Dow back above 9000

Voltron says:

First of all, to those of you who sold SRS at 200, I salute you! If you want to know why the market was up today, just look in the mirror. It was short covering. You could press your advantage and get back into SRS at 133! Best of luck.

The consumer confidence index fell to an all time low of 38, well below economists expectations of 51. It was also announced that house prices in August fell by a record 16% year-over-year. So what followed . . . the 2nd biggest rally ever in the DJIA (pointwise). The biggest ever was about two weeks ago on Oct 13th which brought the DJIA to about 9,400. Despite those two rallies, we are still below 9,400 now, so don't get too bullish yet.

Also, trading volume was only average, making it unlikely that the rally will stick.

So what happened . . .

According to a Bloomberg article, the Fed began making commercial paper loans today in an attempt to unfreeze the credit market.

The "VIX" Volatility Index (chart) which usually oscillates between 10 and 40 and has lately been as high as 90, is now back down to 66, so stock options are cheaper.

The market thinks that the Fed will lower the target rate by 1/2 percent to 1%

It all comes back to the inflation vice deflation debate. Did today's rally mark the end of deflation? Clearly what the Fed and Treasury are doing is inflationary. Bonds and the dollar moved lower but not more than I would expect on a day stocks went up so much. I don't think we are done with deflation yet . . . I'm staying short the market.

If the market continues to rally tomorrow due to expectations of a Fed rate cut, I may get out of DKA, DBU and DBN and try to get back in lower.

Cracks forming in commercial realestate

Voltron Says: General Growth is a component of SRS

 

http://www.reuters.com/articlePrint?articleId=INN2750460520081027

Treasury department is twisting in the wind

http://biz.yahoo.com/ap/081025/meltdown_evolving_bailout.html

Interview with Nassim Taleb

Voltron says: Time magazine has an excellent interview with fellow former FX options trader and author of The Black Swan, Nassim Taleb.

 

http://www.time.com/time/business/article/0,8599,1853531,00.html

Credit-Rating Firms Grilled Over Conflicts

Voltron says: Yesterday was the credit agency’s turn to be tongue lashed by legislators.

 

http://www.washingtonpost.com/wp-dyn/content/article/2008/10/22/AR2008102202311_pf.html

Forbes: How wall street robbed you

Voltron says: Lehman sold “principal protected notes” but investors has no protection at all, in fact, Lehman basically just took their money.

 

http://www.forbes.com/2008/10/22/Intelligent-investing-wallst-robbery-lehman-UBS-panel_print.html

Pepper: The concept of a Principal Protected Note--the reality of one is different than the name implies. A lot are principal protected only in certain situations. A lot of times, it takes quite awhile to get your principal back. If you don't hit a certain index level, you have to double up to get your principal back. Investors see it as, "I get all my capital if the market goes down," but it's not necessarily like that. Many wealthy investors do not understand the conditions of each note.

Lipner: The biggest seller of PPNs was Lehman. So I don't care what happens to the index, the people who bought these have lost all their money.

Pepper: Right.

Lipner: These are what I've come to see as code words. Notes are always principal protected. That's the whole point! Here's the Lehman notes sold in 2008. If the index goes up, you get the index return. If it goes down, your principal is protected. That was the promise. But you know what they're doing with the money they raise? You know what Lehman was doing with that money? They were funding their operations. They weren't buying securities and protecting it with some kind of hedge. They're borrowing money from their clients. Actually from UBS clients because UBS sold the Lehman notes.

Ervolini: They were just general obligation bonds.

Lipner: General balance sheet debts. Unsecured. But they make it sound like they're buying a basket of stocks, and you'll benefit from the upside, and they'll insure the downside for some modest premium. That's not what was going on. They're funding operations. And on the confirmations [the paperwork clients get to confirm they want the notes], all it says is for risk disclosure see prospectus at sec.gov.

 

Fighting the last war

Voltron says: In this Wall Street Journal interview,  Fed Chairman Ben Bernanke's mentor, 92 year old Anna Schwartz, says that the Fed is fighting the last war.

http://online.wsj.com/article/SB122428279231046053.html

Today, the banks have a problem on the asset side of their ledgers -- "all these exotic securities that the market does not know how to value."

"Why are they 'toxic'?" Ms. Schwartz asks. "They're toxic because you cannot sell them, you don't know what they're worth, your balance sheet is not credible and the whole market freezes up. We don't know whom to lend to because we don't know who is sound. So if you could get rid of them, that would be an improvement." The only way to "get rid of them" is to sell them, which is why Ms. Schwartz thought that Treasury Secretary Hank Paulson's original proposal to buy these assets from the banks was "a step in the right direction."

The problem with that idea was, and is, how to price "toxic" assets that nobody wants. And lurking beneath that problem is another, stickier problem: If they are priced at current market levels, selling them would be a recipe for instant insolvency at many institutions. The fears that are locking up the credit markets would be realized, and a number of banks would probably fail.

Ms. Schwartz won't say so, but this is the dirty little secret that led Secretary Paulson to shift from buying bank assets to recapitalizing them directly, as the Treasury did this week. But in doing so, he's shifted from trying to save the banking system to trying to save banks. These are not, Ms. Schwartz argues, the same thing. In fact, by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. "They should not be recapitalizing firms that should be shut down."

Rather, "firms that made wrong decisions should fail," she says bluntly. "You shouldn't rescue them. And once that's established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich." The trouble is, "that's not the way the world has been going in recent years."

NY Post: Wells Fargo are pretenders

Voltron says: New York post article about how Wells Fargo reduced it's loan loss reserves to boost reported profits despite accelerating losses.  It'll get even worse now that they are buying Wachovia.

http://www.nypost.com/seven/10192008/business/the_pretenders_134253.htm

Amusing article about Neel Kashkari

http://www.clusterstock.com/2008/10/neel-kashkari-hated-by-his-snobby-leftist-teachers

Reuters: U.S. REIT investors to focus on balance sheet

Voltron says: I'm not taking profit in SRS yet. The misery in the economy is only starting.

http://www.reuters.com/articlePrint?articleId=CAN1541296220081015

IBD: Worries Grow Over Commercial Real Estate

http://www.investors.com/editorial/IBDArticles.asp?artsec=16&artnum=1&issue=20081013

Confidence is restored . . .

Commercial Real Estate

Voltron says: here's why I think commercial real estate (SRS) has not gone down yet.

Suppose a REIT borrows 10 million dollars to buy a building. They know they won't fill it up right away so they borrow the first two year's of interest on the loan, effectively making it no payments for the first two years. After the first year, they show the building as a $10 million asset on their books even though they have few if any tenants and if they sold the building today, they would only get $8 million for it. The next year, they show the building as a $10 million dollar asset on their books even though they have few if any tenants and if they sold the building today, they would only get $6 million for it. The third year, they have to start making interest payments and they cannot because they have no tenants and they suddenly go bankrupt.

REITs don't need to show losses right away like banks do. Their collapse will be sudden and "unexpected"

From the NY Post Gossip Column

From the NY Post Gossip Column: We hear that the CIA is closely following an Arab-Russian plan to replace the dollar as the dominant international currency - with either the ruble backed by gold, or the free-floating dinar.

Voltron says: interesting, I'd always heard it would be the Euro or a Chinese renminbi backed by silver. Anyway, it's a case of - the source is more interesting than the story.

Peter Schiff book review

I've read the new book. Mostly the same info. He gets into specific foreign sectors to invest in, when they finally decouple from the U.S. economy. He also talks less about how things will be relatively cheap in the US after the crash and more about emigrating elsewhere.

Peter Schiff's new book is out

Reading it now.

Here's what's next

Voltron says: Folks,

The next shoe to drop is the dollar and bond collapse and inflation. Were closer to the bottom than the top of the stock market at this point. As I rotate out of my short positions between dow 8000 and 6000, I will be rotating into gold, merkx hard currency etf and tbt,pst ultra short bond etf to hedge against inflation and keep my powder dry for Asia's renaissance.

This guy, predicted the stock market collapse, the "herd mentality" US bond rally/head-fake that would result and the bond collapse that will follow. He posted it back in JUNE!

US Government bonds will be destroyed going forward.

Reasons
1.Unwise fiscal policy has resulted in unprecedented money supply growth.This was the root cause for the massive bull market in all assets.But now the cycle has turned and we are going to see unwinding of the bubble in all asset classes.Increase in money supply has resulted in inflation which will continue to increase growing forward since nothing meaningful has been done so far.The central banks have been adding fuel to the fire by pouring in more liquidity when increased money supply was the cause of the malaise.At some point inflation will be difficult to ignore and interest rates will have to be increased.Rising interest rates will cause bonds to tank.

2.At some point there will be dumping of US treasuries by foreign governments and that will be disastrous for bonds.

It is to be noted that there is a chance of pain when there is the herd like "flight to safety" when equities collapse and fund managers automatically shift to US Treasuries and the dollar.Do not panic.Hold or ideally accumulate at lower levels.Why not wait till then?I am lousy at timing market timing and have difficulty counting beyond my fingers so technical analysis is beyond me.I think I am good at strategy so I am sticking to that.

Why SRS went down

Voltron says: According to the Wall Street Journal, ProShares UltraShort Real Estate (SRS) topped the list for Selling on Strength, which tracks stocks that rose in price but had the largest outflow of money.  Based on the volume of trades, it looks to me like someone had made a lot of money in SRS and suddenly sold it all to take profit, but there were not enough buyers because people were too freaked out on Friday to do anything.  There was certainly no positive news about commercial real estate on Friday.  Don’t look at the price.  Look at the headlines.  When you start seeing REITs declaring bankruptcy, then it’s time to get out of SRS.  If I start seeing verifiable news that REITs are somehow immune to the coming downturn, I’ll admit I was wrong and bail on SRS.

The Party is Over

By. Peter Schiff / President of Euro-Pacific Capital

 

More than just a mere liquidity or credit crisis, the current financial storm represents the death throes of the old global economic order, and perhaps the birth pains of a new one. The sun is setting on the borrow and spend culture that has all but defined us for a generation. Our long ride on the global gravy train is finally coming to an end, and once it does nothing will be the same. The sooner we come to grips with this the better.

 

Despite the myriad of proposals that are coming from Washington and other world capitals, we must understand that this crisis cannot be cured by governments. In the United States, credit is gone because savings are gone. Our shallow pool of savings has been depleted through bad loans, and we can no longer entice foreigners into lending us their available savings. Given that we are already too loaded up on existing debt that we cannot realistically repay, who can blame them for not wanting to lend us more?

 

As a result, the free market is trying to put an end to our spending spree. Without savings or home equity to fall back on, Americans struggling with rising prices are finally being forced to curtail their spending. This has terrified our leaders and is causing them to dismantle the remaining structure of our free enterprise-based economic system.

 

The intention of all these daily federal interventions is to keep the credit spigots open so Americans can go even deeper into debt to buy more stuff they can’t actually afford. This should be clear enough to anyone who listens to what our leaders are actually saying. When speaking about the need for an even larger fiscal stimulus package, Barney Frank, chairman of the House Financial Services Committee, said, “We have to prop up consumption.” He has it backwards. The government has been propping up consumption for far too long, and the best thing they can do now is remove the props so spending can be replaced by savings.

 

The sad reality is that we borrowed and spent our way into this crisis, and we are not going to borrow and spend our way out of it. Legitimate credit can only be supplied if there are genuine savings to finance it. Savings can’t be magically concocted into existence by a printing press, but can only be created by consumers who spend less than they earn. Efforts to fool the market will not work and will ultimately lead to a monetary disaster and runaway inflation.

 

Were the government to allow market forces to work, Americans would now have to pay cash for their consumption. That would mean no instant credit for new cars, plasma TVs, appliances, consumer electronics, clothing, furniture, etc. Unless buyers actually had the cash in their checking accounts these purchases would have to be deferred. From an economic perspective this is precisely what the doctor ordered. But for an economy based 72 percent on consumer spending, the medicine will go down hard.

 

Ultimately, a serious reduction in consumer and mortgage credit, combined with an increase in personal savings, would again provide a pool of needed capital for businesses to produce products and provide employment opportunities. However, the danger is that this potential credit could be completely crowded out by massive borrowing by the Federal Government. In addition, prices for such things as houses and college tuition will fall sharply, as the credit artificially propping them up disappears. People would still be able to buy houses and send their kids to college only they would pay much lower prices when they do.

 

However, if the government keeps creating inflation to artificially sustain consumer borrowing and spending, there will be no savings left to fund anything and prices will be so high that despite massive consumer spending there will be few goods that Americans could actually afford to buy.

World Markets May Close!

Voltron says: I first heard this rumor yesterday, it seems to have gained credence.  I think they want to devalue the dollar, but under the current Bretton Woods regime, this is not possible.  The G7 is thinking about closing the markets and implementing a new currency system, presumably one where the dollar can be devalued.  GET OUT OF THE DOLLAR TODAY!

 

Berlusconi Says Leaders May Close World's Markets (Update1)

By Steve Scherer

Oct. 10 (Bloomberg) -- Italian Prime Minister Silvio Berlusconi said political leaders are discussing the idea of closing the world's financial markets while they ``rewrite the rules of international finance.''

``The idea of suspending the markets for the time it takes to rewrite the rules is being discussed,'' Berlusconi said today after a Cabinet meeting in Naples, Italy. A solution to the financial crisis ``can't just be for one country, or even just for Europe, but global.''

The Dow Jones Industrial Average fell as much 8.1 percent in early trading and pared most of those losses after Berlusconi's remarks. The Dow was down 0.5 percent to 8540.52 at 10:10 in New York.

Group of Seven finance ministers and central bankers are meeting in Washington today, and will stay in town for the International Monetary Fund and World Bank meetings this weekend. European Union leaders may gather in Paris on Oct. 12, three days before a scheduled summit in Brussels, Berlusconi said today, while Group of Eight leaders may hold a meeting on the crisis ``in coming days,'' he said.

Berlusconi didn't give any details about what kind of rules leaders were looking to change, except to say that leaders are ``talking about a new Bretton Woods.''

The Bretton Woods Agreements were adopted to rebuild the international economic system after World War II in a hotel in Bretton Woods, New Hampshire. The aim of the agreements was to establish a monetary management system, initially by pegging currencies to gold. The IMF was set up later to help manage the international financial system.

 

No confidence in SEC chairman

You’re doin’ a great job Coxie:

 

http://www.nypost.com/seven/10102008/business/cox_comes_up_short_with_other_members_133023.htm

 

excerpts:

 

Securities and Exchange Commission Chairman Chris Cox - already in the doghouse with institutional investors over a series of seemingly ineffective bans on short selling - is suffering a loss of confidence among his fellow commissioners.

Sources say Cox's recent pitches to his fellow commissioners - who are responsible for implementing the laws that govern the securities industry - to continue shoring up short-selling protections, have fallen on deaf ears.

also the first person to comment on the article wrote the following:

 

Imagine a world in which anyone can buy any amount of fire insurance on any building, regardless of its value or ownership. Imagine that anyone can buy any amount of life insurance on any unrelated individual, without their knowledge or consent.

The economic incentives in such a world guarantee that many buildings will burn, and many will die, to the financial benefit of those buying the insurance policies where they have no risk of actual loss.

Wall Street and the SEC have created such a world. Credit default swaps allow a party to reap a financial reward when a company fails. Shorting the ABX index allows a party to reap a financial reward when asset values of certain financial instruments decline in value. Unlimited shorting of stocks, without restraint as price declines, magnifies both the speed and magnitude of the price decline. Purchase of puts sends a stock price lower as the option market makers sell unlimited, unregistered, un-issued shares into the market.

Where the capital markets once functioned as a source of financing for new business ventures, Wall Street and the SEC have turned the capital markets into an unregulated, rigged casino where gambling and asset destruction are the main attractions. Economic incentives now heavily favor the destruction of investment capital, rather than the creation of additional capital.

What can we expect to be the logical result of the past 8 years of SEC and Wall Street corruption of our capital markets?

 

 

No Shame

From the LA Times: full article here

 

As ailing Wachovia Corp. waits to see whether it will be acquired by Wells Fargo & Co. or Citigroup Inc. -- possibly with taxpayers paying the tab for hundreds of billions of dollars in bad loans -- some of the company's top brokers are preparing to depart Saturday for an all-expenses-paid cruise of the Greek Isles.

The weeklong trip for up to 75 employees of brokerage A.G. Edwards, which Wachovia acquired last year for nearly $7 billion, will also include spouses and significant others, said Teresa Dougherty, a Wachovia spokeswoman.

"This is one way that we recognize our top financial advisors," she said.

Word of the Wachovia junket follows reports that senior executives of troubled insurance giant AIG attended a $440,000 company retreat last month at Southern California's swanky St. Regis Resort in Monarch Beach just days after being bailed out with $85 billion in taxpayer funds.

A White House spokeswoman Wednesday called the AIG outing "despicable." Yet even as the Bush administration was wagging its finger at AIG, the Federal Reserve was announcing $37.8 billion in additional loans for the company.

Moreover, a spokesman for American International Group said the company was going ahead with plans to host a three-day confab for about 150 insurance brokers at the Ritz-Carlton Resort in Half Moon Bay next week. About 50 AIG employees also will attend.

The Chosen One

Voltron says: The Treasury Secretary has chosen, as the savior of western capitalism, fellow Goldman Sachs alumnus and aptly named wunderkind Neel Kashkari.  He’s thirty-five years old with FOUR YEARS of experience on wall street, doing investment banking for technology companies after the internet bubble had already burst.  His job had ABSOLUTELY NOTHING to do with mortgages, real estate, trading, pricing, securities, bonds, swaps, credit or derivatives.  I hope he’s a quick learner.  Maybe nobody more qualified wanted the job . . .  Neel, If you look around the room and you can’t figure out who the patsy is . . . IT’S YOU.

Lehman CEO Dick Fuld knocked out by angry employee

While former Lehman CEO Richard Fuld was testifying before the House Oversight Committee Oct. 6, CNBC reported he had been punched in the face at the Lehman Brothers gym after it was announced the firm was going bankrupt. CNBC and Vanity Fair contributor Vicki Ward said Fuld was attacked at the gym on a Sunday following the bankruptcy..

“From two very senior sources – one incredibly senior source – that he went to the gym after … Lehman was announced as going under. He was on a treadmill with a heart monitor on. Someone was in the corner, pumping iron and he walked over and he knocked him out cold. And frankly after having watched this, I’d have done the same too.”

Stock Exchange Circuit Breakers

For Your Guide

Now Wall Street may shun $700bn bail-out

Voltron says:  Treasury Secretary Paulson’s previous idea for Wall Street to bail itself out called the Master Liquidity Enhancement Conduit (MLEC) was abandoned last December by everyone except Orange County, who are not renowned for being great bond traders.  It looks like the current plan may be similarly rejected by Wall Street, because of the punitive provisions, the uncertainty and the stigma of needing a bailout.

By James Doran (The U.K. Observer)

Fears are mounting that many Wall Street banks and financial firms will refuse to participate in the US government's $700bn bail-out package, leaving global markets and world economies in a perilous state for months to come.

'There is a growing feeling that banks ... might instead decide to tough it out,' said Thomas Caldwell, chairman and CEO of Caldwell Financial, a $1bn-plus fund manager.

For the past two weeks all eyes in the market have been focused on US Congress and its attempts to pass Treasury Secretary Henry Paulson's bail-out package - a bill to allow the US government to buy up to $700bn of toxic mortgage-related assets from American banks, which would in theory free the credit markets and set the gears of global commerce spinning once more.

Last Monday, after the bill was thrown out by the House of Representatives, more than $1 trillion was wiped off the value of US stocks as the market was gripped by panic. The bill was passed on Friday afternoon, however, after the inclusion of $149bn of tax breaks and strict rules for participating banks.

But Wall Street analysts believe the addition of so many terms to the bill might deter potential participants.

One of the least attractive elements is a section designed to curb executive pay at banks that participate in the bail-out package. These include limiting stock-related pay and banning 'golden parachutes' for executives.

'I think this hodge-podge of regulations and rules will be enough to put many [chief executives] off participating,' Caldwell said.

Sources close to Goldman Sachs and Merrill Lynch indicated the banks might choose not to participate in the bail-out as there is a growing view on Wall Street that the market may be bottoming out.

Analysts also believe that the mere presence of the government as buyer of last resort will be enough to get credit markets moving again, and that a large number of banks would not need to take part for the legislation to succeed.

Wall Street ended its worst week in seven years with another tumble on Friday. The Dow Jones Industrial Average closed down more than 157 points on Friday at 10,325.38.

 

Economic Pearl Harbor

What is this "economic pearl harbor" that Warren Buffett is talking about?

Could it be that China and the oil rich countries are threatening to finally pull the plug and stop financing our trade deficit, personal savings deficit and government budget deficit?

Why not? China is playing to win. Despite popular belief, they don't need us to consume their products. They can consume the fruits of their production themselves. They've rope-a-doped us long enough and they are going to surprise us with a knockout punch.

Wachovia spurns Citibank for Wells Fargo

Citibank had an exclusive deal to buy parts of Wachovia, with government assistance. Wells Fargo jumped in today and sealed a deal to buy the whole thing for $16 Billion, which is a 79% premium. As a result of the deal, Wells Fargo may lose it's prized "triple-A" credit rating.

Reliable sources have told me that Wells Fargo had stayed away from the most toxic types of FIRST mortgages, so why they would want to buy $100-300 Billion in toxic mortgages is a mystery. Maybe they plan on selling them to the government under the $700 Billion bailout (+$150 Billion of pork, by the way).

As I've blogged exhaustively in the past, Wells Fargo has $85 billion on toxic SECOND mortgages, which are behind toxic first mortgages. These are worthless.

According to this article from Mr. Mortgage, some of Wells Fargo's "prime" mortgages were actually subprime and Alt-A.

Senate passes bailout

Voltron says:

This version is even worse than the house version. It adds about $140 billion in pork .

It's amazing how quickly the media has turned around and all coverage begins with the premise that the bailout should pass. Why? Because the stock market was a little turbulent? Big deal. Stocks go up and they go down. U.S. stocks trade at a 50% premium to other developed world stocks. Well guess what . . . the pixie dust is gone now and U.S. stocks will probably need to go down by 1/3.

Folks, the crisis is bad, but the "cure" is worse. It stems from a complete unwillingness to endure any pain whatsoever.

Remember, the government does not have any money to bail out anybody. They are borrowing it from future taxes or printing it and causing inflation.

I mean, if this was such a good idea, why didn't we do it before the crisis, just out of the blue - "hey, let's borrow money give it to the treasury department so they can start a hedge fund!" It doesn't make any sense.

Most importantly, NO ONE, even the authors of this travesty, NO ONE is saying that this bailout will actually work. Only that it "must pass" and "we must stabilize the market". When asked how they came up with the number $700 billion, they treasury officials said “It’s not based on any particular data point,” translation - "we pulled the number out of our @$$"

For every $50 billion the government has spent on bailouts, it has calmed the market for about 1 day, so I figure $700 billion will smooth things over for about 2 weeks. After that the government will double down to 1.4 trillion. There will be outrage and the dollar will start to buckle, but that will probably pass too. A month later, when they ask for 2.8 trillion, they dollar will collapse before it can even be voted on. The Dow will be at 6000 and gold will be 6000 an ounce.

Don't get excited about speculation opportunities, because it will be too late. There will be capital controls passed into law so that you cannot short stocks, export money, buy gold or other commodities. Expect price controls and rationing.

The bailout is a stalling tactic, so that the big shots can get out of their stock positions and out of the dollar before they clamp down and force you to go down with the ship.

Reality abandoned

Voltron says: the SEC is proposing to eliminate mark-to-market accounting and officially replace it with mark-to-fantasy

"Suspending mark-to-market accounting, in essence, suspends reality."
Beth Brooke, global vice chair at Ernst & Young LLP, WSJ, Sept 30, 2008

"Blaming fair-value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick."
analyst Dane Mott, JPMorgan Chase & Co., Bloomberg

"Suspending the mark-to-market prices is the most irresponsible thing to do. Accounting does not make corporate earnings or balance sheets more volatile. Accounting just increases the transparency of volatility in earnings."
Diane Garnick, Invesco Ltd., Bloomberg