're in for a bit of a recovery followed by a meat grinder." - November 1, 2008.

Warren Buffet
"So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities."

John Neff
"His current portfolio contains about seven stocks. His on-again, off-again love affair with banking giant Citigroup Inc. is on again. He famously bought a big stake in that company for Windsor in the early 1990s when bad loans in real estate and in developing countries pummeled its shares.

He has been buying Citigroup again, believing that its stellar network of offices around the world will help it thrive when the global economy recovers. Citigroup now accounts for about 13 percent of his portfolio." October 15, 2008.

Marty Whitman
"TORONTO -- Marty Whitman, the octogenarian dean of deep-value investing, sees great bargains to be snapped up from the current stock market meltdown.

"It's a great time," enthused the 83-year-old founder of New York-based Third Avenue Management LLC before speaking yesterday at a conference organized by AIC Ltd.

"We can't try to pick the bottom, but it seems to me that there are great values out there now, just like in 1974," the firm's co-chief investment officer said in an interview.

The stock market crash of 1973-74, which affected all the major stock markets around the world, lasted 694 days before bottoming out.

"Everything went down every day, and if you bought, you hit a lot of 10-baggers," recalled Mr. Whitman. "I hope that we do it with a lot of what we are doing now." September 18, 2008.

John Hussman
"As of last week, the Market Climate for stocks was characterized by favorable valuations and unfavorable market action. From the standpoint of the general approach described in the Strategic Growth Fund's Prospectus, this places us in the “moderate” yellow box. The appropriate investment strategy is to increase market exposure gradually on substantial price weakness, which is exactly what we are doing here."

Steven Leuthold
"People say we haven't seen anything like this before. They just haven't looked.""Today's stock market is quite undervalued, in the low 15 percent of our 60-year valuation history."

I am sure Nassim Taleb would have thrown out these reflections as irrelevant and completely out of perspective to this markets character and danger. He may say, "This is not your grandfather's depression, keep going out on that continuum of risk". Of course value investors would be frothing at the mouth in this environment, they have been conditioned their entire lives for moments such as these. Where else in their lifetimes have the most high quality blue-chip companies been cut in half in one year? They are paid to work in these environments. I guess that is all the information we need...

Tuesday, November 25, 2008

Is New Jersey The Next Michigan?

If a rising tide lifts all boats, then naturally, as Warren Buffet says, "only when the tide goes out do you discover who's been swimming naked." It appears that New Jerseyans have been swimming completely bare and in the moonlight for quite some time. It was not always the case. Besides being the whipping boy and the low hanging fruit for comedians bent on exhausting the irony of the Garden State, New Jersey once had a dynamic and diverse economy.

New Jersey has successfully adjusted to changing economic climates in the past. Over 150 years ago, the agricultural-based economy matured and became an industrial and manufacturing-based economy. Paterson became "Silk City". Trenton was "Trenton Makes What the World Takes". Camden became "On Camden Supplies, the World Relies". You could say resourcefulness and salesmanship is in the DNA of New Jerseyans. However, the consistency of their financial success is most likely attributable to the geography and being within a stone's throw of New York City, Philadelphia, Washington D.C and Boston.

In the early 1980's New Jersey completed another transformation, this time to a post-industrial, knowledge-based, high business IQ economy. Businesses flourished in the upper echelons of the pay scale; telecom providers, pharmaceuticals, financial services and information services. Everything that was touted as the very best of America's new "finance driven economy" was within New Jersey's footprint. In 1990, New Jersey had 20% of the nations pharmaceutical jobs. Jobs that average $100,000 a year. Worries were cast aside that they no longer needed the manufacturing sector as ballast. Property values soared, running commensurate with New Jerseyans rank as first in household income and third in per capita income. Tony Soprano was flush. All was well...

The Gathering Storm

New Jersey's tax code use to be a friendly partner to business. Today it is ranked 49th out of 50 for state business tax climate. It's declining cost competitiveness is forcing those hands that once fed the coffers of the State and the people elsewhere. Whether it is the Sunbelt or friendlier international suitors, the depth and job diversity is thinning. For example, whereas in 1990 the State had 20% of the nations pharmaceutical jobs, today New Jersey has only 10% and it is declining rapidly. Comparatively, the State is one of the most expensive places to live, with an overall cost of living 32 percent above the national average. Real estate, rent, property taxes and insurance are high.

Similar to New York City, New Jersey is just arriving at the new great depression in real estate. Interestingly,
"New Jersey was one of just three states (besides Indiana and Alaska) where home sales actually increased from the year-ago period, rising 4 percent in the first quarter, the NAR said."

Just like the stock market was the last to unwind with the credit crisis (real estate peaked in June 2006, credit peaked in early 2007, the stock market in October 2007), New Jersey appears to be following a similar trajectory. It should be no coincidence, since 30% of the State's high paying jobs come from Wall Street or a street running parallel to it. Just look at Jersey City.

"Workers, Mayor Worry City's Giants May Lay Off Thousands

Tuesday, September 16, 2008

With the grim financial news from AIG, Lehman Bros. and Merrill Lynch, much of the speculation in the Downtown Jersey City financial district has concerned how many employees will keep their jobs.

The Dow Jones Industrial Average plummeted 504 points yesterday after being slammed with the double-barrel news that Lehman Bros. was declaring bankruptcy and Bank of America would be buying investment banker Merrill Lynch for $50 billion - half the price it would have cost a year ago. News also came through that insurers American International Group reportedly asked the Federal Reserve for a $40 billion bailout.

All three companies have offices at 101 Hudson St., while Lehman Bros. has an office on Hudson Street and Merrill Lynch has one on Greene Street. Lehman Bros. employs 1,700 in Jersey City while Merrill Lynch has 1,500 jobs in the city. AIG refused to say how many employees it has in Jersey City, but one estimate puts it at around 200.

Jersey City Mayor Jerramiah T. Healy fears that between Lehman Bros. and Merrill Lynch, thousands of jobs could be lost in the city with a deep effect on Downtown restaurants, bars and stores. "It is bad enough that 2,000 people may lose their jobs," Healy said. "But it's made even worse by all those satellite businesses that rely on the foot traffic." Gov. Jon Corzine said yesterday that between one-quarter and one-third of New Jersey's economy depends on Wall Street, either directly or indirectly."

Just The Tip of The Iceberg

For those New Jerseyans who thought there may be a silver lining somewhere... guess again. To truly be horrified as to what is coming down the pike fiscally, look no further than the ever prescient, Mike Shedlock at

"The state of New Jersey is insolvent. Bankrupt might be a better word. New Jersey is $60 billion in the hole on pension funding and the Governor is planning on skipping payments in a "pension payment holiday" until 2012 so as to not increase property taxes.

The Star Ledger is reporting New Jersey pension funds lost $23B so far this year.

New Jersey's pension fund has lost more than $23 billion this year, dropping to its lowest level since 2003 as a collapsing financial market battered its investments, a new state report shows.

The latest losses -- nearly $9 billion in October, and another $3 billion so far this month -- mean the fund is now worth $57.8 billion, or less than half the $118 billion in benefits it is due to pay out over time.

What Happens Now?

New Jersey is burning $5.2 billion a year. If the market is flat over the next 5 years, New Jersey will have a minimum of $118 billion in obligations and will be sitting on $31.8 billion. But what happens if the S&P falls to 450 or 600?

S&P 500 at 600 would be a drop of 24% from here. Assuming the pension plan assets dropped the same, plan assets would fall to $44 billion. On a drop to 450 on the S&P, plan assets would fall 43% from here to approximately $33 billion.

At $5.2 billion a year, New Jersey's pension plan would be completely out of cash in about 6 years in my worst-case scenario of a drop to 450 on the S&P.

However, even on a drop to 600 or 700 on the S&P (highly likely in my estimation), New Jersey, would run out of cash rather quickly putting in $1 billion a year and taking out $5.2 billion a year while assuming growth rates of 8.5% that are totally unrealistic." - Mike Shedlock

In many ways New Jersey is an amplified microcosm of the broader problems we face as a nation. Too much debt, too many entitlement promises, too much consumption, too high taxes, not enough savings and an economy much too dependent on creative finance. It is up to our leaders now globally, nationally and locally to make the hard decisions and to put us on sounder financial footings.

It only seems appropriate to end with a quote from New Jersey's own Tony,

"She was part of that generation who grew up during the Depression. But the Depression to her was like a trip to Six Flags." Tony Soprano

Barbarian's At The Gate

Watch the Prince rationalize why he's made a round trip with his position in Citigroup:

Then watch the Prince shoot his AK-47:

Do you think Vikrim and the other "Prince" sleep well at night?

If this is where we are looking for liquidity, we are screwed. If this is our Rockefeller or our J.P Morgan, the Dark Ages Part Deux may be coming round the mountain.

Monday, November 24, 2008

Which is the Best Analog- 1929 or 1873?

I was first introduced to perhaps the more appropriate historic analog of the 1870's by Bob Hoye, CEO of the market research firm, Institutional Advisors. Mr. Hoye's research has always attempted to place the current market environment inside a broader historical context. The belief being that the market forces that are currently present have been operating since the advent of the civilized marketplace. You could argue it is just another example of nature in the nature verses nurture argument. If you really want to wax philosophical, you could say there is very little free-will to the collective marketplace, since it is evident throughout history that we recreate the same market conditions associated with fear and greed. The stock chart is just our double-helix to that psychology. I have free-will to individually guide myself through the collective, but standing from space I am lost in the crowd.

In any case, here is a piece by Paul Kedrosky at the Infectious Greed blog.


Get Your Banking Crises Correct: 1872/73 vs. 1929

I've been saying this privately for some time, but only now finally getting around to saying it here: In many ways, the banking crisis of 1872/73, less so the bank failures around the Great Depression, is the right mental model in which to think about the current crisis.

The context: A banking crisis in Europe took hold in 1872 after a mortgage lending boom, one in which house prices climbed endlessly, houses became loan collateral, and all sorts of dubious banking and lending behavior went on, much of it pushed by return-seeking banks. Everything came unglued in late 1873 as the European economy unwound and housing prices began falling, thus causing European banks to fail in a cascade, and interbank lending rates to soar as no bank knew which other bank would fail next. The problems spread to the U.S. in 1873, where debt-needy railroads began failing as European banks withdrew funding, this after a long boom had produced an over-levered mess, and then large numbers of U.S. banks followed afterward.

The whole thing took around four years to unwind in the U.S., and slightly longer in Europe. Admittedly, there was little done at the federal level to ameliorate things in any meaningful way, and there were widespread labor troubles at the same time, both of which helped cause the economy to stay down for the count, adding to the woes.

Nevertheless, people need to focus on the right things. And to my mind that is the banking crisis of 1873, and less so the causes and fixes of 1929.


What history provides us with is a mirror to realize that however unique and different we appear to be, we are just another version of our parents, grandparents, great-grandparents and so on down the line. As the saying goes, "the apple doesn't fall far from the tree".

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