Friday, December 19, 2008

Defcon 5 Alert.......

The government did the totally expected move of keeping the automakers on life support. What is another $17B going to do for them? Extend the pain and uncertainty they hang over the markets head. So they will survive till march. Is march within the time line they expect consumers to start purchasing their vehicles in? This is going to end FUBAR. Instead of handing out tough love, I believe they enjoy the discomfort and misery their every move brings the taxpayers of this country. How in the world could such an intelligent group of people get it so wrong? It's as if they are trying to force the worst case scenario to happen. Whatever, just play the game with them to the best of your ability. Although I will caution that things are about to get a lot worse.

After studying the charts tonight I have a strong feeling we have seen the top of the December rally. If you must maintain any long positions do your self a favor and hedge your bets. 913 on 12/16/2008 is where the S&P is going to have topped out for the December rally when this year is over. Sometime between 12/22/2008 and 1/09/2009 my charts show the S&P trading down to the 750 range. What does this mean for the broader indexes? Somewhere in the neighborhood of 7400 on the Dow and 1300 the Nasdaq. Take action now. Christmas is going to be worse than expected.

Retail shorts are where you want to be. GPS, BBY, BBBY, ANF, RL, HD, LOW, TGT, PNRA, KSS, TIF .... to name a few.

Things are worse than they appear. Good Luck.

Thursday, December 18, 2008

Big Economic Bombs Set To Go Off........ SOON

I have been telling friends and family for some time now that the residential mortgage market and housing market were just the first in a series of a chain of economic bombs that were set off. The economic bombs have already been launched and the probability that they miss their target are in all likelihood impossible and the devastation they will cause will be inescapable at this point, and the reason being is that they are all interconnected. Much the same way snow is added to a snowball as it is rolled around on the ground, as this financial crisis rolls down the economic mountain it will inevitably roll over all the different macroeconomic underpinnings that are interconnected by the institutions that develop the financial products to be marketed to consumers to consume.

As I have stated previously, the Fed is the one who brought the monetary policy to a point where the allure of easy access to extremely cheap capital was just to strong a temptation for people to handle. The lender's were able to devise products that were just to complex for most people with the financial acumen of a fourth grader to get their heads around, never the less they took the financial plunge especially since everybody else was doing it. Now their were people who played the game flawlessly and were richly rewarded, and there were those who played the game well but got to intoxicated by all the easy money and didn't realize the party was coming to a end and had that one last flip that made them financially pass out. Now that all these shitty mortgages had been closed and sold to investors like Goldman, Merrill Lynch, Bear Stearns, JP Morgan, Citi and the list goes on. These firms packaged the shitty mortgages in pools and sold them as bonds to other investors seeking income. Some of the bonds paid better yields than others and this was based off of the quality of the pool of loans that comprised that particular bond, these different levels of quality were called tranches. Then there were the side bets of the insurance bought in the case of defaults on the bonds. Everything was going to be fine as long as people continued to make their payments on time and the housing market continued to go up so the house could be flipped to the next buyer at a higher price and the game could continue this way indefinately.

Well the problem that tossed the preverbialy monkey wrench in the plan was that real people who had no financial qualifications to buy a house were now able to move out of an apartment and purchase their very own home for $150,000, ah.... dreams do come true, with a 5.5% 3 year arm that was scheduled to reset to 9.75%. When this first set of mortgage resets hit the streets that is when the keg ran out. Party over. Now it took a little while for people to start sobering up and putting on their clothes and realize they were partying naked and this was not monoply money they had been playing with but real money they were on the hook for. That was when the little snowball started rolling down the hill. Barely noticable as rolled past people still playing the game, but eventually it could no longer be ignored and then it became a monster and even though you saw it coming it was so big you couldn't get out of it's way. It slamed into you and leveled you financially. Now the big firms saw this happening and new all to well this would happen, because actuarilly the diligence had been performed to statistically place a percentage on the number that would default. This is known as risk management, somewhere around 10% was perfectly acceptable and even counted on in projected earnings. Their problem came when that 10% turned into 70% - 80% of all the subprime loans made during the early 2000's.

So now nobody is getting paid, mainly bond holders of these mortgage backed secruities who were sold the bonds under the premise that they were super safe because after all your house is your most valuable and important invest and you are going to pay that bill come hell our high water. Well in the end the terms of the loans were never really disclosed to the people who bought the bonds so when the payments stopped coming they stopped buying more bonds which left all the Investment Brokerage firms with literally trillions of dollars worth of loans on their books that nobody was paying for. Bye, Bye Bear. Bye, Bye AIG. Bye, Bye Lehman....Merrill, Wamu, Indymac, National City and countless smaller other players.

Now my original thought about the bombs in flight as I write this. With the credit markets frozen, capital can almost not be found. And with no way to pay for anything, we as a nation are addicted to credit and can not live like this. What to do? Start living off Credit Cards. When you max those out and start getting $1800.00 monthly bills, stop paying those as well. What about Christmas retail? Nobody has any money, better stay away from the market after Christmas or be short because the only thing Santa is going to bring is a bag full of substantially lower priced stocks. Then there is the commercial mortgage market, same game as residential only bigger. To top all that off, the residential mortgage fallout is only about halfway done. Meaning housing prices will continue to fall and defaults and foreclosures will continue to rise.

So you have residential still a factor, Christmas retail numbers are going to suck so bad, people are going to question whether the stores actually were open during the month of December. Then will either have the commercial mortgages to absorb or the the Credit Card Defaults to work through.

And nobody is evening questioning where the Fed is getting the trillions it is pumping into these bankrupt companies. I assume that question will have to be answered before this is all over and if the answer resembles what the financial markets have put themselves through........... I imagine the economic fallout from that will make this look like the local ATM at the bank ran out of money and ruined your plans for a kick ass Friday night!!!!

Market Commentary 12/18/2008

Markets ended the day with an accelerated decline into the close as the S&P downgraded GE ratings to negative based on earnings concern. Oil also fell to close at $36.80 which most likely caused a bit of friction which slowed the Dow's decline into the close. The fall in oil was the cause for a sell off in most oil companies. Exxon and Chevron took the brunt off the sell off. Prices in commodity stocks also took a big hit mainly the coal producers.


These are a few remarks from Alan Greenspan
stating that the financial markets are going to rebound in the next 6 - 12 months. This from the man who set the monetary policy that enabled the this financial crisis. Just recently Alan was quoted before Congress as saying he did not see the magnitude of the crisis coming because he thought the firms involved had enough sense to look out for their own best interest. Ha. He goes on to say that a stabilization, which he sees, in housing prices will allow the MBS held on the books of the financial firms involved to become more transparent and allow a realistic valuation to be placed on them. Wow! All that from the man who did not see the magnitude of trouble in giving someone with no money ( and in some cases a job ) the ability to borrow hundreds of thousands to purchase Real Estate with no apparent cognizant ability to understand the terms of the mortgages much less the ability to make the payments required to service the mortgage.

Anyway, nothing much has changed. No floor on the housing market until the Fed takes the MBS off the books and allows those consumers in bad mortgages to renegotiate the terms to something that makes fiscal sense to those paying the bills. Dangling a carrot in front of the consumers face will only prolong the problem. Adequate financial measures are required to keep these people in the houses making the payments. Until this is done the Fed and the Treasury are shooting from the hip hoping to hit a moving target.

While Greenspan is obviously a smart man, the maestro may have well already seen his most intellectual days.

Wednesday, December 17, 2008

The Fed and all their glorious wisdom..........

After the extra large rally yesterday after the Fed cut rates I feel the market was bound to sell off based on the fact that nothing has changed. The cut just shows that they are still behind the 8-ball and trying trying to make up for missed opportunity's. By cutting the rate to .25% shows just how desperate they are to stop the slide into a deeper recession. They really have no ammo left at this point, except using taxpayer funds to start buying assets off the balance sheets of banks. The very thing they should have done in the first place.
The Fed is really just as much to blame as the lending institutions and the security brokers for the current crisis. The Fed's excessively loose U.S. monetary policy in 2002-2005 was a factor contributing both to the housing boom and subsequent housing bust. The Lender's who ignored pertinent financial information from applicants were just as much responsible for aggravating an already bad situation as the Fed was for making the money so readily available. The case of the Security Brokers was much the same as the lender's. In an all out effort to keep up with rivals profits they continued their advancement into the realm of risky mortgage back securities. Actually there was only one risky aspect of bundling the mortgages and selling them in the form of bonds. Those who were left with the MBS on their books when the party was over were in a position of holding potentially worthless or at the very least hard to value assets on their books. In the day of Mark-to-Market this was a sure recipe for disaster should the market take a turn for the worse. Instead of being responsible enough to govern in their own best interest they were continuously looking to keep up with the profits of rivals and in the case of the Fed's monetary policy it was all to easy to over look the long term interest of the firms in favor of the short term profits that would boost stock prices and ensure a hefty bonus at the end of the year.

Are these three entities taking responsibility for the financial calamity that has ensued? It would appear that from all outward appearances that they have somehow delegated responsibility to the consumer who was caught up in the fever pitch ride that consumed all of America during the height of the house flipping preoccupation. The fact that The Fed, the Broker houses and the Lenders were making record profits was inconsequential when the bottom fell out. At this time it was reported in the media that it was because consumers, in all their glorious greed, had taken on more financial responsibility than they could handle and had somehow gotten us to a point where AIG, Lehman, Merrill, IndyMac, National City and Washington Mutual had collapsed. Also at this time Goldman, Morgan, UBS, Bank of America, and many others were in dire straits.

And This is all the fault of the consumer who had to, according to the policy makers, lie to achieve the realization of obtaining a mortgage. Never mind that these " lier loans " were products dreamed up by an industry aimed at taking advantage of the excessivley loose monetary policy of the Fed.


More Later..............

Tuesday, December 16, 2008

What will it take to end the economic crisis?

It would appear that the damage has been done and nothing can alliviate the prospects in the short term. It seems that the Fed and the Treasury had ample opportunity to jump in front of the economic tsunamis that were headed our way but did not recognize the warning signs in time to evacuate the village. Time and again they are seen chasing after the destruction with a handful of money trying to figure out how to get in front of it. The basis for our economic dire straits is that we have people who, while being very smart, are either tied to studying the past or just plain part of the current problem. Ben is a student of academia, the guy could to tell you every which way from Sunday why the depression of the 30's happened and how to keep something that transpired the same way from happening again. Hank on the other hand is a Wall Streeter who knows the ins and outs and the repercussions of a nuclear bomb of this magnitude. He also knows how to profit from a bomb this size going off inside America. Lets not forget that Hank up until the mid 2000's was CEO of Goldman and was very well aware of the problems going on in the mortgage industry. Unfortunately at that time it was more profitable to be a part of the problem than the solution which I'm guessing is one reason he was given around $500 Million as a departing gift before being recruited to try and fix some of the previous problems he helped create. Who better to fix a major FUBAR than the one who helped engineer it?

So here we are. Things are completely out of hand and no one knows how to slow it down. All the money in the world is obviously not doing the trick, and why not. Seems that if you throw enough money at any problem you are bound to have an effect on its course of destruction. Well that would be true if the money were being thrown in the path of the problem rather than in the wake of its devastation. This seems to be another maneuver to transfer vast sums of wealth from those who have little to those who already hold the vast majority of it.

A couple of things from someone who claims not to know much but can see the cause and effect of the problem.

1) the freaking unrealistic mortgages have got to be addressed. Somebody who bought a $400,000 house with next to no money down that is currently being valued at $290,000 does not have much incentive to stay in the house making payments. Readjust the mortgages to reflect the true intrinsic value and give the home owner a reason to stick it out and make the payments month in and month out. Don't penalize somebody who either got caught in the downdraft or even somebody who was playing the flipping game. We bailed out the banks for their involvement in the mortgage crisis with taxpayer money, now lets bailout the tax payer. End of story. Problem on it's way to being fixed.

2) Make the proposed 4.5% mortgage rate available to not just new home buyers but to refi's as well. I know this will cost a huge amount, but it will stoke the economy by getting people to buy new homes and refi old ones.

3) Make credit available to those that are credit worthy. With the credit markets frozen nothing is happening and it is the taxpayers money that these banks are hording that was given to them with the express purpose of leading it.

4) Put some people in Jail. Starting with Henry M. Paulson. This man has done more to sabotage the bailout of of America than the banks did by getting us in this freaking mess. Take back all the Golden Parachutes and bonuses that have been paid in the last couple of years starting with Paulson, O'neil, Prince, Dimon, Blankenfeld, and all the others ( Morgan, Bank of America, Wachovia, Wells Fargo, Citi, Wamu, IndyMAc, National City.......etc

5) Get rid of this Mark-to-Market valuation that makes a specific asset or security made to be valued at current prices regardless of the underlying value. This rule is what effectively crushed, Lehman, Merril and AIG. In a bad market values go below what the assets are worth and what was paid for them. Having to account for them in this way reduces the sustainability of positive cash flow company's in adverse economic times.

6) Bring back the up tick rule - this was another blunder that was enacted in 2007. It states something to the effect that a short sale must go off at a price above the last sale of stock. Removing this rule allowed for a steady decline in the absence of any buys.

I'm sure I could come up with a couple more but the point being, we can not get in front of a massive tsunami. The best we can hope to do is limit the destructive nature of such a beast with some effect backstops in place. At this point we should stop chasing the problem down the street and examine the devastation it has caused a proceed with measures that would sure up those aspects of the economy most beaten down in an effort to contain the continued fallout.


Good evening until later............

Current Plays

Things I have consistently been playing to the long and the short side depending on the day, mood of the market, and price of stock relative to it's trading range.

I will up date both the RADAR and the POSITIONS on a daily basis in an effort to more or less chronicle my trades for myself as well as pertinent information about the trades . If anyone feels the need to copy my trades please do so at your own risk. I too, like every other trader, experience loses and gains from the trades I place.

Currently on the radar:


CLF
AAPL
BTU
BHP
SPWRA
BIDU
CENX
GPS
BBBY
BBY
AKAM
C
HIG
ISRG
AF
HD
MS
GM
LOW

Positions Currently:

AAPL - Short $94.0
BBBY - Short $24.57
CENX -Short $8.89
BIDU -Short $117.05
GPS - Short $13.09
RIMM-Short $39.47
BBY - Short $26.98
BCSI -Long $26.55
RVBD-Long $35.11
STP - Long $10.77
TSL - Long $10.33

Fed cuts rates

Today the Fed cut rates to .25%. Not much wiggle room left. I think things are much worse than they appear and much worse than the Fed is letting on to. The fact that the Fed went .25% lower than was expected was the reason I think the market rallied as much as it did today, although I think this should give us all reason to be even more cautious going into the Christmas buying season. The Fed cut more than anticipated by the market in an attempt to jump out in front of the recession and assure people that they were on top of things. This may be a case of being of being to late as usual. Also they are now talking about buying mortgage backed assets again, the very thing they were supposed to do with the original $700 billion. I still call for Hank Paulson to have to answer to a higher authority and spend time in jail for making matters worse for whatever his reasons may be. They sure as hell don't seem to be linked to protecting the general public involved in the largest financial calamity in the last 70 years. Will the rate cut do what is needed to stem the tide of the current down turn in the markets. I think not. I feel that the market has to find it's own equilibrium and anything that is an external stimulate posses the risk of exacerbating an already tenuous attempt at putting a floor under the markets.
I have said it before but the market needs a point of closure to the housing crisis to find the bottom. The external stimuli of money being thrown around, while in theory may be what is needed, in the context that the funds are being disbursed in and the fact the outline of the disbursement is being changed by the Treasury and the Fed based on internal meetings is causing undue confusion and keeping the markets in a state panic.

Some key happenings that are company specific to my portfolio today:

BBY - offering corporate buyouts to all corporate staffers, this will determine how many layoffs are needed in the 1st quarter. Stock traded up about $4. Should have traded down about $4. I am short BBY at $26.98

AAPL - announced that Jobs would not be attending MacWorld and a research note states that while sales of products are holding up, growth has hit a wall. Short at $94.07

BBBY - Took a short out on BBBY because I don't see this as something people are going to spend money on this Christmas in light of the current economic crisis. Short at $24.57

RIMM - Went short on RIMM today at 39.47 because the IPhone is killing them and this uptick was due to nothing more than the Fed rate cut. Short at $39.47


GPS -Short the GAP at $13.09. Who needs a $55 T-Shirt? Short at $13.09

RVBD -Long mainly because I got caught in the down draft from the $30's. Still a good tech company but will have to wait this one out. Long at $35.11

BCSI -Same reasons as Riverbed. Long at $26.55

STP - Long at $10.77. Was a quick trade that went south on me in a hurry. Has been ticking up and may be at break even soon. Long at $10.77

TSL - Long at $10.33. Anoth quick trade that got away from me on the downside. Not showing much signs of life. Considering averaging down ( bad idea, I know ) to bring the cost down so I can jump out on the next up tick.

Later........