(ignore the bit with the President at the end, it's obviously a joke and out of context)
Monday, September 29, 2008
videos: Peter Schiff and Ron Paul
voltron says: for your viewing pleasure.
(ignore the bit with the President at the end, it's obviously a joke and out of context)
(ignore the bit with the President at the end, it's obviously a joke and out of context)
Sunday, September 28, 2008
NYT: Citigroup and Wells Fargo Said to Be Bidding for Wachovia
Voltron says: It seems to be another shotgun marriage.
http://www.nytimes.com/2008/09/29/business/29bank.html
http://www.nytimes.com/2008/09/29/business/29bank.html
No change
Voltron says: Everything is unfolding according to my forecast. The government is nationalizing the banking system. The Democrats are demanding dilutive senior equity in "some" of the bailed out companies that would wipe out the shareholders (by "some" they mean all except Goldman Sachs). Many bond investors are upset about the FDIC's rough handling of WaMu, saying that they were unfairly wiped out. This has been termed "reverse moral hazard" because the government is capriciously wiping out good investments. Shareholders of AIG feel the same way . . . in fact the New York Times claims that the bailout of AIG was actually a bailout of Goldman Sachs.
The government is doubling down. One blogger claimed that the $700 billion dollar bailout will actually be used to recapitalize the Federal Reserve Bank which has already swapped 3/4 of it's $900 billion balance sheet for junk mortgages. The proponents of the plan claim that "it won't cost the taxpayer anything". Continued refusal to accept any economic pain leaves them no alternative than doubling down.
Peter Schiff said on his radio show that the government's ill conceived, hasty and unlimited guarantee of $3 trillion in money market accounts may have the largest unintended consequences of all. If all money markets a guaranteed by the government, then people will funnel money to the banks offering the most interest, regardless of the safety of the investments. More moral hazard.
Finally, I think the euphoric upward movements in the stock market are either manipulation or simply "buy the rumor, sell the news" When people figure out that this bailout is merely a band-aid on a arterial wound, look out below.
The government is doubling down. One blogger claimed that the $700 billion dollar bailout will actually be used to recapitalize the Federal Reserve Bank which has already swapped 3/4 of it's $900 billion balance sheet for junk mortgages. The proponents of the plan claim that "it won't cost the taxpayer anything". Continued refusal to accept any economic pain leaves them no alternative than doubling down.
Peter Schiff said on his radio show that the government's ill conceived, hasty and unlimited guarantee of $3 trillion in money market accounts may have the largest unintended consequences of all. If all money markets a guaranteed by the government, then people will funnel money to the banks offering the most interest, regardless of the safety of the investments. More moral hazard.
Finally, I think the euphoric upward movements in the stock market are either manipulation or simply "buy the rumor, sell the news" When people figure out that this bailout is merely a band-aid on a arterial wound, look out below.
Thursday, September 25, 2008
China may pull the plug
Voltron says: Here's how the global economy worked for the last 20 years. China sends us poison baby formula and lead toys. We send China dollars. China uses the dollars to buy fraudulent mortgages and treasurys. For some reason, this might not be sustainable.
From bloomberg:
Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding....
``We are in the same boat, we must cooperate,'' Yu said in an interview in Beijing on Sept. 23. ``If there's no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.''
An agreement is needed so that no nation rushes to sell, ``causing a collapse,'' Yu said. Japan is the biggest owner of U.S. Treasury bills, holding $593 billion, and China is second with $519 billion. Asian countries together hold half of the $2.67 trillion total held by foreign nations....
``Whether some kind of agreement between them to continue to hold Treasury bills is viable, I'm not sure,'' said James McCormack, head of sovereign ratings at Fitch Ratings Ltd in Hong Kong. ``It would be unusual. If it became apparent that sovereigns in Asia were selling Treasuries the market would take that quite badly, it's something to be avoided.''...
China's huge holdings of U.S. debt means it must bear a large proportion of the ``burden of sorting things out'' in the U.S., Yu said. China is not in a hurry to dump its U.S. holdings and communication between the two nations every ``couple of days'' is keeping Chinese leaders informed and helping to avoid a potential panic, he added.
``China is very worried about the safety of its assets,'' he said. ``If you want China to keep calm, you must ensure China that its assets are safe.''
Yu said China is helping the U.S. ``in a very big way'' and added that it should get something in return. The U.S. should avoid labeling it an unfair trader and a currency manipulator and not politicize other issues, he said.
``It is not fair that we are doing this in good faith and are prepared to bear serious consequences and you are still labeling China this and that, accusing China of this and that,'' he said. ``China knows what to do. We don't need your intervention.''
The U.S. financial crisis had taught China a lesson and that was: ``Why are we piling up these IOUs if they may default?'' China's economic expansion strategy, which emphasizes export growth that has led to trade surpluses and the accumulation of $1.81 trillion in foreign-exchange reserves, is the main problem, said Yu.
``Our export-growth strategy has run its natural course,'' he said. ``We should change course.''
From bloomberg:
Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding....
``We are in the same boat, we must cooperate,'' Yu said in an interview in Beijing on Sept. 23. ``If there's no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.''
An agreement is needed so that no nation rushes to sell, ``causing a collapse,'' Yu said. Japan is the biggest owner of U.S. Treasury bills, holding $593 billion, and China is second with $519 billion. Asian countries together hold half of the $2.67 trillion total held by foreign nations....
``Whether some kind of agreement between them to continue to hold Treasury bills is viable, I'm not sure,'' said James McCormack, head of sovereign ratings at Fitch Ratings Ltd in Hong Kong. ``It would be unusual. If it became apparent that sovereigns in Asia were selling Treasuries the market would take that quite badly, it's something to be avoided.''...
China's huge holdings of U.S. debt means it must bear a large proportion of the ``burden of sorting things out'' in the U.S., Yu said. China is not in a hurry to dump its U.S. holdings and communication between the two nations every ``couple of days'' is keeping Chinese leaders informed and helping to avoid a potential panic, he added.
``China is very worried about the safety of its assets,'' he said. ``If you want China to keep calm, you must ensure China that its assets are safe.''
Yu said China is helping the U.S. ``in a very big way'' and added that it should get something in return. The U.S. should avoid labeling it an unfair trader and a currency manipulator and not politicize other issues, he said.
``It is not fair that we are doing this in good faith and are prepared to bear serious consequences and you are still labeling China this and that, accusing China of this and that,'' he said. ``China knows what to do. We don't need your intervention.''
The U.S. financial crisis had taught China a lesson and that was: ``Why are we piling up these IOUs if they may default?'' China's economic expansion strategy, which emphasizes export growth that has led to trade surpluses and the accumulation of $1.81 trillion in foreign-exchange reserves, is the main problem, said Yu.
``Our export-growth strategy has run its natural course,'' he said. ``We should change course.''
Wednesday, September 24, 2008
How the short ban is affecting short ETFs
Excerpt from the Wall Street Journal:
The short-sale ban has been particularly troublesome for some ETFs that let investors bet against financials. Rydex Investments and ProShare Advisors said Friday said they would temporarily halt the creation of new shares for several of these ETFs. Trading in the three ETFs -- Rydex Inverse 2x S&P Select Sector Financial, Short Financials ProShares and UltraShort Financials ProShares -- was halted for part of the day Friday.
The companies decided to suspend creation of new ETF shares amid concerns about their ability to get the swap agreements and other instruments that allow them to provide short exposure to financials. Typically firms issuing such swaps would hedge their exposure by shorting financial stocks.
When an ETF isn't creating new shares, it may trade at a premium to the value of its underlying holdings, since there is no new supply of shares to meet any increased demand. On Friday, for example, UltraShort Financials ProShares traded at a hefty premium to the value of its underlying holdings.
Amid the shifting short-selling rules, the ETFs will also likely have to pay more for the complex instruments that allow them to bet against financials, says John Gabriel, ETF analyst at Morningstar. Those higher trading costs could weigh down the returns of the funds.
"We expect pricing on these derivatives contracts will probably increase in the near future," says Steve Sachs, director of trading at Rydex. But "I wouldn't expect it to have a significant impact on the fund," he says.
Tuesday, September 23, 2008
Jim Cramer says sell
Voltron says: Joe Sixpack listens to Jim Cramer. On moday, he said to sell 20% of your portfolio and buy gold! I don't agree with everything he says, but the herd follows his advice, so he can influence the market in the short term and propagate bubbles in the market.
http://www.cnbc.com//id/26840500
http://www.cnbc.com//id/26840500
SEC changes short selling rules
Voltron says: the SEC proves that they are incompetent morons by changing the rules they just changed. The rules basically have no teeth now, so disregard everything I previously said about the short selling ban.
The SEC's latest change of direction on short selling caught some market participants off guard and prompted criticism that the agency has miscalculated the impact of its rulemaking.
The SEC, in a release issued at 12:26 a.m. EST Monday, reversed a position it had taken Friday when it said that market makers couldn't short financial stocks after Friday. The new rules as of Monday: Those engaged in bona fide market making and hedging activity, including in derivative contracts, could continue to short.
"The purpose of this accommodation is to permit market makers to continue to provide liquidity to the markets," the SEC explained in the revised order. To try to prevent short sellers from using market makers to take big positions, the SEC said market makers couldn't short for a customer if it would give them a net short position in the security.
Also Friday, the SEC issued a temporary ban on short sales in nearly 800 financial stocks, including those who make markets in the securities. In a short sale, investors borrow shares and sell them, hoping the stock will fall and they can buy it back at a lower price.
The agency said Friday that hedge-fund and money mangers needed to disclose short positions the first Monday following the trade.
Monday's rules: Hedge funds still must disclose their positions to the SEC, but the SEC won't make the trades public until two weeks later. The SEC also announced Monday that it had delegated to the stock exchanges the decision about which company makes the no-shorting list.
The SEC's Friday no-short-selling list left off some companies with large financing arms, such as General Electric Co. and Credit Suisse Group, while other companies not embroiled in the financial crisis, including some health-care insurers, were included.
The Monday change prompted NYSE Euronext to send blast emails to its listed companies asking them to identify themselves as fitting criteria laid out by the SEC. Companies that were U.S. or foreign banks, brokers, money managers or parent companies of such financial institutions would qualify. Companies could also opt out from the temporary ban.
The NYSE added 71 companies by Monday evening, including GE, General Motors Corp., Credit Suisse, GLG Partners, Canadian Imperial Bank of Commerce, American Express, Legg Mason and Moody's Corp. That list could grow. The Nasdaq OmX Group added 66 companies Monday.
The government response to the market upheaval has in many ways been unprecedented, and the SEC has been under pressure to do something from Wall Street chiefs, who were pleading for relief from short sellers they blame for driving stocks lower.
Erik Sirri, director of the SEC's trading and market division, said when the agency crafted the order Thursday night, they knew there would be amendments to the rule, but didn't want to craft them until after they spoke with market participants over the weekend.
Mr. Sirri said that while the SEC was aware of the implications the temporary short-sale ban would have, "the rule reflected a compromise balancing the limits of our authority, the need to avoid triggering a close-out event in OTC derivatives, and the demand for legitimate hedging by market makers."
But the agency's inconsistent response has opened it up to attacks -- including by Republican presidential candidate Sen. John McCain, who said last week that SEC Chairman Christopher Cox should be fired.
"It looks like we have a bunch of amateurs that don't know what they're doing," said James Angel, an associate professor of finance at Georgetown University. "To come out and say let's ban short selling shows the desperation of the regulators, and it shows the fact that they really haven't been thinking things through."
Monday's hastily revised rules prompted more critiques.
"Obviously, the amendments today are an attempt to remediate a failure to consider carefully what was going to happen," said Lawrence Harris, a former chief economist at the SEC from 2002 to 2004. "With the SEC basically granting its regulatory authority to the exchanges, they're basically asking the exchanges to write its own regulation. That's an extraordinarily irresponsible delegation of responsibility," he said.
The SEC "just decided from a risk point of view that we needed a time-out," said Charles Jones, a finance professor at Columbia Business School. "There are a lot of us out there who are wondering what the SEC is thinking, whether they've gone off the rails here."
Sunday, September 21, 2008
Behind the scenes
Voltron says: this explains why everybody is freaking out even though the market was flat
excerpt:
The market was 500 trades away from Armageddon on Thursday, traders inside two large custodial banks tell The Post.
Had the Treasury and Fed not quickly stepped into the fray that morning with a quick $105 billion injection of liquidity, the Dow could have collapsed to the 8,300-level - a 22 percent decline! - while the clang of the opening bell was still echoing around the cavernous exchange floor.
It could get much worse
Exerpt from http://www.baltimoresun.com/news/opinion/oped/bal-op.economy21sep21,0,1400702.story By Rolfe Winkler – The Baltimore Sun
If the
That could never happen here, argue some. The $10 trillion national debt is "only" 70 percent of GDP, leaving the government plenty of borrowing capacity. But that ignores $60 trillion of projected liabilities for Medicare and Social Security, according to economist John Williams.
What's true of companies is true of countries: The more they borrow, the more they operate at the mercy of creditors. The more they borrow, the more violent their inevitable failure.
Under no scenario can Uncle Sam raise the trillions it needs to meet all these obligations. No tax rate is high enough, no discretionary spending cuts draconian enough. And there is no creditor of last resort for the U.S. Treasury. If default implies an Argentina-like scenario, that would leave us with only two options. The first is to print money; Mr. Williams says this would lead to "hyperinflation on the order of 1920s
Why the market will crash next week
Voltron says: There is opposition building to the bailout proposal because it is a blatant power grab. It’s in line with my prediction of the government nationalizing the banks. Since – despite gyrations – the market ended basically flat last week, I expect the government to engineer a major crash next week before the legislation comes up for a vote to “force” congress’ hand.
http://www.bloomberg.com/apps/news?pid=20601087&sid=ae6b6P1L8E_E
Changing the rules
Voltron says: The problem with changing the rules of the game is that next time, no one will want to play. In order to delay disaster for a few weeks (at best) the government is ensuring that the market will never recover.
http://www.nytimes.com/2008/09/20/business/worldbusiness/20markets.html
Saturday, September 20, 2008
SRS
Voltron says: of note in the proposed bailout:
(1) Mortgage-Related Assets.—The term mortgage-related assets means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.Why are commercial mortgages included? They aren't even in trouble yet. Especially if you look at the price of SRS. What does the government know about commercial mortgages that the market doesn't know or has not admitted yet? If this bailout is passed SRS may get crushed. If it fails it will go through the roof, especially if they ban shorting all stocks. SRS is at the mercy of congress now.
Mother of all bailouts
voltron says: here's an analysis of the proposed bailout: http://market-ticker.denninger.net/archives/587-The-Mother-Of-All-Frauds.html
It allows the Treasury to purchase mortgages, but at what price? The problem is that there is no bid for this toxic waste in the market. It is rumored that the treasury will conduct a reverse auction. I've also heard it will be a dutch auction, but that makes no sense because no two mortgage securities are the same, just as no two houses are the same. If the government pays to much, the taxpayer gets screwed. If the government doesn't pay a premium, the banks are still insolvent anyway. This confirms my forecast that government will attempt to nationalize the banking system.
It also does nothing to solve the "root problem" of house prices falling. I say that in quotes because the real root problem is that instead of borrowing to produce, we borrowed to consume (houses), so of course we can't pay it back!
The real cost of this could be more that 700 Billion, it's essentially a blank check on top of the blank check that the Treasury got to bail out Fannie and Freddie. There is no practical taxpayer protection. This confirms my forecast that the government will continue to double down, at least until the election.
Foreign companies are excluded. Is this a way to "get back" at hedge funds?
Well the government is firing all guns at once so congress will be under pressure to add bailouts for auto makers, airlines, "main street" and homeowners.
It's expected to be voted on next week. You don't get to vote.
New Disclaimer
Voltron says: All bets are off . . . it's every man for himself.
1. The government is changing the rules of the game as they go along. Moral Hazard concerns are out the window.
2. The government is preparing to throw $700,000,000,000 into the market to bail out their cronies and screw you.
3. There are Armageddon scenarios so dire, that no matter what your portfolio has, you will never recover any of the value. These scenarios now have non-zero probabilities.
I'm going to continue blogging, but keep in mind that it's no longer a free market. It's politics now. I know what the government should do, but that has nothing to so with what they will do.
Good Luck.
Paulson Goes All In
By Peter Schiff – Europacific Captial
Just three days ago, after looking at the prospect of bailing a string of distressed financial institution in the country, the government seemingly drew a line in the sand, and refused to bail out Lehman Brothers. The authorities clearly saw Lehman’s demise as a trial balloon to see how the markets would react if the government stayed on the sidelines. That trial balloon quickly turned into the Hindenburg. Immediately reversing course, the Government has decided to go “all in” and bail out every institution with financial exposure to
Moving beyond the guided munitions of selective bailouts, the Government is now trying the financial equivalent of carpet bombing (for AIG, Merrill Lynch, and especially Lehman Brothers, this gives new meaning to being a day late and a dollar short). To continue with the military analogies, Paulson’s bazooka turned out to be a nuclear tipped ballistic missile.
By committing trillions of tax payer dollars (not the “hundreds of billions” that Paulson predicts), the plan will save commercial and investment banks from certain bankruptcy. In his statement today, Paulson made clear that Congress must pass new legislation to allow the Government to acquire even those loans too poorly collateralized to currently qualify for GSE or FHA absorption. The losses baked into these mortgage products, which Wall Street has been reluctant to even estimate, will now be borne wholly by taxpayers.
In his press conference, Paulson assured us that this plan was designed to safeguard our savings. But in typical government fashion, the plan will have the reverse effect as savings will be wiped out through inflation. He also claims that the plan will safeguard home equity by keeping real estate prices high. Since when did high home prices become a strategic national priority? If the plan succeeds, the gains for home sellers will simply be matched by losses for homebuyers, who end up paying inflated prices, and taxpayers, who get stuck with the losses when those buyers default.
Paulson’s distress and confusion was clearly evident when he fielded questions from reporters. The first asked Paulson to describe his fears regarding the probable economic consequences of government inaction. Paulson provided no answer and promptly exited stage right.
When the
While it is dizzying to predict how this plan will be implemented, it is fairly simple to foresee the macroeconomic consequences. The U.S. dollar will be shattered beyond repair. The government simply has no means to make good on the trillions of new liabilities. Interestingly, while both Paulson and President Bush acknowledge that the plan will put “significant amounts of taxpayer dollars on the line,” they did not mention any tax increases. Given the politics, no such move is forthcoming. The printing press is their only solution.
The government has also decided to insure all money market funds, adding trillions more in unfunded liabilities to the Federal balance sheet in the blink of an eye. Of course, since bad real estate loans are not the only toxic assets on the balance sheets of financial institution, we will also need to absorb other classes of asset-backed securities, such as those backed by credit card debt and auto loans. So while the move ensures that depositors will not lose money, is does insure that the money itself will lose value. Is the trade-off really worth it?
Further, since I assume the plan will apply to all mortgage debt,
Although gold initially sold off as the apparent need for a financial safe haven ebbed, look for a spectacular rally to commence as its traditional role as an inflation hedge returns with a vengeance.
Short sale ban - answers
Voltron says:
Existing short positions are grandfathered.
Right now, you may not short to hedge options. As a result options have started becoming more expensive (spreads widening). The option market may seize up next week. The SEC may grant an exemption for option market makers (link) but it certainly opens the door to abuse of the rule.
The Short financials ETF (SKF) was halted shortly after it opened for trading on Friday. Trading resumed, but no new shares will be created. I expect it to go up because now it is the only way to short financials and supply is limited. (link)
Credit Default Swaps (the white elephant in the room) are still completely unregulated. The SEC has no plans to address them.
Thursday, September 18, 2008
SEC bans short selling of financials
In a 2am press release, the SEC has banned short selling on almost 800 financial stocks.
How does it affect existing short positions? How does this affect options? Can people hedge options? Can market makers still short? How does it affect the short ETFs? How does it affect credit default swaps? I'm sure the SEC has carefully considered all of this.
For your guide, you can create a short position using options. So if option trading is not curtailed, this does nothing.
this is the mother of all desperation moves and is going to massively distort the market.
The government is doing everything it can to
- prevent price discovery
- prevent transparency
- prevent you from protecting yourself
Fed losing control
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