The Market Ticker

You sit on CNBS this afternoon and tell us all that you want our financial firms to "take their losses, mark them to the market, and then rebuild their capital."

Well then how about you get off your ass and do what you say?

How about if Treasury cuts off from all Treasury-related activity those primary dealers who still have off-balance-sheet vehicles?

THAT WOULD BE ALL OF THEM!

How about you do the same for anyone who claims "Level 3" assets?

THAT WOULD BE ALL OF THEM!

Why, we can't have you actually DO what you say, can we?

You're a liar Hank. A bald-faced, chrome-domed LIAR.

Not one thing you've said has been honest since this bout of turmoil in the credit market began.

When Citibank needs to pay double digit rates to obtain capital it is because they are not being straight about their exposure.

When Merrill, Morgan and others are forced to borrow at more than twice the Fed Funds Rate, while they have access to the Fed Primary Credit facility (whether it be the TAF or the Discount Window) it is because they are not being straight about their exposure.

There simply is no purpose in listening to "financial TV" any longer when there is nobody left who tells the truth - WHERE WAS THE CHALLENGE TO PAULSON FOR HIS OBVIOUS AND BLATANT LIE?

Technicals will be posted in TICKS this evening. I'm "de-coupling" from daily tickers for a while - unless, of course, there's news - like this nonsense.

Oh, and I've got to go wash my eyes out with bleach after seeing Paulson on TV.

Unfortunately I also need to stimulate the economy this afternoon - I just had a bout of projective vomiting that destroyed my LCD TV screen at the sight and sound of that crook.

Really.

Last night one of the wonderful forum folks dug up a post from another blog who had in turn dug up a published Fed document that settled in no uncertain terms the entire "hyperinflation/deflation" debate.

Simply put, this debate is over.

The Fed has been aggressively draining the SOMA account, with the pace of that drainage stepping up precipitously since December.

Draining.

Not adding.

The whole report (in PDF format) can also be accessed.....

The "money graph" is right here:


Why?

You can think of the SOMA as the Primary Dealers (big banks) "margin" account. (This is not strictly accurate, but is close enough.)

Many market crooners and "technicians" have been stating that "The Fed is hyperinflating to bail out the economy."

The facts say otherwise.

This has profound investment implications.

• If you are investing today on the premise that "The Fed has our backs", you're wrong.
• If you are buying metals in the belief that The Fed is intentionally devaluing the dollar and hyperinflating the money supply, you're wrong.
• If you think The Fed is intentionally being "the bagholder of last resort", monetizing bad debt, you're wrong.
• If you think The Fed leads the market and sets rates, again, you're wrong. (Read the entire PDF - very carefully - you will find that The Fed is in fact following the market, and admits so!)

There simply is no more debate on any of these points, because we now have the actual data from the Horse's Mouth.

There are is no more "postulating" this or that, as we now have the facts, and they are what they are.

• There is no bailout in process via monetization. Period.
• There is no hyperinflation via "printing." Period.
• The Fed does not "set" interest rates. The market does, and The Fed then does their damndest to deal with it. Period.

In fact, The Fed is actually taking down risk, as I have said repeatedly, and de-leveraging not only their own balance sheets but they are also forcibly taking down risk in the primary dealers - whether they like it or not!

Now we know - for a fact - why Citibank had to go to the Arabs for money at double-digit rates. Why the other money-center banks are issuing preferreds and other instruments with returns at more than double the interest coupon required to borrow through the primary Fed credit facility (whether it be the TAF or the Discount Window.)

We now know the facts of life:

• Fact: The good collateral has all been pledged.
• Fact: The margin credit supply has been decreased.
• Fact: Risk capacity is being withdrawn actively by The Fed.
• Fact: The money supply is deflating.

Get that all in your head and make sure it sticks, because if it is not the foundation of your investment thesis over the next several months, you are proceeding from an incorrect premise.

Oh, and there are others who can read too, despite the nutjob-grams I've received in my email since posting this originally. Try this one on for size:

"Fear that a hobbled banking sector may set off another Great Depression could force the U.S. government and Federal Reserve to take the unprecedented step of buying a broad range of assets, including stocks, according to one of the most bearish market analysts.

That extreme scenario, which would aim to stave off deflation and stabilize the economy, is evolving as the base case for Bernard Connolly, global strategist at Banque AIG in London."

The base case?!

You mean to tell me that this is not an outlier any more; this is actually what we have professional analysts EXPECTING to happen?

Gee, its not just "nutjob bloggers" who can read any more, eh?

There is plenty of other news, but that's something for another time - and another ticker.

Recalibrate your thesis folks.

We are no longer dealing with postulates and hypotheses.

We are now dealing with facts.

Uh, no, actually.

Buffett's announcement of his offer to "take" (for a price) the muni portfolio off the monolines hands was responsible for a huge spike - +200 on the Dow - this morning.

You have to sit in awe at the utter stupidity of traders in this market who would bid up all but one of the Dow 30 on this news.

Why?

Because Buffett just stuck his knife in the back of the monolines, hit the aorta, and then gave the knife a couple of REALLY good twists!

How 'ya figure? Simple, really:

• Insuring municipal bonds is the only part of the monoline business that makes money.
• All the insurance premium is paid on origination - there is no recurring cash flow. To "take" this liability the monolines would have to pay Buffett - money they cannot afford.
• This would also establish Buffett as having a clean and large book of said business, which would basically guarantee he'd get all the future issues. This would instantly and fatally cut off the monolines recurring cash flow.
• The CDOs, CLOs and other trash on their balance sheet would continue to bleed them out, but not they'd have no offsetting revenue.

Bang.

One of the monolines has already said "no". Well duh. They will all say "no", but it no longer matters.

The fact that the offer is out there means that now the ratings agencies can downgrade with impunity, because all that the ratings agencies and governments care about is that the muni business survives. Without that the towns and states get raped, which is unacceptable - but with that gone only those who took the inappropriate risk are going to eat it.

This isn't good news folks - its bad news. Very, very bad news.

Mark my words - the downgrades will now come within days. There is no longer any political pressure to NOT downgrade these issuers, because in a bankruptcy Buffett simply steps in and takes the muni business.

He's already offered to do it; there is no longer any reasonable fear that these bonds will end up being hung out to dry.

Those of you who are cheerleading this move and buying stock today - you made a serious mistake.

It never ceases to amaze me how foolish people can be. Like the futures spike this morning on GM's earnings announcement - their entire "net profit" came from a one time, and unanticipated, tax benefit. This of course wasn't in the estimates, and if you back it out GM lost nearly $3/share - way beyond analyst estimates.

There are a lot of people who think "this Bear Market is basically over."

Oh really?

You expect me to believe that we can have a five-year long credit orgy predicated on intentional mispricing of risk and outright fraud in credit origination, over $6 trillion in consumer funds MEWed out on fictitious home value increases, and when this fraud is discovered and collapses the damage is limited to 10% off all-time highs in the stock indices over two months and then we're off to the races again to make new highs - when the move from the previous bottom, where this all began, was a near-doubling in the S&P 500 and more than a doubling in the Nasdaq?

Corporate profits will all be ok through this? We've "troughed" and are headed higher?

Lending will return to normal, even though we've yet to see anywhere near all of the defaults run through the system and the losses recognized?

Multiple expansion, all of which was fueled by that fraudulent credit creation expressed in an orgy of leveraged buyouts will be back, even though there is more than $150 billion worth of the previous credit orgy's LBO debt still stuck on bank balance sheets that nobody wants?

Can I have some of whatever you're smoking please?

Let us remember that back in the 2000-03 Bear Market, which was caused by a credit bubble in Tech Stocks less than half the size of this one, there were market crooners calling "its over" several times from the spring of 2000 all the way to what proved to be the actual bottom in 2003.

In each and every case, except for of course the last one, they were not only wrong but your account would have suffered catastrophic damage had you bought into any of their previous calls.

Indeed, there is no better way to lose ALL of your money in the market than to sell on a decline, buy on a rebound when the crooners tell you that the bad times are over, and then sell once again when that "rebound" turns out to be a false hope and turns down on you once again.

This was a critical mistake that people made time and time again during the 2000-2003 Bear Market, and the crooners on CNBS and elsewhere were doing the exact same thing - calling false bottoms - then that they are doing now.

Don't be suckered.

Oh, and the EFF today? Anemic. Below target. This despite a (small) drain in the slosh. Go back and read the earlier entry from today if you don't understand why this is important.

Bluntly - commercial credit demand continues to collapse because there is simply no more good collateral available to be posted by people who otherwise might want to borrow.

This is what a deflationary credit collapse looks like, whether the stock market recognizes it right here and now or not.

Today Paulson gets on TV and all but pleads for people who are in trouble with their mortgages to call and "work 'em out." Well what do you expect him to do other than try to get people to put themselves in a disadvantageous position for the benefit of the lenders who wrote all that crap paper?

You want my recommendation?

It is the same that it was a week ago and a month ago. Here it is again, just in case you missed it:

Go seek legal and tax advice. Go see both a CPA and a Lawyer. Pay each for one hour of their time, and get an "automated" (e.g. "drive by") appraisal on your house - this should cost you less than $500 in total.

Determine whether, at your home's present value, it makes any sense at all to retain your house. Take into account the change in value over the last year, the probable change in value over the next two years, your income and the potential for it to be interrupted (or improve), your present credit score (FICO) and what the impact of taking an intentional short sale, deed-in-lieu, or outright foreclosure would be on all of the above.

Determine whether your mortgage is a "no-recourse" mortgage or whether intentionally forcing a foreclosure would also entail being persued and perhaps being forced into bankruptcy.

Determine the tax consequences of these choices, if any.

Once you have ALL of the facts that apply to your situation, make a PURE BUSINESS DECISION on what YOU should personally do.

Your lender and Realtor made a pure business decision without regard to your financial health when they sold your the house and mortgage.

The only sane thing for you to do is to proceed on exactly the same path to determine what the correct path is for YOU.

IF, and only IF, you determine that keeping your home is in your best interest, THEN call their "Hope Now" or "Lifeline" numbers and try to work something out.

But do so ARMED with the facts as to what is the best path forward for you, not what is the best path forward for the investor who bought your mortgage, or the lender who sold it to you.

Here's your technical!

Or, if you prefer, AIG.

That was the news this morning.

And folks, it really is as serious as it sounds, and more.

Why?

Because their auditors are the ones who forced the issue.

That's right - their auditors.

So what does this tell us about "The Street" in general?

Simple - firms have been and continue to have poor internal controls, they continue to attempt to report horseshit, and the result is that what you're being told in "earnings reports" IS NOT THE TRUTH.

Is the impact of this material? I don't know - you tell me - it appears to be about one quarter of AIG's full-year earnings estimates!

Is that "material"? I'd say so.

Is this local to one company? I don't know - would you like to bet that there is only one cockroach?

Yet the market, for the most part, shrugged it off on the broader indices, confining most of the damage to AIG and others in the insurance sector.

I think that is a huge mistake.

Oh, and Friday night we got news that BAC had received a "Wells Notice" from the SEC related to alleged bid-rigging in the "guaranteed income" and "swap" areas of the municipal debt market. Allegedly, there are other firms that either have or are expecting to receive similar notices.

Those are good too, right? Rigging bids is a positive thing?

And while you're at it, don't look behind the LCDX curtain. You'll find some real pain back there, with the most serious of it being the fact that over $150 billion in leveraged loans is "hung" on bank balance sheets - nobody wants it! And how's it trading? Well, if you believe the LCDX, at 90 cents on the dollar - which implies yet another $15 billion worth of writedowns not yet taken or reflected in prices, and that assumes the pain stops here - it probably won't.

So exactly when do we get some clarity here?

Will it be before or after the economy goes into an economic depression due to the credit market totally seizing up? Would you loan someone money if you didn't know if they were being honest with you about the state of their balance sheet?

Well, if you have money in a bank, guess what - you are!

How certain are you that (1) the bank's financials fairly represent its fiscal health, and (2) that if they don't, the problems aren't so systemic that the FDIC will be unable to bail YOU out?

And speaking of which, why is the FDIC, OCC and OTS not all over this? After all, if there are falsehoods (or just plain old-fashioned "hidden truths") on bank balance sheets they will be the ones who have to clean up the mess and make depositors whole!

Back to my familiar refrain - WHERE ARE THE COPS?

This is getting well beyond reasonable and into the realm of pure insanity.

At some point you have to ask yourself whether all of the "surprises" are "honest mistakes" or whether we are instead talking about rampant, systemic, organized and collusive fraud.

Or even, pehraps..... racketeering?

Heh, I don't have those answers, but this much I do know - when you have ratings agencies stating right up front that they are "aware of" (and therefore responding to) the consequences of downgrading the credit rating of the monolines, instead of just rating them on their merits, we have falsely-propped-up balance sheets, and now the auditors are throwing up over all of this and are saying "we ain't signing that!", exactly what sort of conclusions are we supposed to draw?

The balance sheets of these firms must be deleveraged and the truth exposed or the credit markets will not heal.

We will NOT have a healthy market nor economy until this happens.

We can either have it happen NOW, via government intervention and the jackboot of regulation being applied to the NECK of these institutions for their misdeeds - the proper role of government in all its forms - or the market will do it for us in a much more painful way for everyone in the United States.

The politicians, being in an election year, are NOTABLY ABSENT on this issue.

Have you heard ANY of the Presidential Candidates come out and raise hell about this?

Nope.

Nor will you, even though from a standpoint of the American Public this should be THE issue of the campaign!

Why?

They are all in these firm's back pockets!

So who's left?

It appears, Cuomo and a few other STATE law enforcement agencies, such as Dann of Ohio.

Well guys, I have one thing to say to these fine folks on that: GIDDYUP!

Here's your technical!

Seems appropriate, given that it is now Lent.....

Although one could apply this to the US Credit markets, who are on an involuntary fast at the present time, fueled by those who have sewn-shut mouths (credit demand disappearing due to lack of postable collateral) and those who has sewn-shut rutsacks of grain (due to lack of willingness to lose any more of it due to the blatant fraud!)

So this morning Spamazon comes out and spikes the NDX futures with their "announcement" that, in response to the recent precipitous decline in their share price, they will be buying back stock funded with new debt! (Of course the annoucnement didn't quite phrase it that way, but that's what how I read it!)

And like Pavlov's dogs, people rush in, bidding up AMZN $3 in the premarket.

But wait a minute here. We have a company that pays no dividend and has no place to invest their money that will grow their business, and thus feels compelled to take on new debt to buy back shares to "manage" their share price?

Why do I keep thinking of Countrywide Financial which did exactly the same thing (although they DID pay a divvy!) only to be saddled with debt servicing costs and a collapsed share price anyway - in other words, they not only got to eat a capital loss but in addition got to pay interest on the capital loss! How did that work out for CFC bag, er, shareholders, with the stock now trading under $7 - the buyback was initiated at $40!

But this was good to turn around what was promising to be a mild market rout this morning, flipping the NDX by 20 points within minutes - all of which "held" into the close!

And did it stay local to Spamazon? Nope. Apple, Google, RIMM, all up 2% or more this morning.

Because one company decided to take on more debt in a raw attempt to prop up its share price.

Now do I in fact care which way the market moves? No. I'm perfectly happy to make money on the market going up or down. Of course I'd like the fundamentals and direction to align, becuase that's a lower-risk trade than if the market moves against those fundamentals.

Why?

Because prop jobs, or slam jobs, when they go against the fundamentals underpinning the market, have a habit of disappearing with frightening speed and that usually leads to an equally frightening evaporation of capital from your account!

This morning we had yet another "KoolAid Drinking Reporter" - this time its Bloomberg's Caroline Braun. She cites many "bloggers" who sounded alarm bells at the latest H.3 report.

I'm one of them, by the way.

Well, if I'm a tinfoil hat wearer (in her opinion) for noticing that Citibank was forced to borrow hard money from the Arabs at 14% interest, yet is allegedly a "perfectly solid and wonderful US financial institution", and the banks (in aggregate) are in fact funding their reserve requirements via the TAF specifically to avoid transparency in going to the discount window then I accept the label with pride.

Tell 'ya what Caroline - why don't you do your "journalism job" and tell us why Shitibank had to borrow money from the Arabs at 14% interest if everything is ok, why these other "safe and sound" banks are borrowing money via preferred issues in the 7%+ range when Fed Funds is 3%, and why this demonstrates that ALL THESE INSTITUTIONS ARE PERFECTLY GOOD AND SOUND BANKS WHEN THEIR DEBT ISSUES ARE PRICED AT JUNK BOND LEVELS!

I know that part of the media's "purpose" is to lead the sheep in where they can be SHEARED, but in my view this has gone well beyond the usual yellow journalistic pumping that compels me to wrap dead fish in the newspaper.

The fact of the matter is that the "hard money" guys - you know, those Arabs and other foreigners who have actual money which we gave them in exchange for their oil and cheap imported products, are increasingly demanding senior status for the use of their money AND interest rates which exceed that which I pay to borrow on my credit cards!

To put it bluntly, Citibank's credit, in the eyes of these folks with actual money, is worse than MINE, as I can borrow UNSECURED at a LOWER RATE OF INTEREST THAN CAN SHITIBANK WHICH IS FORCED TO SEEK SECURED FUNDING!

To put this in even MORE stark relief, JOE SIX PACK AVERAGE can STILL get a 30 year fixed mortgage for a bit over 6%, secured by his house, WHILE CITIBANK WAS FORCED TO PAY FOURTEEN PERCENT, OR MORE THAN TWICE AS MUCH, FOR SECURED FUNDS!

I think that Caroline needs to revise her thesis just a little bit - when not only I (and I admittedly have a very high FICO score and am quite liquid) but Joe Overlevered Sixpack can borrow for less than half the cost of one of our nation's largest banks, I believe that something is wrong with that bank's risk profile and balance sheet.

Do you disagree Caroline? Or is your next missive going to be to tell us how the management of Citibank intentionally overpaid by more than 100% for the capital they either wanted or needed to access?

Ok, on to the rest.

The Department of Justice is now, according to the Wall Street Journal, no longer simply interested in Bear Stearns. They now are seeking information from Merrill Lynch as well.

Gee, nothing like closing the barn door after all the horses have left (and the losses taken). But isn't that how our "enforcement" mechanism works? Even though the alarms were sounded years ago on the rampant fraud in the mortgage space, never mind that mathmatically it is impossible to get 300 bips of margin out of a pool that only has an actual risk-adjusted premium of 200, it is only when a few trillions worth of losses are taken and the hard money folks say "screw you!" that we see actual investigations.

This is just a total load of crap. Yet it is oh-so-typical.

Cuomo, on the other hand, appears to be the real deal.

Here you have a guy who's both a law enforcement official and instead of sucking off the teat of campaign contributions, indirectly of course, but still there, he's not afraid to start issuing subpoenas and perhaps even indictments.

Now that would be precious - and delicious.

In reality, indictments are exactly what we need, and not against people - we need 'em against businesses and specifically, the Wall Street banks that claimed that there was more margin in these deals than was mathmatically possible.

Intent there is simple to prove - 1 + 1 still equals 2 and always will.

Mathmatics is a bitch as it is both the only true science and is impossible to argue with.

Unwind all the money paid to everyone up and down the line - the fees the banks and ratings agencies collected, specifically, and I bet you will find that the actual available return in these deals were less than Treasuries.

In other words these securities were flatly unmarketable as you cannot possibly make the claim that there was less risk in them than in US Treasury debt, yet via any "fair" computation of their price THEIR COUPON HAD TO BE LOWER THAN TREASURY BONDS!

Cuomo need do nothing more.

If he goes down this road it's game over for the Wall Street banks, because as soon as you take those margins out and find that what's left by the time the securities get to the buyers there is less risk-adjusted premium than in Treasuries, yet they were sold with a coupon higher than that, you have established that they were mispriced.

Now who's the expert here? A Wall Street bank which makes its money off the spread, or an investor who buys based on the representations from that bank and the ratings agencies?

Now consider that the only way these banks could sell even ONE of these issues is if they put them out there with a HIGHER coupon than Treasuries. In other words, "fairly priced" nobody would have bought them - and the people with an incentive to misprice are the ones who make money from the mispricing.

You run that by a jury, I believe you get a conviction.

Every time.

Ok, on to consumer credit, released yesterday.

Growth was 2% on an annualized basis last month, which is, historically, horrible. It is particularly bad given that December is, of course, the holiday season and Christmas spending is a huge part of the economy, with most of it coming on credit.

Even worse, while revolving (credit card) credit issuance went up by 2.7% last month, non-revolving (e.g. cars, houses, etc) increased only by 1.8%.

And, to add to that, delinquencies are up big as well.

Oh, never mind that securitizers were active there as well, selling off tranches of credit card debt! Of course this was all priced off historically-low default rates as people refinanced their credit cards and effectively avoided default by tapping their "phantom wealth" from their house!

Don't worry the crooners tell us, it will all be ok. The hard money folks who got screwed by buying mortgages that were intentionally mispriced won't mind when it turns out that the credit card securitizations were mispriced using exactly the same mechanism - the belief that house prices would continually increase at double-digit annual percentages, and therefore, credit cards would never default because consumers would simply take the money from their house "appreciation" and pay off the line!

This would be funny if it wasn't so serious.

Folks, we are talking about a sixteen trillion dollar, more or less, phantom appreciation, with about one third of that actually extracted and spent.

While the rest of that is "paper gains" and when the "paper losses" come it will suck for those who think they have wealth but find they do not, the impact of defaults in all of these spaces when this six trillion dollars of spending through credit creation based on false asset values cannot avoid being severe.

People keep talking about this as if its a "recession caused by ordinary business cycles."

Uh, no.

It was an intentionally blown bubble and was exploited by these Wall Street and Main Street folks for their profit at your - yes, your - expense.

There are many who blame Greenspan for this. Nope.

This was not the fault of the Federal Reserve. It was the fault of Wall Street, the Realtors, the Mortgage Brokers and others in the field, all of whom made an incredible amount of money fueling speculation.

How many times did you hear during the housing bubble "buy now or be priced out of the market"?

Now were you a fool if you listened? Sure. Just like you were a fool if you listened during the Tulip Mania or any of the hundreds of other bubbles that have been blown throughout the years.

Guess what folks - it really is a "dog eat dog" world out there. No, that Realtor down on the corner isn't interested in whether you get a "great deal" on a house, no matter what they tell you. No, that mortgage broker is not interested in whether or not house prices are reasonably related to affordability (that is, three times median income for a median house in a given area); they are only interested in whether an early-payment default will result in the transaction being "put" back on them.

Just one question that ought to put this in perspective for all your folks out there in the "consumer" world:

Have you ever heard a car dealer tell you its a bad time to buy a car?

That's what I thought.

Oh, and what are you going to get if you don't pay attention? Let me put it this way - you'll be very interested in this law, because its about the only thing that will save you.



Here's your technical!