Friday, August 14, 2009

Unreal Estate

Much like the stories of economic recovery lately, I have been astounded by the bottom-calling that is going on in real estate.

Here's how the storyline goes: Median prices have ticked up, as have some pending sales, and the rate of change in decline has tempered. The problem with business journalists nowadays is that they know how to write, but not what they write about. Any random noise for a month or two in a longer-term data trend is weighted more heavily than it should be.

The reason that median prices have ticked up is because the sales have been so skewed to the lower-end, that any slight increase carries a heavier weighting in the data and elevates it. However, does anyone really believe housing has bottomed because some foreclosures have moved up temporarily from an average of $100k to $105k (example for illustrative purposes only)?

The middle and higher end are still falling substantially. And Google a chart of OptionARM and NegativeAM loan resets, and then reconcile them concurrently with current Notices Of Default (NODs) and foreclosures. The future of housing is indeed bleak.

Further, as Calculated Risk has noted "the increase in pending sales has been mostly from lower priced homes with demand from first time home buyers (taking advantage of the tax credit) and investors. As [Lawrence] Yun notes, the demand from first time buyers will probably fade in another month or two."

But I don't want to get to far into these details, because in this post, I am primarily concerned with one, which I'll address after this rosy article from my city's newspaper.

From the Dallas Morning News: It's a risk to say it, but it looks like the worst is over for real estate market

...All that being said, I'll go out on a limb and say that the North Texas home market has bottomed out. After some significant declines in sales and prices early this year, the numbers are showing a definite leveling.

This week, North Texas pre-owned home sales data showed that July had the lowest percentage decline in almost two years. And median prices last month were up 3 percent from a year ago, according to statistics prepared by Texas A&M University's Real Estate Center.

The National Association of Realtors reports that median home sales prices for the entire second quarter were basically flat in D-FW when compared with prices a year ago. That follows five consecutive quarters of falling prices in the Realtors' benchmark report.

Yet another home price measure, by Standard & Poor's Case-Shiller, recently found that the Dallas region was one of only two metropolitan areas in the country with three consecutive months of home price increases...

...Home inventories – new and pre-owned – are now at the lowest levels in several years. Tight lending restraints will make it hard for builders to put up a bunch of spec houses.

The only real wild card left is the foreclosure situation.

My focus is Interest Rates...unlike the author's view, they are the key real unobserved wild card (although I will be the first to admit there are many). I don't know why NO ONE will address them.

Well, maybe I do.

The recovery story loses its luster when you have to address interest rates. Not one person has been able to articulate to me - in a data-driven, historical context - how recovery built upon inflation expectations can be achieved without higher interest rates.

But, maybe they won't go higher, maybe this is the new norm.

Um, no.


The chart above is as far back as I could dig up (with limited time) for the 10-year Treasury yield, which most closely approximates a 30-year fixed mortgage because of its normal life (people do sell their house before the mortgage is paid off after all). It shows that we are at the bottom of a range stretching 50 years.

Further, average mortgage rates for the last 35+ years demonstrate the same. Doing some rough calculations off of rate approximations, I come up with an average rate of 9.125% for this time period.

It can be argued whether rates will go that high, but based on a legitimate recovery case - and with all of the monetizing of debt and printing that has gone on (getting those Excess Reserves at the Fed into circulation), I think it is reasonable.

Let's examine what happens to the bottomed housing market when stagnant incomes that can't lift the demand curve much beyond where it currently is are suddenly hit with higher interest rates:

$400,000 house @ 6% interest rate = $2,398 P&I

$400,000 house @ 9.125% interest rate = $3,254 P&I

Payments just went up 36%.

Looking at it another way, to maintain the same housing payment that could be afforded before, the house price must now drop to $294,750. The price just decreased by another $105,250, or 26%.

So, buyer beware. This is just one element of a housing collapse that I expect will continue for years to come based on fundamentals and not noise in data sets.

YOU CANNOT HAVE AN ECONOMIC RECOVERY AND A HOUSING BOTTOM AT THE POINT AT WHICH WE CURRENTLY STAND. It is simply not structurally possible.

Thursday, August 13, 2009

History Speaks to the Future: You're Gonna Suck

I am currently reading "America's Great Depression" by Murray Rothbard. It analyzes the period from an Austrian Economics point-of-view - one where business cycles of a significant and disruptive nature are caused by interventionist monetary policy alone.

It shouldn't come as any surprise, but early on, I am already struck with how eerily - and perilously - similar the crisis and policy prescriptions are between then and now. To cast aside historical experience to make way for a "new" paradigm is something frequently done, but without legitimacy. Human nature, as pertaining to incentivization, emotional response, and self-preservation is rather constant, whether in the 1700s or 2000s.

That is the primary reason why I give high credibility to the research behind cycle theory, price waves, and general trending as it can pertain to markets or social structure.

There have been some startling predictions to come out in research reports recently from various funds, and while I may disagree with some of the details (I do not believe currency collapse will stem from hyperinflation but rather a deflationary spiral catalyzed by Treasury auction failures), I believe that escalating unemployment, social unrest, market crashes like not seen before, and a flatlining economy are very real possibilities.

Again, be wary of ignoring warnings stemming from history. Every major empire has collapsed under the weight of its own imperialism, debt, and money printing.

These are must-reads:

THE DARK YEARS ARE HERE (Hat Tip to Matterhorn Asset Management and Zero Hedge)

IDENTIFICATION OF MAJOR CHANGES OF TREND IN ADVANCE OF TRADITIONAL ANALYSIS


Wednesday, August 12, 2009

Bear Market Rally Over Now?


Click on the bear to play the latest video from Bob Prechter of Elliott Wave International discussing what's next to come in the markets.

Thursday, August 6, 2009

The Stock Market Kiss of Death

Many investors and traders staunchly believe in "contrarian indicators" as a tool for predicting market tops and bottoms. The reason has to do with emotions and momentum in an extreme sense, such that at that point, there are few bystanders left to be sellers in a downtrend, or buyers in an uptrend.

So, while I have seen many lately, none were quite as promising as today's from none other than the total failure of a clairvoyant, Abby Joseph Cohen from Goldman Sachs. I can't even remember how many times she has been wrong, but I'm sure others can, and I can pretty much guarantee they'll be front-running the market down now that she has piped up.

According to the WSJ, she has made the following comments:
  • The S&P 500 Index may rise as high as 1100 this year

  • "We do think the new bull market has begun"

  • Investors have seen improvement in key areas such as the job market and business inventories.

  • "We are beginning to see improvement even in the labor market, where it appears that the job losses are slowing and there is some job creation going on,"

  • Earnings of $75 a share for the S&P 500 next year are "reasonable" and that the S&P 500 at 1050 would put the price-to-earnings ratio around 14.

I don't think it's a stretch to say that she is my new favorite person. Her sense of humor and grand delusions are infectious and endearing.

Seriously, what the $%&* is she talking about? Investors have seen improvement in the job market? WHERE?! The job market is escalatingly abysmal and the only reason that the loss rate looks LESS BAD is because people have been unemployed so long, they're falling out of the ranks of those that still qualify for benefits.

Oh, and, I hate to be the bearer of bad news (i.e., reality), but the current P/E Ratio on the S&P is now 140. Earnings have dropped 97% from peak.

Keep that in mind.

The Myth of Stabilization: GDP Really Down 15%?

In my post from back in April, How Low Can You Go?, I wrote:

The Elliott Wave experts currently believe that we are in a primary up wave (i.e., countertrend rally / retracement wave) within the context of a secular bear market. While there may be a very near-term pullback, the expectation is for prices to retrace a previous wave pattern to around 10,000 on the Dow. Near this level also represents a valid Fibonacci retracement level, which could add credibility to it as a final target.

But make no mistake, this bullish frenzy will end.

While this bear market could be halfway done in terms of time, it is likely less than halfway over in terms of price decline. And it is extremely naive to assume that prices will quickly rally off of the ultimate lows when they are formed. Neither the technical, nor fundamental picture makes this probable. Anything is possible. But probable? No.

A supercycle (think Kondratieff) ascending price channel on the Dow that has held up for 80 years has now been broken. It appears that the lower channel support sits between 3800 - 4000 on the Dow. This would be bad enough if prices were expected to halt their decline at this level.

That is not the case.

Many that I know have long since forgotten that I made a call for the Dow to return to a 9,500-10,000 level based on retracement targets during the up-wave expected. I'm bearish but I'm also a realist. As such, the market and economic picture continues to play out quite closely to what I expected based on historical parallels and price waves.

Make no mistake - our situation is dire and reality will set in soon enough. We have ADDED leverage during a time when recovery could only be achievable with massive reductions in the trillions.

The current data is being manipulated in order to inspire confidence that the economy is stabilizing.

It is not.

YOU CANNOT BURY REALITY FOREVER.

I am thankful that another blog took a creative approach to analyzing and reconciling what was obviously a joke of a GDP release. Of course, this was to be expected. The government will do everything and anything in its power to hide the true state of affairs from our country until they realize it for themselves through their own hardships and not data releases.


The GDP report was released this morning and it was a compendium of incomprehensible and illogical numbers and, worse, it is just plain wrong.

Of course, since so much rides on an accurate assessment of our true economic state of affairs, it behooves us to make sense of it as best we can, understanding that the GDP report is less than perfect and riddled with difficult-to-rationalize statistical manipulations and quirky additions.

For example, the imputed value of "owner occupied housing" is a non-cash 'addition' to GDP meant to capture the value that people derive from their houses, due to the fact that they own them and do not pay rent to themselves in order to live there. If this does not make sense to you, that means you are normal.

So we gamely march off into the most current GDP report, which came out this morning (Friday, July 31, 2009), mostly to expose just how wrong it is.

First, I want to reveal how I look at data. It comes in three buckets for me. From the most recent Martenson Report:

As I tell people in my seminars, I divide my data (or facts) into three buckets: good, murky, and unreliable.

Into the good bucket I put all sources of data fitting the following important criteria: The data itself is not statistically massaged before release, it is not 'sampled' but rather tallied up in its entirety, and it squares up nicely with other good sources of data.

Good Data

  • Sales tax data
  • Income tax data
  • Truck tonnage moved
  • Port shipping container traffic
  • Air transport
  • UPS, FedEx, and other major shippers' volume
  • Corporate Revenues (just added to list)

Into a bucket of lesser importance goes the murky data. This data is based on sampling, usually conducted by self-interested parties (National Association of Realtors data for example), or is seasonally or statistically adjusted, and/or does not square up with other, better data.

Murky Data

  • NAR home sales data
  • Continuing claims
  • Retail sales data
  • Trade deficit reports
  • Corporate Income (just added to list)

Into the final bucket goes the utterly unreliable 'data,' so bad that I need to use quotes around it. This 'data' is modeled or otherwise manufactured out of thin air with no accountability, does not square up (at all) with good sources of data, has massive errors in methodology that have never been explained, consists of survey data for reasons covered in an earlier Martenson Report (Survey Says...), is self-referential (e.g. LEI or 'leading indicator' data), and/or has been proven repeatedly in the past to be consistently biased for political or self-serving gain.

Unreliable Data

  • New home sales data
  • Employment data (due to the Birth-Death model)
  • All survey data
  • Leading indicator data
  • GDP (just added to list)
I realize now that I goofed in that report and left out of the largest and most unreliable source of data from that final list. And that is the GDP report itself. So I have added it here.

Also, into the "good" bucket, I have now included corporate revenues, because, unlike a corporate earnings statement (now in the murky bucket), there are many fewer games and shenanigans that can be played with revenue. Apart from sliding revenue forwards and backwards a quarter or two, it is relatively pure data. GAAP accounting assures as much.

Added up across all companies, revenue provides a nice, clean picture of where things are going. Perhaps the best we have.

What we see here is a comprehensive enough sample for ALL companies in the S&P 500 that we can use it as a reliable measure of revenue across the entire corporate landscape. We find that revenues are down more than -15% in Q2 2009, compared to 2Q 2008.

Now, if you think about it, when people buy (or consume) anything, that transaction passes through a company somewhere, somehow. So we might use this -15% decline in corporate revenue as a pretty good approximation of how much less stuff is being consumed this year, compared to last year.

Okay, now let's look at the GDP report.

I am going to avoid all of the massive complexity that normally accompanies discussions of the GDP report and go for the simplest possible illustration of just how spectacularly off-base and misleading it is.

On TeeVee, and from a raft of well-meaning experts, you will hear explanations for why this GDP report makes sense. They will trot out things like increase in government expenditures, falling imports, inventory builds, and all the rest. But we can skip all that and simply look at one thing.

The formula for calculating the GDP is shown below.

All I want to focus on here is just one component, circled in green above: consumer spending, which represents over 70% of the economy. Given this prominence, and taking our argument that there must be some proportional relationship between consumer spending and corporate revenues, we need look no further than this one simple measure to determine that something is seriously out of whack in the GDP report.

From today's GDP release, we get these numbers for the total GDP, along with something called "PCE" which stands for Personal Consumption Expenditures (i.e. "Consumer Spending" in the formula above):


Going from the very peak of the economy in QIII of 08, we can see that the BEA reports that GDP and PCE have only dropped by 2.7% and 2.3%, respectively.

Really?

PCE is only down -2.3% from peak? With corporate revenues in total down more than 15%? How does that work?

Is there some way to explain how people are consuming away, but doing so without spending money on products and services offered by companies? How do we explain a 15% drop in the solid, reliable corporate revenue numbers but a 2.3% drop in Personal Consumption Expenditures?

I really can't think of any possible explanation that makes sense. And so I have to defer to the more reliable and trustworthy of the two numbers; corporate revenues.

Of course, comparing from the peak to current is not exactly what we should be doing, because that is comparing a QIII to QII drop in PCE to a QII to QII drop in corporate revenues.

When we ask the question, "How much have GDP and PCE dropped between QII 08 and QII 09?" we get these results:

Well, there, that certainly makes me feel better!

Just kidding.

This means we are being asked by the Bureau of Economic Analysis (BEA) to accept a reported -2% drop in PCE and a decline in corporate revenue of -15% , a figure more than seven times
larger.

Of course, the discrepancy between the two cannot be reconciled. It is impossible. One must accept one or the other.

I will point out that a -15% decline in corporate revenues is also in alignment with sales tax data from the states (down some 10% yr/yr), unemployment (9.5% and climbing) and many other economic measures. I will recall here that good data is that which aligns with other data.

How is such a misleading GDP report created? (Hint: think sausages)

The answer lies in a disturbing mixture of seasonal and hedonic adjustments, imputations and other statistical wizardry not subject to review or insight. We are asked to simply accept the results without question. Disturbingly, the Wall Street/MSM (Main Stream Media) spin-machine runs off with the GDP report as though it were the sacred truth itself, as we can see in this series of headlines I captured off of Google shortly after the release.

The triple combination of stocks up(!), bonds up(!), and gold down(!) constitutes a "win-win-win" for government statisticians/politicians and the Federal Reserve, because such a result means that their efforts are being taken "the right way" by the markets.

Such a trifecta constitutes a vote of confidence in their suite of actions generally, and in paper wealth specifically.

Of course, curious minds might be interested in learning how such articles manage to come out within mere minutes of the GDP release, almost as if they were pre-written.

If they are (as many suspect), then this implies that the "market responses," as well, were already known in advance, implying that they are as fake as the report itself.

In the scheme of things, one might question whether a country that routinely lies to itself, and then accepts those lies, then reprints those lies, and ignores the obvious discrepancies, is really on a sustainable path to recovery, complete with green shoots, or whether it is merely leading itself astray.

But if one is like me, then no wondering is involved. Such self-deception is viewed as a prescription for failure.

Other Links to Excellent Articles Disproving Recovery:

TrimTabs Continues Throwing Sand In The Eyes Of Fake Economic Data

About half of U.S. mortgages seen underwater by 2011

Friday, July 31, 2009

Clunkers for Government


Oh, sweet irony. I can't think of one government program with more perfect symbolism to the people behind it than the "Clunkers" program. Now, if only we could trade in our junk government for something else.

Well, it appears that our all-knowing, all-seeing government has slightly miscalculated the take-up rates - and expendiency - of this program.

I know, I know, I was as surprised as you when I heard that people like free money. My natural response was something along the lines of "Get the $%&* outta here!" But alas, I guess it is true.

This marks another regularly scheduled episode of the show "Stupid Government Tricks" in which instead of dogs barking the alphabet, we have politicians robbing us blind and then acting astonished that people were willing to accept the spoils of the crime (I think the acting may be the talent portion).

If unbeknownst to me, a criminal robbed someone down my street and then came to my house donning a ski mask with pistol in hand, offering to hand me a few hundreds, I would slam the door in their face. However, if someone showed up at my door with a suit on and a "Government" lapel pin offering me money, I'd take it in a heartbeat. It's practical human response to incentivization. And there's no fundamental difference in the act that's been committed, just in the window-dressing.

The program lasted 6 days. 6 days. And then it had to be suspended because the $1 billion that had been budgeted for it was looking to be fully allocated based on pipeline transactions.

A few quotes sum it up: "People are loving it...," salesman Andy Beloff said. But when asked if the government was running the program well, Beloff said, "No. No." And "If they can't administer a program like this, I'd be a little concerned about my health insurance," car salesman Rob Bojaryn said.

Yup.

I enjoyed hearing that auto-shill Phil Lebeau on CN(BS) this morning speaking about the pent-up demand that this evidences.

Phil, you don't appear to have even a basic grasp of economics.

This evidences pent-up demand in the same way that giving away free TVs evidences pent-up demand. Ah, but you say that free is much different than a discount. Not to me, when you're talking absolute dollars that would amount to much less than this subsidy.

Here's why the pent-up demand argument makes ZERO sense. At any point along the supply/demand curve, there is a price that the free market has found appropriate based on experience. If people aren't buying at a certain price, there is NO pent-up demand. Demand is what it is. The only pent-up demand exists when at the current supply/demand equilibrium, people are planning to buy IMMINENTLY AND ARE CAPABLE, but haven't yet. Maybe they haven't had the time.

To change the demand in a meaningful way, price must fluctuate, either as a function of price or supply, or both. At that point, it wasn't an example of any pent-up demand. It was an example of a completely new demand dynamic that created new behavioral responses.

And by meddling in the free market, all the government has done is pull forward future demand (read: lower future GDP) and encouraged even more leverage into a system THAT CANNOT RECOVER UNTIL MASSIVE DEBT IS LIQUIDATED.

What to do?

I guess I'll just wait for my $200,000 Ferrari rebate to release my pent-up demand.

Monday, July 27, 2009

Making Sure the "Not Possible" Stays Not Possible


Nassim Nicholas Taleb authored "The Black Swan" which is a premier literary work on 'tail-event' risk, or the risk which has a low probability but significant consequence. He currently is one of the most educated and brilliant voices identifying what went wrong and how not to let it go wrong again.

Who wants to bet that no one listens?


Ten principles for a Black Swan-proof world
By Nassim Nicholas Taleb

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.

5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.

6. Do not give children sticks of dynamite, even if they come with a warning. Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.

8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).

10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

In other words, a place more resistant to black swans.

Thursday, July 23, 2009

Public Healthcare? As A New Proposition? We Haven't Had Private Healthcare in AGES.

I have taken quite a considerable hiatus since the short time ago that I started this blog (time is a limited commodity nowadays). So, it may seem a little odd that I return with a topic that seems purely political: Health Care.

Unfortunately for us, it also has exponential economic ramifications, and this is something that is not properly articulated often.

Here's the thing - the primary reason that health care costs are so high, that there are so many uninsured, that the quality of care is incongruent to the prices paid - is that government is already too deeply involved.

Re-read that. It's important to know that the cause of a problem cannot also be the solution. Over many decades, our government has so heinously overstepped their boundaries into the alleged free market system that we have, that they have ruined the healthcare system that could have been. If you think that we have a free market healthcare system, and it was itself to blame, you are seriously mistaken.

Each step along the way, as government escalated the problems with their ineptitude (and attempts to appease their constituency), they have become more deeply engrained, producing a vicious circle.

I cannot say this any more simply: The problems will be solved when government detracts itself from healthcare (like all industries), NOT entrenches further.

Government already severely limits competition in ways that are not discussed, but are ENTIRELY relevant.

Five Steps to Real Health Care Reform

Although the bill currently being considered by Congress is being advertised as health care reform, it actually includes very little in the way of real reform. It is a thousand-page disaster which attempts to address problems which were created by government regulation with more government and more regulation at an enormous cost. There are real problems with high costs and millions of citizens with no health coverage, but raising costs even higher and mandating insurance for those who cannot afford it, enforced with draconian penalties is not a rational solution. It is a crude attempt to address the symptoms without looking at the causes. It's like giving a patient with skin cancer some makeup to cover his unsightly moles instead of removing them and curing his cancer.

The root problem in health care in America today is massive over-regulation, government interference in the marketplace and a lack of essential competition which would keep the costs of care and insurance reasonable. Past attempts to address problems in health care have consistently taken the wrong approach and have built on each other to create a tottering house of cards where everyone pays too much and the quality of service is too low. Real reform cannot be achieved by adding more bad ideas on top of old failures. Real reform requires tearing down all the old, failed measures and starting over again. It requires creative thinking and charting a course which is almost exactly opposite of what Congress and the President are currently considering.

We need to start over from scratch, tear away the mistakes of the past and really rethink how we manage health care in America today. It can't be done overnight, but here are five simple and powerful ideas which would be the beginning of substantial change in the right direction.
  • Insure individuals, not groups. The current system of giving businesses tax credits for contributing to employee insurance takes away free choice and discourages competition which would encourage insurers to provide better service. Plans are picked by company management based on price rather than on benefits and service quality. Employees then have to pick only from the plans their employers offer, which may often be only one plan and is rarely more than three. This eliminates the force of free market competition. If individuals picked and paid for their own insurance, the better plans would get more customers and the insurers with poor service and benefits would either improve or go out of business. Prices would also be lowered as insurers worked to attract more customers, because insurers could no longer count on guaranteed large pools of customers from group plans. Businesses which no longer had to pay for health insurance would increase salaries so that employees could pay for themselves. This would also help with the problem of the uninsured, because many of those currently uninsured are self-employed and cannot find competitive plans, because most insurance is currently marketed to groups rather than individuals. Give individuals a tax credit only if they purchase insurance themselves. Encourage people to self-insure and eliminate regulations like HIPAA which give special protections to group plans. Insurance companies will rise to the challenge by providing better and cheaper coverage and more variety of plans.
  • Eliminate coverage mandates. Currently there are over 1900 regulations requiring health insurance companies to cover specific ailments, most of them ones which are more common among older patients and many of them quite rare. The insurance companies lay off the cost of this coverage on the general customer base which massively raises the price for the young and healthy who make up about 40% of the uninsured. Eliminating these mandates would lower the price of health insurance sufficiently for that group such that they could afford to be insured. Instead of mandating what conditions insurers have to cover, let customers pick plans based on the level of coverage which they feel meets their needs. There will be a market for full-coverage insurance and competition to keep the price of premium plans low. No private or public system of insurance will ever exist without some rationing of care, but in a free market, consumers will be able to decide in advance what areas they are willing to sacrifice and where they want to focus their coverage, rather than having those decisions made by their employer or the government. Consumers could still be protected from abusive practices by a private certification system which would analyze plans and certify the quality of coverage offered, and the market could be made more accessible and competitive through nationwide internet-based insurance shopping.
  • Privatize Medicaid and Medicare. One of the largest factors in the inflation of health care prices is that so much of the money in the industry comes from Medicaid and Medicare and prices are set at the rate which the government is willing to pay rather than by competition in a free market. Private insurers are then expected to pay for services from doctors and hospitals at the same inflated rate. Medicare and Medicaid costs have increased at about twice the rate of general inflation since the programs were started in 1965. The result is that the price of these programs has doubled every 7 years until today they are 50 times as expensive as they were at their inception. For comparison, the cost of most other goods and services has increased by an average of only 8.5 times in that same 44 year period. We have people being billed $25 for an aspirin because the price of that aspirin is not based on the current market price, but on a schedule of Medicare/Medicaid prices which factors in that enormous level of artificial inflation. Hospitals and insurance companies then follow those pricing trends. Elimination of Medicare and Medicaid as they now exist would force hospitals and doctors to price competitively because insurers would refuse to pay for overpriced products and services. Instead, Medicare and Medicaid should exist only as government payment plans which would subsidize the purchase of private health insurance or health services for the poor and the elderly.
  • Free the health insurance marketplace. State and federal laws currently place a huge number of restrictions on the kinds of health insurance available to consumers. One result of this is that regulations make insurance much more expensive in some states than in others. If consumers could shop for insurance in an unrestricted nationwide market then they could spend their money in Wyoming where a good plan costs $1500 instead of New Jersey where an equivalent plan costs $5000, or more likely, expensive plans would go down in price so that people everywhere could afford them. Similarly, eliminating many of the current legal restrictions on insurance companies would encourage the creation of alternatives to traditional insurance, like health care cooperatives and hospital-based medical plans where customers could subscribe to health care services from a specific source instead of having to go through an insurance company at all. Eliminating the regulations which prevent health care providers from marketing their services directly to consumers would lead to substantial reductions in costs from increased competition.
  • Open up free trade in prescription drugs. One of the factors which keeps the price of health care high is the inflated cost of many prescription medicines in the United States. Government regulations protect pharmaceutical companies from having to compete in a free market by prohibiting private or commercial importation of drugs. This lets pharmaceutical companies charge more for their products in the United States to offset the lower costs they charge in other countries. The result is that on average drugs cost 30-40% less outside of the US and the price differences are much larger for the newest and most effective drugs. If consumers could buy their drugs outside of the US or if pharmacies could import their drugs from other countries — many of which have even higher quality standards than we do here — prices would go down substantially for American consumers who are currently paying far too much and subsidizing the low cost of drugs in other countries.

These five steps won't solve every problem in our health care system instantly, but they will eliminate most of the really serious problems, almost all of which originate in over-regulation. Our current system is designed to keep insurers and health providers from having to compete in the free market, a practice which limits consumer choices and keeps prices artificially high. Make them compete and the qualify of their product will become better, at a lower price.

There are a few things which these proposals cannot address directly. Free market changes do not guarantee a solution to the large number of uninsured, most of whom are uninsured by choice. Many of them will take advantage of lower-priced plans aimed at their part of the market, but there will continue to be a problem with those who are difficult to insure because of preexisting conditions and those who just don't want to pay for insurance. Those who cannot qualify for private insurance at a reasonable price would have to be made eligible for some sort of public subsidy under an expansion of Medicaid. The cost of doing this would still be enormously less than the proposed cost of Obamacare. Those who choose not to be insured could be dealt with under a gap insurance system where if they went to an emergency room their treatment would be covered, but they would be required to repay Medicaid for that treatment on an extended payment plan.

Right now no one is considering this sort of real, fundamental reform of the health care and insurance system as a comprehensive plan. However, there are a number of bills, which include many of these ideas, being proposed to essentially reform the health care reform plan before it even passes . Among these is a bill from Senator Ron Wyden (D-OR) called the Healthy Americans Act which would take the idea of Health Exchanges in the current proposal and use them as a way of transitioning from group plans to individual insurance. Another idea is the Pharmaceutical Market Access and Drug Safety Act, which would open up imports of pharmaceuticals to create a competitive market. It was proposed by Senator Byron Dorgan (D-ND) and has 29 bipartisan co-sponsors, but is stuck in committee. There's even a bill to privatize Medicare with a voucher system proposed by Representative Marsha Blackburn (R-TN). These are all good ideas, but they are being left by the wayside as congress looks at the proposed 1000 page plan which meets President Obama's requirements, but offers little real reform and just expands and makes even more expensive and less efficient the current system.

The plan currently being considered is not health care reform. It is more of the same on a larger and more expensive scale. Real reform means going back and starting over and figuring out what we've been doing wrong and then doing it right. That means reintroducing free markets to the health care and insurance industries and putting choice and control back in the hands of the people. Real changes like the five proposed here will reduce consumer costs and improve the quality of care without massively expanding government or increasing taxes. Ideas like these ought to be part of the debate and not shoved aside in the headlong rush to impose more of the same failed ideas on an ever larger and more expensive scale.

Wednesday, May 27, 2009

TNX Havoc



Maybe I'm going to be right a lot sooner than I thought.

This isn't tough to describe.

Bad.

Why Bonds are the Real Market To Watch


I'm not saying anything that hasn't been said before: The Stock Market is often noise and game-playing. Credit Markets are the true barometer of economic health.

But, right about now, this bears repeating. Over and over again.

I wrote last week about Crowding Out the Future and even further back about yields beginning to blow out further out on the curve.

I'm not the only one who fears imminent collapse may be upon us.

Bond Market Close May 26 2009

Prices of Treasury coupon securities are tumbling today and the longer the maturity of the issue the more painful the plunge.

The 2 year note has suffered the least as its yield increased by 3 basis points to 0.92 basis points. The yield on the 3 year note climbed 8 basis points to 1.46 percent. The yield on the 5 year note climbed 10 basis points to 2.30 percent. The yield on the 10 year note soared 9 basis points to 3.54 percent. The yield on the 30 year bond also jumped 9 basis points to 4.48 percent

The yield curve is losing its curve and is about to go perpendicular. The 2 year/30 year spread is closing the day at 356 basis points. I have recounted many times here that the widest level for that spread since man has walked erect was at 369 basis points in October 1992. The yields were 3.60 and 7.29 percent, respectively.

The 2year /10 year spread is 262 basis points and it is within hailing distance of its record level of 273 basis points which I believe we touched in 2003 when the Federal Reserve pilots were just receiving their helicopter licenses.

The 2 year/5year/30 year spread has broken down and trades 80 basis points. That spread had supported at 90 basis points but will probably now trade between 60 basis points and 90 basis points.

Why is the market crashing and why is the curve so steep?

We are drowning under the weight of near term supply for sure but I guess I think something else is afoot here.

Look at the breakeven spread on the 10 year TIPS bond. That spread is currently 185 basis points. I do not believe that we have been that wide since the advent of the financial crisis in 2007. I think that investors are uttering a gigantic and collective nyet regarding the implementation of monetary policy and fiscal policy in the US. That is why the curve is steepening so dramatically.

Foreign central banks continue to intervene, buying dollars and selling their local currencies. The names most mentioned in that endeavor are Russia and Brazil. Sources tell me that the fruits of the intervention are parked in 2 year notes and 3 year notes. There is a dearth of central bank interest in the longer maturities.

Some cite the very strong 2 year note auction today as a sign of the market’s health. I think not. The issue is propped up by the prospect of a very low funds rate for an extened period of time. The carry and ride down the curve profits are seductive.

Central banks bought over 54 percent of the issue. I would submit that while that is great for the 2 year note it is a less than festive sign for the 5 year note and the 7 year note which will auction over the balance of this week, the money in the 2 year note is money that will not be invested in the 5 year note and the 7 year note. The treasury should organize a posse to search for marginal dollars for the 5 year and 7 year. If one wishes to observe bond market panic I think it would develop quickly if the 5 year note or the 7 year note auctioned with long tails as we observed in the Bond auction earlier in May.

A long tail in a bond auction with its attendant risk is one thing. If that were to occur in a shorter maturity in would be a sign that investors are in full retreat from longer dated US assets.

Maybe the final climactic event is upon us. Maybe the final bubble to burst is the US Treasury market and maybe we are on the verge of a financial Krakatoa which will realign financial markets.

Whatever the case it feels like the calm before the storm and we are about to embark on another interesting expedition.

I feel like the perennial Chicken Little lately, but I can't get around the facts - and the rationale that accompanies them.

Government cannot control markets. They can jump in the pool and splash around for a time, but in the end, homeostasis will occur.


Thursday, May 21, 2009

Crowding Out the Future. Bond-Style.

I am not any less short on time than I have been recently, but I was compelled to discuss an issue which I believe could be profoundly disturbing.

I have discussed the "crowding out" effect before as the government and/or Fed (who can tell where one stops and the other starts nowadays?) tries intervening in a multitude of markets. For ease of reference, let's just say that here it means that vested parties (investors) take their ball and go home when both their resources and demand have been diminished by government actions creating competing objectives.

And, of course, in this instance we're talking about that tiny little immaterial market known as Treasuries. You know, the one where we rely on investors - mostly foreign - to give us money for what everyone surely knows are worthless IOUs down the road. You know, the one that keeps our currency, and economy, from collapsing.

I have long wondered how the strategy can keep from crowding out demand from investors, when artificial Fed demand that will dissipate down the road will shred Bond investors by backing that demand out, flipping prices on their head and driving yields through the roof. I wondered how it would prevent compelling Treasury buyers from becoming sellers to the Fed itself. In this instance, the US authorities would eventually "crowd out" everyone but themselves as both buyer and seller (seller when the Fed eventually held most, if not all, Bonds).

Um, yeah, well, good news!

CBs And Other "Real Money" Had Enough?

"21. There apparently is a new wrinkle to the intermediation trade between buying from Treasury to sell to the Fed with real money, including central banks, now in on the act. Indeed, several Street sources relay central banks were aggressive offers into this morning's coupon pass, with one letting go of a large block of old 5-years. Other offers too are coming in from embedded Asian real money longs -- in the higher coupons -- also looking to sell size without unduly upsetting the market, and especially considering the illiquidity in off- the-run bids from the Street."

"Whether influenced or not by the much higher tenders coming in on the Fed Passes ($45 bln tendered for $7.4 bln bought in today's pass for a 16.2% hit rate), fast money has been tattooing the bid and especially so in the belly with the 10-year most leaned on. Note as well, earlier this week the Bank of England (BoE) gilt pass too saw a need to offer paper at or below the market's bid side in order to get sales off."

"If Foreign Central Banks are selling into Ben's bid then the game is literally weeks or even days away from being over."

"I have written for over a year about the potential for a bond-market implosion and subsequent economic collapse."

"We are following the precise same path we went down in the 1930s."


And more good news that seems to be trashing the long end of Treasuries today:

Britain no longer a AAA nation? It could happen, S&P warns

Excerpts:

"Britain was put on notice today that it could lose its AAA credit rating because of massive government borrowing, a warning that ought to at least prick up the ears of U.S. policymakers."

"Standard & Poor’s cut its credit outlook for the United Kingdom to "negative" from "stable" and said there was a one in three chance that the country’s AAA rating could be reduced."

From Bloomberg News:

"We have revised the outlook on the U.K. to negative due to our view that, even assuming additional fiscal tightening, the net general government debt burden could approach 100% of gross domestic product and remain near that level in the medium term," S&P analysts led by David Beers in London said in the report.

"The downgrade highlights the precarious fiscal outlook the U.K. economy faces," said Nick Stamenkovic, a strategist in Edinburgh at RIA Capital Markets. "The huge amount of issuance to face the [bond] market in the coming months will push yields to the upside. We’re bearish."

Like the U.S., Britain is borrowing heavily to rescue its economy from a deep recession. Britain’s debt load next year will be 66.9% of gross domestic product, Bloomberg said, citing forecasts from the International Monetary Fund. That would exceed Canada’s 29.1% and Germany’s 58.1%. The U.S. will be at 70.4%, and the 16-nation euro area at 69%, according to the IMF.

In case you missed the hidden subtlety, America will have a debt-to-GDP ratio that is 3.5 points higher than the UK. Not to harp on the obvious, but this seems to be strategic maneuvering by S&P to give the US a signal as to the guillotine that they may be soon to drop.

Something very telling happened today. The dollar has been getting absolutely blown apart lately, but the story today wasn't the Pound taking the greenback's place. It was...the dollar getting blown apart again.

The cynical part of me reads this with a single-minded vacuum: Traders know what is coming for the US is much worse than the rest of the world.

Friday, May 15, 2009

"The Worst Is Yet to Come: If You're Not Petrified, You're Not Paying Attention"

I have not had much, if any, time to post lately, but will resume soon enough. In the meantime, this pretty much sums up my current thoughts.

Which were a lot like my previous thoughts.

Which will probably be a lot like my future thoughts for many moons to come until major economic structural changes take place.

UPDATE:

So much for the embedded player, which doesn't seem to be working. Here's a direct link to the online player with video.

Thursday, April 30, 2009

Bond Vigilantes to Fed: F*ck You

The Fed has been embarking on their quest to drive down interest rates by buying longer-term dated Treasuries, Agency debt, and MBS. Originally, the initial announcement at the very beginning of December (shown in the first circle) managed to drive prices up on the 10 year (which is the most often used proxy for mortgage rates since it best approximates the average mortgage life), and inversely, yields down.

However, soon after yields began rising again, presumably because lip service only moves markets for so long. When tangible plans were announced in mid-March (shown in the second circle) that the Fed was going to imminently begin to purchase the debt, this also triggered a massive price spike - and yield drop.

Yield found technical support at its lower bound of the Moving Average Envelope, and surprisingly has been trending higher ever since.

And then, they actually began buying.

And yields rose.

In fact, yield now stands at a level higher than when the Fed plans were initially announced last December. It has now broken through both a long-standing resistance level and its 200 day moving average (EMA). This could be quite bullish and yields may first target the upper bound of the envelope at around 3.4-3.5%. Overbought conditions may have to be worked off as the Relative Strength Index is approaching 70.

So far the Fed has purchased around $75 billion of Treasuries out of a total $300 billion planned for. So, it is true that the efforts are early. Additionally, as far as I can tell from the NY Fed Open Market Operations activity, only a few billion dollars of the 10 year have been purchased. In a market as massive as Treasuries, that is miniscule.

But....

That explanation seems to be one of the biggest problems: Fed intentions amount to trying to boil the ocean...it is seemingly too large.

Rather, what seems to be happening is that foreign investors are becoming ever more wary of seeing the US government attempt to monetize debt and flood the market with new Treasury issues to finance their budget.

There is a fear in the market that the Fed is going to crowd out private capital (i.e., foreign investors). When China takes its ball and goes home, look out below.

Wednesday, April 29, 2009

Is China the Next Great Bubble?


Much like here in the US, the China story is one where people evaluate data points in a vacuum and conclude that recovery is on its way.

For instance, the Shanghai Composite bottoming and rising nearly 30% is a positive sign in isolation. However, months ago Michael Pettis had identified that the growth in lending that the market rose on the back of was actually heavily attributable to sham transactions to appease Chinese government directives. Further, evidence coming out of China was demonstrating that 1/3 of the lending that did take place was not done so for productive investment purposes, or even consumption. Rather, it went into the stock markets, which indicates a complete unsustainability (um, since debt has to be paid back and not always at the best or most liquid of times).

In my post PIMPCO Strikes Again, I disputed the recovery case in China because sustainable signs are non-existent.

Vitaliy N. Katsenelson, CFA, Director of Research at Investment Management Associates in Denver, Colo presents an excellent case of support in "The Next Great Bubble?" I have excerpted portions, but the entire post is definitely worth a read.

...I get the distinct feeling that investors’ prayers are now being answered: There’s a new bubble now - or an old one is being re-inflated, depending on your perspective even as I type this. I’d like to call it the Troubled China Revival Program (TCRP).

Why start reserving bubble-naming rights? Well, I recently received an email from a friend that had the following subject line: “China … Record Loan Addition, RecordMoney Supply, Record Auto Sales, Record Imports of Copper, Iron Ore, andCoal, Strong Property Sales.”

I checked every figure (the hyperlinks above are mine), and every single one checked out. I couldn’t quite believe what I was reading. I had thought China was in a spiraling-down recession. But even the decline inelectricity consumption — a true gauge of economic growth — decelerated from 3.7% in January and February to a mere 0.7% in March. (Take a look at the FXI for more.)

So is China really the first nation to rebound? Is this the first sign of a rebounding global economy?

I’m sorry to say that the answer to both questions is no...

...Though China can’t control consumer spending, the consumer is a comparatively small part of its economy: Currency control diminishes the consumer’s buying power. All of this makes TARP 1 and 2 look like child’s play. If China wants to stimulate the economy, it does so - and fast.That’s why we’re seeing such robust economic numbers...

...It’s literally forcing banks to lend - which will create a huge pile of horrible loans on top of the ones they’ve originated over the last decade (though of course we can’t see them). Don’t confuse fast growth with sustainable growth. As I’ve discussed in the past, China is suffering from Late Stage Growth Obesity. A not-inconsequential part of the tremendous growth it’s seen over the last 10 years came from lending to the US. Additionally, the quality of late-period growth was, in all likelihood, very poor,and the country now suffers from real overcapacity...

...Now China needs to stimulate its economy. It’s facing a very delicate situation indeed - which is a nice way of saying that China’s screwed. China needs the money internally to finance its continued growth. However, if it were to sell dollar-denominated treasuries, several bad things would happen...

...This is why China is desperately trying to figure out how to withdraw its funds from the US dollar without driving the dollar down. Good luck with that...

Tuesday, April 28, 2009

More Than One Type of Car Crash


This will be a short and sweet post. I'm listening to an Ernst & Young presentation on supply chain risks right now and something has struck me as odd (to hear out loud).

The common public face is that auto sales should stabilize and rise sometime in the very near future, which is something I have taken issue with. There is an auto industry executive on this panel that just asserted that they believe that the worst is yet to come. In fact, the phrase "few years" was used to describe when a bottoming may occur. I find this view far more credible based on the lack of recovery engine.

I think it is reasonable to think that this could act as a proxy for the greater economy in general, particularly because auto industry sales levels have suffered far more severely than other sectors, and they may act as a leading indicator.

Dow Theory: "The Primary Trend is Down"

Richard Russell is a legend in the markets. When he talks people tend to listen and with good reason. His current views as expressed in "Let the Bear Market do its Work":

“People in this country don’t realize how bad things can be,” said Richard Russell on Saturday night.

“I lived through the Great Depression. I remember people standing in bread lines. It was hard to get a job, any job, back then. But now, you see the restaurants are still full. People are still spending money. They may be worried and they may be beginning to save, but there’s no sense of urgency. And there’s a rally on Wall Street. You know, every bear market produces a rally. You can expect the market to retrace its steps by one- to two-thirds.

“And every bear market has a surprise. I think the surprise is that this is going to be a lot worse than people expect.”

Richard Russell is 84. He’s been writing his investment newsletter, Dow Theory Letters, for 50 years. This weekend a group of his admirers, including your editor, came together to say thanks.

There are a lot of people with opinions on the economy and the stock market. You can hardly turn on your computer without getting dozens of them. But there are not many opinions with the depth of experience and knowledge behind them as those of Richard Russell. He’s been studying “the language of the markets” for more than half a century. Though no one ever fully masters the language of the market, Richard can at least carry on a conversation with it.

The primary trend is down,” says he. In the end, he continues, no matter what Obama and Bernanke do, the primary trend will have its way. The bear market will continue until it “has fully expressed itself.”

Friday, April 24, 2009

Stress Test aka Simon Says

Well, details are now out about the summary conclusion of the health of US banks (Surprise! It's good) and the methodology used for the evaluation (Surprise! It's bad).

And thanks to this information, any remaining doubts I had about whether or not we are becoming a Banana Republic are now scarce.

I want to highlight a few key passages from the CNBC breaking story "Most Banks Have Enough Capital After Stress Tests: US":

The US government, releasing details of how it conducted "stress tests" on the nation's 19 largest financial institutions, said “most banks currently have capital levels well in excess of the amounts needed to be well capitalized."

The report said the tests are a “forward-looking exercise designed to estimate losses, revenues and reserve needs” under two different macroeconomic scenarios, including an adverse one.

According to the report, the "banks were asked to project their credit losses and revenues for two years." The process "involves the projection of losses on loans, assets held in investment potfolios and trading-related exposures, as well as the firm's capacity to absorb losses in order to determine a sufficient capital level to support lending."

Let me address these excerpts one by one:

First, in regards to these banks having more than enough capital, I'll simply say stay tuned. If this is the case, not one more dime of taxpayer money should be allocated to bailouts in kind, loans, or any other forms of guarantees against losses.

Of course, this will not be the case, and if I was stupid enough to be a shareholder in any of these banks right now for anything other than a quick trade, I'd have my attorney on speed dial with my finger hawking over the button.

And the simple reason is this: there is not remotely close to enough capital in the banks based on the deterioration of the economy and their assets as they are correlated. And one of 2 things (or both) is going to happen: Outright nationalization whereby common stock is zeroed out, and/or further issuance of common stock or conversion into it, thereby massively diluting shareholders.

Second, the scenarios are essentially a joke. Nouriel Roubini has already noted that many of the scenario conditions / metrics have already been superceded by the actual conditions / metrics that we have deteriorated so quickly to.

Third - and this is my favorite - was the statement I highlighted above, "banks were asked to project their credit losses and revenues for two years."

Wait, maybe I should re-read that again just to be sure that it wasn't a joke. Hmm, no subsequent punchline.

Uh oh.

Let me put this in very simple perspective. The Treasury was conducting a test. This test was to assess the potential that an financial organization had for future success or failure. MUCH LIKE THE WAY ANY SCHOOL TEST ASSESSES THE SAME FOR A STUDENT.

Were you ever given a test where the administrator asked you to tell them what you think the answer should be? And then it was? This is not a test. This is a game.

And that is what we have become. A land of fiction and fantasy, where the potential for any company is limited only to their imagination (and self-interest, of course).

New Commercial: Change of Auto Strategy

It was bound to happen sooner or later at the rate that things are going....

Thanks Corey.

Thursday, April 23, 2009

Oh Yeah, Wells Fargo Seems Legit. Part II

In my post Oh Yeah, Wells Fargo Seems Legit I went oh-so-far out on a limb to suggest that Wells' earnings were a sham accomplished through accounting tricks - specifically under-reserving for bad assets which are known to be underperforming.

Oh, guess what?

Wells Fargo's Papier-Mâché Earnings Report

This just in from Dave the Bond Trader.

We would not have minded this bit of accounting chicanery so much, if Wells had not accompanied their earnings with so much "master of the universe" bravado and bluster about their superior banking management.

But we suppose when you are down on your chips and running a bluff, you have to give out the right sort of attitude and moral high ground to make it work, to hide the fact that you are just crooking the books like everyone else.

That smoke you feel being blown up your backside is nothing more than legalized accounting fraud being presented to the world in the form of Wells Fargo's 1st Qtr 2009 earnings release. As suspected, the infamous "record profits" preannounced 2 weeks ago by Wells Fargo are nothing more than a result of our Wall Street-financed Government, including our President, forcing the FASB to change the way big banks account for toxic assets. As per WFC's earnings release today:

"The net unrealized loss on securities available for sale declined to $4.7 billion at March 31, 2009, from $9.9 billion at December 31, 2008. Approximately $850 million of the improvement was due to declining interest rates and narrower credit spreads. The remainder was due to the early adoption of FAS FSP 157-4, which clarified the use of trading prices in determining fair value for distressed securities in illiquid markets, thus moderating the need to use excessively distressed prices in valuing these securities in illiquid markets as we had done in prior periods"

Essentially, what WFC did was post $5.2 billion mark to fantasy gains, which were then added into its revenues, by reversing out previous charges expensed against their securities and loans held for sale. Without this gain, Wells Fargo loses a couple billion.

In looking at WFC's balance sheet, I see that their "securities held for sale" miraculously jumped to 27% of their net loans vs. being only 21% of loans at the end 2008. This is obviously WFC taking full advantage of the new mark to fantasy accounting standard and piling as much toxic waste into this category and marking the price levels up substantially. Be really interesting to see what kind of worthless crap was conveniently moved into this category.

I can't say this following sentence loudly enough: If you jump into the markets (or stay in) with manipulated earnings like this as your catalyst for believing that stabilization is imminent, beware.

Wednesday, April 22, 2009

Good Ole Days


Ah, this seems familiar. The sweet siren call of the last hour of trading (in this case last 30 minutes) that tempts the bravest and most determined of warriors...to start dumping shares vigilantly.

This may be a good indication of how the next few weeks will likely play out, depending on volume. I was within a few points of my recent 7750 support call when the market bounced. I don't believe that holds again this time around.


Daily Show on Bank Profits

This fits perfectly with the theme from yesterday's post Are We Descending Into a Banana Republic?


The Daily Show With Jon StewartM - Th 11p / 10c
http://www.thedailyshow.com/video/index.jhtml?videoId=224259&title=clusterfu#@k-to-the-poor-house
thedailyshow.com
Daily Show
Full Episodes
Economic CrisisPolitical Humor

Tuesday, April 21, 2009

Are We Descending Into a Banana Republic?

In the upcoming May issue of The Atlantic, Simon Johnson addresses some unpleasant similarities between unstable emerging economies he dealt with while at the IMF and the current state of the US.

The Quiet Coup

Some key excerpts:
"...Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise..."

"...The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs..."
And the best for last under the section heading "Becoming a Banana Republic":
"...In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people..."

"...But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them..."

Monday, April 20, 2009

Future Tax Liabilities

I find the current stance of the President and his Administration very disingenuous surrounding tax implications.

First, a few key excerpts from the article Obama aide takes dim view of anti-tax tea parties:

A top adviser to President Barack Obama takes a dim view of last week's anti-tax "tea parties," promoted by organizers in the spirit of the Boston Tea Party.

"The thing that bewilders me is this president just cut taxes for 95 percent of the American people. So I think the tea bags should be directed elsewhere because he certainly understands the burden that people face," David Axelrod said Sunday.

Axelrod was asked on CBS' "Face the Nation" for his opinion on what the show's host described as "this spreading and very public disaffection with not only the government, but especially the Obama administration."
Here's the obvious problem with the Presidential sleight of hand: It is a myopic, here-and-now examination of tax burdens and does not evaluate out into the future the detrimental impact of current actions.

Our government is essentially calling the American taxpayer stupid, saying, "Here's an extra banana Monkey," and assuming that our intellect is limited to gleefully understanding only the banana in hand.

That's the dissent. We will pay dearly down the road for the seeds of destruction sown today. Whether or not we pay for it today.

Let's do some quick math to make this fun.

An estimated 130 million Americans file a tax return each year. The CBO projects that the current Federal budget proposals will ADD $9.3 trillion to the national debt in the next 10 years.

What happens?

Every American that files a tax return will owe an additional $71,500. And that's not even factoring in the exponential impact that compounding interest on that debt has on the total to actually be paid back through taxes.

Oh yeah, I don't see what the big fuss is about.

Stress Test Results

Rumor? I won't pretend that I can confirm as to whether these are the actual results, but I do know that (most?) tests seem to be over and the Treasury Department is blatantly lying now.

This speaks for itself.

Treasury: Caught Lying Again

"Last night Hal Turner (who has a reputation that is best described as heavily-adorned with Reynolds Wrap) published this:

The Turner Radio Network has obtained "stress test" results for the top 19 Banks in the USA.
....

1) Of the top nineteen (19) banks in the nation, sixteen (16) are already technically insolvent.

2) Of the 16 banks that are already technically insolvent, not even one can withstand any disruption of cash flow at all or any further deterioration in non-paying loans.

3) If any two of the 16 insolvent banks go under, they will totally wipe out all remaining FDIC insurance funding.

4) Of the top 19 banks in the nation, the top five (5) largest banks are under capitalized so dangerously, there is serious doubt about their ability to continue as ongoing businesses.

He then goes on to list things that we know to be factual, including derivatives exposure (mostly in interest-rate swaps and similar.)

This appears to have led to Treasury issuing the following statement this morning:

The U.S. Treasury Department has not yet received the results of "stress tests'' on the health of the nation's 19 top banks, spokesman Andrew Williams said Monday, after a blog said it had obtained the test results and some U.S. bank shares moved lower.

That's a lie.

How do we know its a lie?

Because of this from April 10th:

April 10 (Bloomberg) -- The U.S. Federal Reserve has told Goldman Sachs Group Inc., Citigroup Inc. and other banks to keep mum on the results of “stress tests” that will gauge their ability to weather the recession, people familiar with the matter said.

The Fed wants to ensure that the report cards don’t leak during earnings conference calls scheduled for this month. Such a scenario might push stock prices lower for banks perceived as weak and interfere with the government’s plan to release the results in an orderly fashion later this month.

How can you be ordered not to release something you don't have?

Since that was published on the 10th of April, we therefore know that the results exist and Treasury, the banks involved and The Fed have them, as The Fed was concerned that some banks might try to use them (perhaps in a misleading fashion) during their first quarter conference calls and earnings releases...."

Get Short(y)?


As I wrote in my post It's Go Time, the Dow finally broke out of its ascending triangle very calmly to the downside (in more of a consolidation than a break). It rode the lower ascending trendline up as resistance, and once it reached the 8100 level of resistance that it has done battle with so many times recently, it broke through just enough to again test the ascending trendline on Friday unsuccessfully. On massive volume.

And now, it has broken a trendline on the RSI that has held for over a month. That should be good for a few shorting opportunities in the near-term.

Friday, April 17, 2009

Carving Another 2/3 Off the Stock Market

In my post How Low Can You Go?, I presented the equivalent of Exhibits A and B in the case of a market plunge far deeper that what has been experienced so far.

I guess this would be Exhibit C then:

Federated’s Tice Says S&P 500 Is Poised to Plunge 62%

The Standard & Poor’s 500 Index’s 28 percent rise since March 9 is a “sucker’s rally,” and the overvalued measure may plunge 62 percent as earnings continue to shrink, according to David Tice of Federated Investors Inc.

Stocks are overpriced relative to earnings, which won’t rebound soon after posting the longest quarterly slump since the Great Depression, said Tice, the chief portfolio strategist for bear markets at Federated. Analysts estimate that the S&P 500 earnings decline, which has lasted for six quarters, will continue for three more quarters before profits improve, according to data compiled by Bloomberg.

The S&P 500’s five-week advance, the steepest since the 1930s, according to S&P analyst Howard Silverblatt, may carry the index 16 percent higher to 1,000 points before faltering, Tice said.

“Stocks are overpriced in terms of earnings,” he said in a Bloomberg Television interview. “We are closing down factories and retailers and businesses all over the place. How in the world are earnings going to stabilize? We just don’t see it.”

The Federated Prudent Bear Fund that Tice founded returned 27 percent last year as the S&P 500 plunged 38 percent, the most since 1937.

Tice said the benchmark index for U.S. stocks may end the year at 500, representing a 42 percent slide from today’s close of 865.30. It may eventually fall to 325, he said.

Companies in the S&P 500 trade at 1.9 times their liquidation value, according to data compiled by Bloomberg. Tice said that ratio may fall to between 1 and 0.5.

“I’ve never been more confident that this market will fall back to at least book value,” Tice said.

Now back to commentary. And this is why the rebound story is a farce. I have yet to hear from one bull as to exactly how this stabilization and recovery will be orchestrated. For fun, try it. I have, and every time I ask, I get some touchy, feely response about stimulus and the fact that America is the greatest, most innovative country on Earth, so it's inevitable.

Um, no. It's not.

Our productive capacity, organized labor system, and economy in general is structurally damaged in a profound way. Not the least of which is the leverage embedded (I'll likely be touching on that in more detail this weekend).

The past few days I have been in countless meetings with a leading edge global manufacturing client, and heard firsthand that bookings - and their bookings typically cover a WIP time of 12-18 months, so this is a serious leading indicator - are almost nonexistant. I was made aware of other grim details that I won't discuss, but none of it paints a picture where the bleeding stops in a sustainable way.

While historically the stock market does bottom between 6-9 months prior to the economy, there is no legitimate reason to believe that economic recovery is anywhere in sight.