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...