The Market Ticker

Here it comes folks.....

As if you didn't know the mortgage trade was "dirty", here comes the proof....

" An internal JPMorgan Chase (JPM) memo titled "Zippy Cheats & Tricks" offers a peek into just the sort of dubious lending tactics that underpinned the housing market's deepening downward spiral."

Hehehehe.... But ossifer, we didn't mean it! Honest Ossifer!

And of course there's Lehman, who is now (in a stunning act of hubris) claiming they were the victims of fraud:

"Lehman provided the funds for a hospital investment business backed by guarantees from Marubeni, the people said. Marubeni in a statement yesterday said the guarantees were forged and two employees that may have been involved were fired on March 10. The Tokyo-based company said it had asked the police to investigate and that it was a victim of fraud. "

Awwwww, cry my a river!

Of course all the stated-income fraud and appraisal fraud and asset "documentation" fraud is ok, but boy, when we get our butthairs singed, why we're gonna SUE!

Oh, monoline insurance? What if you put something out there for sale and nobody bought, finally realizing that what you've been selling for the last 10 years is either overpriced or, worse, worthless?

"California Treasurer Bill Lockyer is leading more than a dozen state and local governments that say bond ratings exaggerate the risk of default, pushing up interest costs and forcing issuers to buy unneeded insurance. Lockyer said in a March 26 interview his state will shun Berkshire Hathaway Inc.'s venture because Buffett's company supports the current ratings."

Yep - the system is worth nothing as it stands, but you're charging us for it. Sounds like the states are finally figuring out one of the best ripoffs of the last 20 years (writing "insurance" on something that is exceedingly unlikely to default, but for which there is no capital support if you have to pay) isn't a good bargain after all!

Of course Cramer and his minions are all screaming about "evil short sellers" and "bear raids."

Really? Take a look at the Shanghai Index you fool!

You can't short in China, nor are there options on their stocks! Here's what THAT does to your market....



Gee, looks like those evil short-sellers are actually stabilizing the markets! But its all those e-vile shorties faults..... honest!

(Psst: Without shorties there wouldn't be anyone to cover in a panic when your buddies at The Fed announce their latest and greatest "Sticksave Version 3.1.4.5.9.2.6.5.4")

In a clear sign that "no Mildred, commercial R/E won't be different this time" a huge project for the Las Vegas strip appears to have gone down in flames:

"The site of what was supposed to be the tallest tower in Las Vegas, and among the tallest in the U.S. at 1,064 feet, is now for sale. Las Vegas developers and Wall Street securities analysts assume the proposed $5 billion project, which was scheduled to open in 2011, is dead."

Take that, all you who said "this time its different."

Psst - don't read McKinnon's OpEd in The Wall Street Journal today. It points out the folly of playing "let's play liquidity games" when the issue is in fact solvency:

"The Fed responds to the credit crunch by cutting interest rates, which would be the seemingly correct textbook strategy if the economy were closed and the foreign exchanges could be ignored. But the economy is open, and capital flies out of the country. Because of the unique position of the U.S. at the center of the world dollar standard, the drain of Treasurys -- the prime collateral in impacted credit markets -- exacerbates the credit crunch, and monetary expansion abroad worsens world-wide inflation. The Fed then further expands in response to the tightening of U.S. credit markets."

Circle, meet jerk! Its about damn time that some ink was spilled in pointing out the obvious (gee, I've been singing this song for quite some time now) if for no other reason than to prevent policymakers from claiming "I didn't know!" when it all goes to hell in a handbasket.

Indeed, this morning the WSJ seems to be finally yelping about The Bear Deal and shines a white-hot light in a place that I missed and I'm sure the policy wonks at The Fed wished had never been unearthed:

"The flawed process employed by the Fed in that unprecedented move violated the spirit of an important law -- the Federal Deposit Insurance Improvement Act. The FDICIA was passed specifically to establish procedures to be used by regulators then dealing with failed financial institutions. But FDICIA applies only to federally insured depository institutions, like banks and savings and loan associations. When the statute was passed nobody in their wildest dreams thought that government bailouts would extend beyond federally insured deposit institutions to include investment banks -- which unlike commercial banks have no small creditors and no federally insured deposits to protect."

One has to wonder whether there might be a letter in there to go with the spirit..... note to self - more reading required on this one.

Of course the real problem - as I've written about since this whole ball of string started to unwind last year - is in fact lack of trust.

Now we have Cramer and others clamoring for less trust instead of more, by allowing banks to continue marking to fictional, made-up "values" for their securities.

That, if permitted, will simply make the problems we face worse - perhaps much worse. We have already managed to provoke a mild form of capital flight and risk aversion; should we be foolish enough to permit institutions to simply make it up "indefinitely" we will have a re-run of the Japanese "experiment" with the same sort of foolishness and are quite likely to suffer the same result.

One has to wonder - does Cramer want to see the SPX trade at 500? Does he have a bunch of short hedge fund buddies that would welcome the destruction of our nation's financial strength?

It would certainly appear so.

In reality you can't fix any of this while Paulson, Bernanke and the other clowns sit around giving their "best friends on Wall Street" Lewinskis', and most of the rest of America finds that behavior, if they bother to notice it, disgusting. (As an aside, I would pay real money for a picture of any of these guys with a goat..... not that I'm suggesting that any such photo exists, of course.... )

Here's the "money shot" folks - when you have people in the "financial services" or "financial reporting" industry telling you its a good time to buy stocks because firms are going to be allowed to cheat even more than than they previously have in the statement of their financial results, you have to be a special brand of CRAZY to listen to them.

Indeed, such a pronouncement leads me to ask a rather pointed (and inconvenient) question - do we now have "commentators" on national television advocating for FRAUD as a means out of this mess? IT SURE SOUNDS THAT WAY TO ME!

Paulson's "new plan" is outrageous on several fronts, with the most important being that The Feds now want to take away state insurance regulation.

Let me remind everyone that during the last eight years The Federal Government literally stepped in and preempted state mortgage regulation under the rubric that OTS and OCC-regulated banking institutions were beyond the reach of state regulators, and that was, in large part, why these banks and other institutions were able to play their games with the "liar loans" that became pervasive during the last few years.

The Federal Government's preemption of state regulation of mortgage issuers was, in large part, WHY we had such a monstrous housing bubble and WHY we now face the turmoil that is roiling our capital markets. Instead of prosecuting these clowns Paulson wants to institutionalize some of these problems!

Equally important, it was The Federal Reserve, via the speeches of one Alan Greenspan, that organization's head, who ENCOURAGED homeowners to "lever up" via ARMs at the low point in an interest-rate cycle which they knew would not be sustained!

To be rather impolite (but accurate):

Alan Greenspan literally lured millons of Americans into the gaping maw of a debt trap which he and his cronies then snapped shut on YOUR HEAD!

There is much noise being made over The Fed being able to "examine" various institutions that presently are beyond its reach.

But there is nothing in this document or plan that forces public disclosure of those examinations, and in fact, bank examinations are by statute secret at the present time. Without public exposure of the results of these examinations the public cannot calibrate its own view of the risk being taken, and thus there is no market discipline that can be imposed by investors.

Is it wrong for there to be a run, for example, on Lehman? Its only wrong if Lehman is in fact strong - their balance sheet reflects reality and their liquidity position is solid. But for the average hedge fund or other person who owns some of their products there is no way for those investors to find out whether or not this is the case, since the information necessary to come to that conclusion is being intentionally hidden by the company with the explicit cooperation of the government, including Treasury!

So from where I sit it is not only appropriate for such "runs" to take place every single investment bank and other institution with ANY off-balance-sheet or "Level 3" exposure should suffer such a run.

THAT would be a "Come to Jesus" moment for these clowns, and if they didn't respond immediately with full disclosure it might bring what market discipline often brings to people who try to hide the details of their financial condition - bankruptcy.

The key issue here for Paulson and friends is that there is no part of the proposal that forces the garbage out into the light, there is no demand for a cessation of off-balance-sheet games, nor is there a demand that the OTC derivatives mess be brought out into the light where margin and capital requirements can be enforced.

As just one bit of this hidden reality, have you seen any writedowns of HELOC debt? Neither have I. Why not? An absolutely monumental part of that debt is uncollectable under present market conditions as the homes it was written on are underwater, and HELOCs are subordinate to the first mortgage. What this means in practice is that the HELOC writer gets nothing if the first forecloses and there is insufficient recovery to pay the first off in full!

Without changes to force disclosure, along with criminal charges for those who proffered debt securities that were intentionally misrepresented as to their credit quality and the capital adequacy of those standing behind them we cannot fix the underlying problem that got us into this mess.

That underlying problem, quite simply, is greed.

Greed is, to a large degree, what powers innovation. In that regard it is not evil - greed is, in fact, why we have automobiles, personal computers, stereos, DVD players and plasma TVs.

But for Henry Ford's greed, we would still be riding horses to get around town.

But when greed is not counterbalanced both by the risk of financial pain upon failure and the certainty of criminal punishment when one lies, cheats or steals, instead of a culture of innovation we foster a culture of theft, fraud and deceit.

We live in a nation where our government works for us, not the other way around.

Yet this model only serves as its proper check and balance when the people are willing to step forward and make noise.

SILENCE IS CONSENT, and if you don't get that into your head - and soon - we will add yet another layer of institutionalization of fraud, deceit and theft as "how stuff works" in our capital markets, ensconced into law, with your consent via your silence.

Never mind that the foreign press - you know, those fine folks who we need in order to finance our profligate entitlement spending - are already on to the game and saying "eat me!":

"The most striking thing about the current problems is just how much money the banks and the investment banks have lost. They apparently had no idea of how risky their own exposure was. The supposedly smart guys were simply stupid.

For me, the main lesson from this debacle is that both banks and investment banks must be required to fully report what securities they are holding, both directly and indirectly. No more off-the-book special purpose vehicles, no more hiding derivatives under the table. If a bank or an investment bank is holding a security, they have to publish the amount and the basic characteristics."

No kidding.

Now think about what happens WHEN, not if, those foreigners decide they're not going to prop us up any more. How would you like to see Social Security and Medicare collapse - no, not in 20 or 30 years, BUT RIGHT HERE AND NOW.

Think it can't?

You'd be very wrong - we need roughly $2 billion every day from foreign governments in order to sustain our government's (our) entitlement spending binge and if they come to the conclusion that we are going to institutionalize fraud and theft, effectively becoming a banana republic, they can and will go somewhere else with their funds!

Foreign governments have been willing to do this because we have bought so much of their crap (e.g. cheap Chinese products) that they have needed a way to "recycle" (or "sterilize") those funds, lest they fuel insanely-destructive inflation bubbles in their economies.

But that golden goose - consumerism - has been contaminated and destroyed by greed, fraud and theft in the financial markets, and now our consumption is slowing. Thus, we now have two things working against us - less demand for foreign products AND a lack of trust in the safety of our markets, leading foreign governments to quite-reasonably ask - should we bother with recycling these funds into the United States, or should we be looking for somewhere that is SAFER?

The amusing part of this is how "in front" of this all bloggers like myself have been. Now we're finally seeing it from "mainstream media":

"We should be as bold as Volcker, he suggests: Face the scale of the mess, take a $1 trillion writedown and shore up regulatory measures. His recommendations include forcing loan originators to retain the first losses; requiring prime brokers to stop lending to hedge funds that don't disclose their balance sheets; and bringing the trading of credit derivatives onto exchanges.

What he fears is that the U.S. will instead follow the Japanese precedent, seeking to 'downplay and to conceal. Continuing on that course will be a path to disaster.'"

I'll be damned.

Its time to choose folks - if you choose NO more fraud, NO more deceit and NO more theft, you need to head over to http://financialpetition.org/ and get your "John Hancock" on that petition here, now, and today.

WE START as a society by DEMANDING that Congress reverse the Bear Stearns transaction and $29 billion "TaxPayer Guarantee" and, if The Fed and Treasury refuse, that President Bush and Hank Paulson be impeached.

WE CONTINUE by calling, writing and visiting our Congressfolk, literally flooding the Capitol switchboard and lawmaker's fax machines, making clear that we will not allow the institutionalization of fraud, deceit and theft as a matter of public policy in the United States.

WE DO NOT STOP ringing the phones and faxes on Capitol Hill until we see legislation enforcing daily mark to market, public exchange trades for all derivatives, public bank examination reports, enforced margin and capital requirements on a level basis for all market participants, an immediate end to all off-balance-sheet "securitizations", and finally, prison terms for those who game the system, no matter who they are or what position they hold.

It has always been illegal to rip people off and commit or conceal fraud. We have seen no prosecution against those running rumors of incessant "Buffett Buyouts" or "AAA credit" that is really toilet paper because we refuse, as a society, to get off our fat asses and raise hell, even as our own pockets are REPEATEDLY PICKED by the Wall Street goon squad.

Time is running out, and its not just you we're talking about being screwed here. Its also your children and grandchildren who are having their futures systematically destroyed by the rampant fraud and abuse.

Remember:

"If you choose not to decide.....
You still have made a choice!"
- (Rush, from the lyrics from Freewill)

A quick update via Youtube on the "macro level" - where we are and where I think we're going, including a video illustration of the long-term timing signal I've talked about in the blog before.

Quickie today...

Consumer spending came in 0.1%, with income up 0.5% m/o/m. Unfortunately the reason for the change is largely technical (read: statistical noise due to the way the data is collected) on the income side, and spending? Well, its flat.

Here's the money quote:

"Within the 0.1 percent rise in personal spending in February, the gain was led by a 0.3 percent rise in durables and in services. Nondurables fell 0.2 percent. But in inflation adjusted terms, overall spending was unchanged in February after rising a mere 0.1 percent the month before. For now, it looks like the consumer sector is going to be doing very little to keep real GDP growth in positive territory in the first quarter."

No kidding.

Or, if you prefer, just look here, from the above link:





Any questions?

Consumer sentiment dropped to 69.5, with inflation expectations for the next 12 months up to 4.3%. That's a print that historically has been associated with recessions.

Fundamentally this "credit crisis" is morphing rapidly to an economic crisis. Reality is this - we have had tremendous "faux wealth" that is now being destroyed, with the creator of that "faux wealth" being the criminally-unsound lending that took place over the last few years.

Now the chickens have come home to roost and the check is on the table.

There is no cheap, fast, easy, or painless way out of this. Consumers cannot spend without real income, and they are rapidly having their wealth destroyed as the faux fraud-based "appreciation" of their assets is unwound.

Everyone is now screaming for "the government" to come save us, but in fact the government can't save us. The problem didn't come from government, it came from Wall Street and the insatiable desire among Americans to get something for nothing. While Wall Street created the environment that allowed you to think you were a "genius" for having a house that doubled in price in the last four years, the fact is that you were a fool for spending that faux money, and now you're stuck with the real debt.

Let's see what Congress decides to cook up with this Bear "StealOut". And before you judge (or vote) make sure you first check out who's been buttering your CongressCritter's bread - odds are you will find big PAC and campaign contributions coming from these very same Wall Street firms that stole your retirement - and your future.

Make sure you say "thanks" this coming November, but remember that this is not a Democrat or Republican issue - both parties have been blowing the Big Wall Street execs under the board room table for more than 20 years.

Psst - and go sign the petition to stop this crap, beginning with Bear Stearns.

Your money was stolen folks. Either speak up or give up - your choice.

Oh, and now we have hard proof that the Auction Rate Security turmoil (ARS), which has hit lots of high-net-worth people and countless firms, has spread beyond a simple "lockup" - UBS is marking down values in customer's holding accounts!

"UBS, however, using an internal model to value the securities, will mark them down this afternoon and inform clients via their online statements shortly thereafter, people familiar with the matter said. The markdowns will range from a few percentage points to more than 20%, the people said."

Oh, those were "cash equivalents" eh? Now they have a 20% haircut? Why do I think that's not going to go over very well?

Yes, there are lawsuits over this already, and there will be plenty more too I suspect......

Psst - FGIC garnered another "junk" rating today. Booya!

Oh boy, the tape bombs are good.

Let's start with an explosive allegation - that KPMG may have pulled an AA with New Century!

"New Century 'engaged in a number of significant improper and imprudent practices related to its loan originations, operations, accounting and financial reporting processes,' Missal wrote in the report. He said 'KPMG contributed to certain of these accounting and financial reporting deficiencies by enabling them to persist' and in some cases 'precipitating' a departure from 'applicable accounting standards.'

.....

The examiner said several people he interviewed for the report claimed KPMG recommended the improper changes to the reserve calculation, and KPMG denied doing so. Work papers show KPMG 'evaluated and approved the change,' Missal said."

That might leave a mark (to market); the money quote is that they found work papers. Oops.

Bankruptcy auditors have a nose for this sort of crap.....

Speaking of "mark to market", it appears that we're about to have the world wake up to the reality that all these "credit default swaps" that have been "protecting" their portfolios are in fact worthless. I've been saying this for quite some time, but now we have active attempts to avoid payment, first in the suit that Merrill filed and now this:

" FGIC Corp. said it's walking away from an agreement to provide $1.9 billion in guarantees on mortgage-linked securities because Credit Agricole SA and IKB Deutsche Industriebank didn't live up to their side of the deal."

Hahahahaha.....

Of course the claim here is that the folks who bought this "protection" misrepresented various things, like, for instance, what was inside and their financial condition. Uh, no kidding folks! Or, to put it in one word: DUH!

While the numbers so far are small ($1.9 billion thus far on this one, and $3.1 billion in the case of Merrill) if this gets any sort of legs, and you can bet it will, it means that the underlying credit quality (or lack thereof) will instantly "appear" back on the bank's balance sheets!

As I've said for a long time the underlying problem here is one of capitalization.

NONE of the firms writing this crap have the capital behind them to survive any significant phalanx of claims. They can't because the fiction that underlay this entire business model was that you could buy insurance against default for less than the actual risk premium over risk-free return. In short, the model was predicated on the ability to find a "free lunch."

Now, however, the claims are coming fast and furious and the truth is coming out - the capital simply is not there, and the insurance these people bought is in fact worthless!

What's worse is that now FGIC has admitted reality - they have exceeded legal risk limits. That is, they are now in violation of New York State Insurance Law!

"FGIC also said in a statement that it had a substantially reduced capital and surplus position through Dec. 31. As a result, insured exposures exceeded risk limits required by New York State insurance law, the company, which is based in New York, said."

The upshot of this, of course, is that NY State could decertify them as an insurer at any time, which instantaneously vaporizes all of their credit insurance products' value!

This will cause capital problems for those who bought these swaps. Maybe serious, or even critical ones. No, not on a couple of billion, but what if the number is $10, or $20 billion? Or more? And what if, as frequently happens, the reserve requirements in that instance double or even triple? Is the capital there to absorb that without causing severe, perhaps even extreme, stress?

Oh, and in the "we'll downgrade them after they blow to bits" Fitch dropped ratings on all three of XL Capital, SCA and FGIC today - all to "junk", or below investment grade. All three are now considered "junk" or "high risk" debt - which should, in theory at least, mean that all the swaps they wrote now have the same "BB" or worse ratings.

IF, and I stress IF, there are honest accountants at the buyers of swaps from these folks, they will all be removing the value of those hedges this morning. This should result in an immediate reserve requirement increase.

The paradox is that those who argue that "bailing out" Bear Stearns was necessary claim that the purpose of that bailout was for this precise purpose - that is, avoiding these reserve increase requirements!

Oops.

Folks, LISTEN UP, because THIS IS THE TRUTH AND IT CAN NO LONGER BE DENIED:

The credit default swaps written to "protect" the ratings on the CDOs and other complex instruments out there are WORTHLESS.

THEY ARE WORTH ZERO.

ZERO.

Drill that into your head until it sticks, because IT IS A FACT. They are worth ZERO because the people who wrote them DO NOT HAVE THE MONEY TO PAY AND THEY HAVE NO PRAYER IN HELL OF BEING ABLE TO EARN IT BEFORE THE PAYMENTS MUST BE MADE.

The model of EVER INCREASING LEVERAGE is and ALWAYS WAS bankrupt.

It was a FICTION.

Ever-increasing leverage as the foundation of a financial spiral is trivially easy to prove as mathematically impossible. Charles Ponzi created the "original" scheme of this sort in American Jurisprudence but he was not the last one to try it, and the latest incantation of CHARLES PONZI'S WORK is now found in these "credit default swaps"!

These swaps NEVER HAD ANY CHANCE OF PERFORMING UNDER STRESS because eventually the ever-increasing spiral of geometrically-increasing amount of new business that underlay this model MUST RUN TO EXHAUSTION, and when it does THEY ALL BLOW UP, just as Charles Ponzi's scheme did.

YOU CANNOT CREATE MORE VALUE IN A POOL OF LOANS, AS EXPRESSED BY THEIR ORIGINAL RISK-ADJUSTED RETURN, THAN WAS THERE ORIGINALLY.

I have gone over this REPEATEDLY and yet people continue to argue that the financial equivalent of PERPETUAL MOTION and VIOLATIONS OF THE LAWS OF THERMODYNAMICS can and will hold up.

These laws are called LAWS in the physical world for a reason. You cannot get a patent on a "machine" that violates the laws of physics because the Patent Office understands that you are attempting to run a SCAM.

Why we continue to have financial regulators who REFUSE to put forward one simple test - is it mathematically possible for this piece of financial engineering to perform on a perpetual basis, and then prosecute those who put forward schemes that fail this simple test of mathematics, is beyond me.

Yet this very simple reality is in fact why we keep having blowups in our markets and financial sphere. It was responsible for the Tech Blowup and now the Subprime Blowup. It was responsible for The Great Depression and the two Depressions (that nobody talks about before the 1930s) prior to that.

The Fed is not the reason we have had these economic dislocations but they are partially responsible for refusing to stop the root cause before the dislocations happen, because Ben Bernanke and all the other Fed Governors did, in fact, pass high school mathematics, and that is all you need to know that these schemes CANNOT POSSIBLY WORK.

This basical mathematical reality is why the dislocation is not over and why there are many more firms that will FAIL. For the list of those firms you need only look towards those who are reliant on the premise that home prices will increase at a rate that exceeds growth in incomes in the financial "products" they currently have on their balance sheet. All of those firms that have insufficient capital (and are unable to raise sufficient additional capital) to withstand the drawdown that a price correction in the housing stock to no more than 3x average incomes, which is an average national home price decline on a constant dollar basis of 33%, will go under.

This is a mathematical certainty; those who argue otherwise are arguing with the laws of mathematics, not with my or anyone else's opinion.

THEY ARE WRONG.

The Clear Channel "buyers" are suing the banks and apparently, this morning, got a TRO. Seems they don't like the idea of the banks walking off. Awwwwww.... such poor pump monkeys! (snicker)

And to those who say that there's "limited" impact on the economy from the house price adjustment, don't talk to these people:

" Miami-area homeowner Richard Welch is spending $70 less on groceries a week after his house lost $145,000 in value. Rita Roland cut off 11 inches of hair to save on salon trips, and Victor Parris stopped drinking his favorite brands of dark ale."

Yeah, ok. Falling home prices don't influence consumer spending eh? Tell it to the mouse!


Guess the truth sucks when you're a pump monkey eh?

Now, back to Bear and friends...

This morning we saw The Brits decide to release "more liquidity" (read: loans) into the banking system, which moved the Euro markets higher and spiked our futures somewhat. The result here was somewhat mild but certainly present, and out the pump monkeys come - again - crooning about this and that.

What we need to examine as investors, however, is the macro economic picture - oh sure, we can sell rallies and buy dips, but at the end of the day the bottom line is whether the environment in which we live and invest has changed.

IT HAS.

More to the point, over the last four years (until last August) we have lived in an extraordinarily low-volatility environment and, from 2002-2004, in a period of extremely low "official" interest rates. This has led people to gear up more and more in an attempt to earn a "good" return, where "good" is "enough to buy my new Ferrari" (if you're an investment banker or Hedge Fund.)

But leverage - gearing - is your undoing when the worm turns. The reason is quite simple - while you can make more using leverage, when things go bad you can lose more than you started with.

This is of course the mantra of those who think "short selling" is inherently suicidal - that stocks "can go to the moooon" and wipe you out.

Of course the truth is something different - I've seen more stocks go to zero than go to infinity, eh?

But in good times everyone forgets the bad side of leverage. We now have "Investment Banks" that are geared at 20, 30, or even higher ratios. When you are geared at 20:1 a 5% decline in your positions net-on-net wipes you out!

Now how many of us haven't had a 5% decline in our stock portfolios at some point in our life? Did we die and go to Investment Hell? No, because we're strictly limited in our gearing; if you're not using margin then you have no gearing, 1:1, while if you do have "maximum margin" you're only geared at 2:1.

Yes, there are ways to blow your head off as a retail investor, with the key one being the futures market - there, tight stops and discipline are absolutely essential lest you find a big smoking hole where your account once was.

So yeah, these guys are "The Smartest Playas In The Room" but in point of fact we're all human, we all make mistakes, and when you are geared like this and volatility spikes, you die.

This is the underpinning of our financial system?

Here's the truth, although you won't hear this on Bubble TV -

There is no way that a financial system geared at 20 or 30:1 is stable or sustainable. Regulators need to step in here and now to FORCE that crap to stop by whatever means are necessary.

This means, at minimum:

• No more "off-balance sheet" games. I've been hollering about this for a year now, and my viewpoint has not changed one iota. These vehicles are an explicit and obvious attempt to circumvent the rules on leverage and margin that are imposed on various financial institutions and hide that gearing from the investing public and regulators. This needs to be treated as what I believe it is - organized fraud, that is, Racketeering, and the organizations involved in it need to be given no more than one quarter to consolidate all this back onto their balance sheets or face prosecution.
• Gearing ratios must be set by reserve levels and strictly enforced. Since we live in a world of fractional reserve banking the inherent gearing of 8:1 or thereabouts that is involved in such a world must be the cap for all financial institutions including banks, brokerages, and others who we, the people, will provide any sort of protection against market failure. This regulation must be strictly enforced via nightly mark-to-market with capital shortfalls generating immediate "margin calls" by the regulators. This also means that all instruments must trade on an exchange where we have public price discovery, so that nightly mark can be enforced.
• Any financial product or model that relies on ever-increasing business or earnings beyond the long-term historical level of GDP growth must be banned. It is mathematically impossible for such a model, scheme, or system to work. This is trivially easy to prove using nothing more than elementary-school mathematics; if you can do four-function math on a piece of paper you can easily prove that an expansion of financial results beyond that in GDP, over long periods of time, must blow up, sticking the investors in same with huge losses. It is therefore fraudulent to claim that such a model is "sound".
• We have PROOF that market participants will cheat if there is any way for them to do so. This has been proven over and over again, from the crash of 1929 to the '87 "portfolio insurance" blowup to LTCM and 00-03 Tech Wreck. The story is never different - without the jackboot of the government on the neck everyone in the financial sphere cheats in an attempt to post "better numbers" than their competitors! As such regulation must be consistent, it must be impossible to cheat, and it must assign a net present value of ZERO to any "non-publicly-verifiable" asset. If people want to carry around such "assets" that's fine but they cannot use them as part of their capital base nor use them as the foundation for their leverage.

There will be people who claim that this makes the business model of investment banks "inherently broken."

Guess what - at the recent prices these institutions have sold in the market, they are unsustainable - that is, the business model IS broken.

You cannot have a sustainable marketplace based upon nothing more than debt-financed LBOs, yet that has been the premise and base of the last three years in the equity markets, whether we're looking at "private equity" or debt-financed stock buybacks!

This sort of blatant pumping, enabled and fueled by "Bubble Television" is no more than a modern-day version of Tulip Mania and these sorts of manias always end badly, bankrupting most participants who stay too long at the dance.

The pernicious part of this is that the mentality espoused and promoted through that "Bubble TV" has in fact imbued itself into the "meme" in consumer behavior and the financial television folks are the part and parcel of drilling this into your heads!

"Flip This House", for example, is an attempt to enlist Joe Six Pack - the ordinary person - into the leveraged financial mania! It was fueled, promoted, and stuffed into the nation's eyeballs via the media and the financial "lever pullers." It worked - for a while.

But all leverage-driven manias will and must bust.

They must bust because prices cannot rise on a sustainable basis faster than actual productive gains in the common man's earnings power, that is, wages.

There is no free lunch kids.

There never has been and never will be.

Not now, not ever.

Oh, and guess what popped up today from Barak Obama? An interesting attempt to get my vote. While there are things in there I don't particularly care for, including a raw lack of acknowledgement that the solution to housing cannot be found until prices fall to roughly 3x incomes on an average basis, many of the other issues he hits on are items I can identify with.

Next one - another note from Mish - you have to read it to believe it.

Citibank is apparently trying to refinance people from their ARMs to Fixed Rate mortgages as they are about to reset. Good for customers, right? Uh, one small problem - the ARM resets are to a lower rate, not a higher one. Yes, Mish says he has proof.......

The TSLF's first results are out, and while oversubscribed, it appears the banks attempted to lowball The Fed. Now there are people who claim this is "bullish", but there's another way to look at it - they don't have anything else elegible for collateral, even under the new, "expanded" criteria. Which is it? Hmmmm.... tough to know eh? Yep. Such is our "newer, more transparent Fed".

Pull the other one Ben.

Psst - you know those comments about Fannie buying crap paper? Here's an example. This is a VA loan, and thus "insured", but it is an example of the sort of garbage that gets through the system - even today. There is absolutely no way this loan is affordable. Not a snowball's chance in Hell.

Do I need to underline why I think the GSEs may well be zeros?

Well, there goes the "resilience" claim.

Durable Goods fell 2.6% ex-transportation, down 1.7% headline.

Inventories up, durables down, non-defense new orders down, shipments down, January revised up slightly.

Unfilled orders were up, which is the only good news in there.

Most ominously in the internals, machinery orders are down 10.3% on the month. This is a particularly nasty number because machinery is, of course, necessary to make "things", which turns into GDP, and these are the "900lb Gorilla" when it comes to durables - they are things like EDM machines, lathes, CNC mills, etc. They're big, very expensive, have a long life, and you buy them if you think you will have capacity demand in the future.

You stop buying them when you think you can fill your order book's need for the next six to 12 months without purchasing new. Most of this equipment has a ~10-15 year service life, so a 10% decline is basically a wipe-out on capacity addition.

Motor vehicles (cars, trucks, etc) and parts were also down significantly, 2.7-2.8% both for shipments and orders.

Semiconductor shipments were down a colossal 31% month-on-month. Thirty-one percent?! They were up big last month and that's normal as manufacturers rebuild stock after the Christmas season - if that demand has collapsed then it portends poorly for people in the Tech Sector. When you add JBL's warning last night to this.... Hmmmm....

No recession eh? Yeah, right. This is two durables reports in a row that show business wallets are snapping shut as are those of consumers.

What's a recession? A generalized contraction in economic activity.

What does this Durables Report show?

Not only a contraction in retrospect in the form of actual orders in the past month, but a contraction on a new orders basis - that is, a contraction looking FORWARD as well.

Tonight we get Oracle's numbers, which will be interesting not so much from a standpoint of the report itself but what sort of commentary we get on order trends. Their software is expensive both to buy and maintain (maintenance costs on products like this typically run 20% of purchase price annually); a lot of this maintenance expense is essentially mandatory.

Citibank agreed to settle claims related to the collapse of Enron and their involvement in same. Big bucks, but now over. Gee, think we might have a new round of that coming up when the dust settles on this mess? Hope springs eternal.

New Home Sales came in down 1.8%, slowest pace since 1995, and down from January which was also down 1.6%, both seasonally adjusted. Inventory not down at all. Prices down 2.7%, which is going to continue to hammer margins, and of course these price numbers are not including all the "hidden incentives" that builders are granting to buyers. The 900lb gorilla is the inventory numbers - until we see inventory come back to reasonable levels we're not going to anywhere.

Kudlow's show last night had a guest on who put things in the proper perspective - the market will clear when buyers and sellers find price equilibrium. That hasn't happened yet, and the claim that all these "auctions" will clear the backlog are false - nearly all of these auctions aren't really a price-discovery mechanism as they are not absolute auctions, and the banks are bidding on their own properties. Until that stops and properties sell for the highest bid price discovery has not taken place.

Further, as was pointed out last night on Kudlow (correctly), the wealth destruction is real and you can't ignore it. The same people who claim that "home price appreciation has fueled consumer spending" over the last six years are now arguing that home price declines won't translate into consumer behavior on the way down. This is outrageously duplicitous, but you rarely hear anyone get called on it - and never on Bubble Television.

There are an amazing number of people in the "investment community" who are making claims that the s&P 500 will rally by 20% before the end of the year. This is insanity; these people are, almost to an individual, admitting to a US recession but calling for a rally to all-time highs despite it!

1620?

This is the same sort of call that was made all through the 2000-2003 tech wreck - all the way down. At the start of it in 2000 as the indices began to crack these calls were literally incessant, and it continued through until about the middle of 2002 when even the most bullish threw in the towel.

LET'S BE CLEAR - IF YOU BOUGHT THE NASDAQ, SEVEN YEARS LATER, YOU ARE STILL MORE THAN FIFTY PERCENT IN THE HOLE FROM THE TOP, AND YOU ARE STILL IN THE HOLE FROM THE TOP IN THE S&P 500!

Remaining "fully invested" through thick-and-thin does not work if you add money into your account during ANY bubble period, because following these bubbles you typically see a decade or more of flat-to-down index behavior over an extended period of time, and this will murder your long-term performance.

Let's be straight here with people about the clear conflict of interest that is NEVER disclosed on bubble television - UBS' David Bianco is the latest to do this, and UBS only makes money from their retail clients if they buy stocks.

Their interest is in earning the commission from your buys, and whether or not you have a positive return is not material - they can claim a "win" even if you lose, so long as you beat the index straight up.

The key item here is that you still lose money versus sitting in cash!

I repeat - there is a simple timing signal that will not catch the "exact bottom" but it will keep you out of the worst Bear Markets and get you back into the market within a few percent of the bottom. It is the 20w/50w timing indicator that I have posted in The Ticker.
Today, I took that post, extracted out the timing piece, and posted it to Ticker Classics where its easily found by anyone who wants to make use of it.

I believe you are flatly out of your mind to buy equities for long term investment until that indicator goes positive.

Once it does, long-term investors should, in my opinion, move to their normal equity position in their portfolios, but until it does, you are taking a terrible risk, and history is clear that absent outright CRASHES such as 1987 this indicator has NEVER LOST YOU A MATERIAL AMOUNT OF MONEY but it has SAVED YOU from the sort of hideous declines seen in 2000-2003!

Even in "disclocations" such as 1987, the loss you suffered by following it was modest - only a couple of percent. A quick look back using other charting tools shows that it appears to have performed admirably going back over even longer time frames - it produced good signals in the 50s, 60s, 70s and 80s prior to the "mega-run" in all the indices starting in the 1990s.

Bubble Television - including but not limited to Bloomberg and CNBC - will NEVER show you this timing indicator. Why not? Because if they do, once it goes negative there is no reason for them to show you anything else until it moves back to positive, and there is no reason for you to watch their incessant market pumps!

If you're a long-term investor and use basic timing signals like this you won't get sucked into the vortex and you won't lose 50% of your account in these sorts of nasty bear markets.

For long-term investors (e.g. retirement money), isn't that the point?

This is not to say you can't profitably trade the long side even in a Bear Market. You can. But for most people, those who are long-term investors, you simply do not want to be long the market until and unless this indicator turns. Once it does, you get long the market, and when its not, you go to cash. That's all. For the long-term investor turn the bubble TV off and stop listening to the idiots who are nearly-certain to have you buying at the top and selling at the bottom!

Oh, and "The Pigman Extrordinaire", Paulson, was dissembling again today.

"Still, he said that if homeowners who are "underwater" on their mortgages walk away from them, they are no more than speculators and don't deserve special help."

But you will make sure that your investment banking buddies and their enablers, which include the buyers of their debt, such as, for example, Bear Stearns, who are also nothing more than speculators, get special help, right?

This guy is the best argument for a Democrat President I've seen in a long time, and coming from someone who has voted Republican back to Ronald Reagan, that's saying something.

It may be time to change my party affiliation, sadly enough.

FGIC has "voluntarily" suspending writing new business. Uh huh. That's called "going into runoff" for an insurer, and while it doesn't portend instant insolvency, it ain't good.

Clear Channel's debt syndication/finalization (for their LBO) blew sky high last night, tanking their stock. Credit crunch over eh? Worst behind us? Uh uh. There are several hundred billion of these deals "in the pipe" and while banks have managed to get about half of their backlog sold most of it has happened at 90 cents - meaning they took an instant 10% haircut (that's called LOSS.)

There will be more of this - count on it.

IF YOU THINK THE CREDIT MESS IS OVER, OR THAT THE HOUSING MESS IS NOT GOING TO NAIL THE BANKS AND THUS THEY ARE "GREAT BUYS", you better take a look over here at Mish's Blog. This is an absolutely STUNNING look inside one of Washington Mutual's "packaged" mortgage bundles from last year and how it is performing.

Please note that 92.6% of this pool was rated "AAA" and yet 22.7% of that pool is 60 days delinquent while 3.5% of it is now actually foreclosed and held by the bank!

This is NOT being talked about nor is it being taken into consideration by the crooners like Dick Bove. This is where his analysis is wrong and the only conclusion I can come to is that he simply hasn't LOOKED! When he and I talked I asked him if he had a Bloomberg terminal (in other words, has he actually been looking at things like this - is he truly informed) and he admitted that he does not.

Well Dick? What say you to that delinquency data? Still think banks are a "Generational Buy"? This is a new (mid-summer) securitization and since these are all EPDs they're going to get "put back" on the issuer!

Here's the truth about housing bubbles - they always take YEARS to burst and then collapse, and frequently take A DECADE OR MORE. 18 months top to bottom? You're nuts.

Oh, in "Fedspeak" today Fisher has said the economy is in for a prolonged slowdown. Hmmm... reality slipping into The Fed? Gee, but Ben said on The Hill just a short while ago that "the economy remains strong"? What does this mean for equities? If we're in for a prolonged slowdown the last thing you want to be doing is buying stocks!

TRICHET (the head of the ECB) said today, in effect, that to lower rates now would be the same thing as taxing citizens to bail out the banks! He is not going to go along with what we're doing and his message is clear - eat your sandwiches boyz, no matter what's in them, because we're NOT going to bail you out!

BERNANKE, PAULSON, AND OUR CURRENCY have been thrown under the bus by the European Central Bank!

And let's be clear - The Fed has thrown roughly half of its balance sheet at this problem and now the European Central Bank has said "no mas!" to standing with us in the most clear terms possible!

Further, we're not done and real stress, as determined by the "higher risk" yield spreads, has not come in to any material degree, and in fact right now is way above the levels where it sat during the height of the August meltdown!

Ben and Hank are being forced to choose between destroying our currency and economy (and if the "Dollar Carry" gets legs, that's exactly what will happen) or abandoning their attempt to play "hide the sausage."

Here's the problem, in a nutshell:

We are no longer the center of the universe in the United States, despite the raw arrogance of those in our government and banking system who think we are.

Other Central Banks are now able to tell us to get stuffed, and we have no choice but to listen. We cut off our internal energy supply capability and as a consequence we have no defense to such a coordinated attack; we cannot "close up and run internally" any more, as we are required to import huge percentages of our energy supply.

The result of this is that Trichet (the ECB), Australia, Iceland and others can effectively tell Ben to get stuffed and stop with the crap and games or they will simply sit back and shove price inflation at us until we crack, while at the same time the carry folks show up and start treating us as a funding currency and evicerating our financial institutions at the same time, and there's not a damn thing the United States can do about it.

Tick.... tick..... tick......

Looks like The Bear Stearns Deal is starting to get a bit more in the way of ink - and legs.

"But the night that Bear signed the original bid, the Fed opened what's known as the discount window to companies like Goldman Sachs and Lehman Brothers - oh, yes, and to Bear, too. Except that the Fed didn't tell Bear that it planned to open the window when it was signing its deal with JPMorgan.

Had Bear known it might have access to the discount window - a crucial source of liquidity - it might have been able to hold out for a couple more days or at least had enough leverage to seek a higher bid. But the Fed clearly preferred the original bid."

No, really? We would never have a Federally-chartered instrumentality intentionally withhold critical information from a firm under stress so as to force a transaction to take place that, had the information been known, would not have taken place, would we?

Gee, is there a name for that too? Is that name felonious?

Inquiring minds want to know.

The sad part is that out of all of this while we have over 1,000 signatures (confirmed, signed, sealed and sent) on The Petition to ask Congress to investigate (and, should they find that there was willful involvement by The Executive, to impeach) one thousand signatures is about one hundredth of the number of signatures that should be present on that petition at this point in time.

I've had some "pushback" claiming that asking for impeachment is a "bridge too far."

Let me explain.

First, the petition doesn't ask for impeachment. It asks that Congress compel the unwinding of The Bear transaction, and calls for articles of impeachment only if The Fed and Treasury refuse to step in and force that to occur.

It is clear that Treasury and The Fed concealed the opening of the Discount Window until after the ink was dry (by a few minutes) on the "merger", yet the vote to open that facility was taken prior to the merger's execution, and that was a material piece of knowledge that would have instantly derailed the deal.

Second, emboldened by this act and the lack of immediate and loud response from our lawmakers The Fed has now taken an additional step of effectively buying mortgage-backed securities (which everyone clearly agrees is unlawful without an explicit act of Congress) and is now setting up its own off-balance sheet securitization facility in the form of the "LLC" that they've hired Blackrock to manage!

We have now allowed The Federal Reserve to Enron-ize itself, with the taxpayer on the hook for the consequences (good or bad), all without a vote in the Congress authorizing any of it!

We know how Enron ended; shouldn't our ELECTED representatives be the ones making these decisions, with full debate and consent, if indeed they are necessary?

From this gent's vantage point I can find no legal authority for any of what has happened here. I find violations of The Constitution's "takings" clause in the original act, with those violations extending to every Bear Shareholder who was literally screwed out of his or her investment. The exact amount of damage is difficult to determine because clearly Bear had problems, but that there was a "taking" is clear on its face.

That The Executive was explicitly involved in this mess and not only gave consent but was an active participant has been admitted - with some element of pride! In fact, Hank Paulson quite proudly supported - yet again - all of this just today in a speech!

It is a near certainty that Bear Stearns would have survived as an independent entity with access to The Discount Window, and the opening of same was both known by The Fed at the time this "transaction" was being negotiated with The Fed's active involvement.

The fact that The Window was to be opened the very next day to Investment Banks was intentionally concealed from Bear's management by that very same Fed.

A bridge too far?

I think I am being quite kind; in point of fact I believe there is a real possibility that indictments should issue against some of these participants, in that the shield afforded to government (or quasi-government) employees in the performance of their duties only extends as far as their statutory authority.

No person, not even in a government or quasi-government role, has unqualified immunity, and if we as a nation allow that sort of mentality to take hold, we lose the underpinning of our republic - that we are a nation of laws, not men.

Oh, and before you dismiss petitions, read this - all of these folks got copies of the signatures, and will get copies of any signatures posted from here on too..... make your voice heard!

"The top lawmakers on the Senate Finance Committee said they are reviewing the terms of the taxpayer-backed sale of Bear Stearns Cos. to JPMorgan Chase & Co.

Committee Chairman Max Baucus, a Montana Democrat, and Iowa Senator Charles Grassley, the panel's top Republican, sent a letter to the firms' chief executives, Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben S. Bernanke, and New York Fed President Timothy Geithner seeking details on how the buyout was negotiated."

Yeah, petitions like this one are worthless and nobody in Congress listens to you.

The facts say otherwise - now what say you about taking that 1,000 signature count up by enough to add another zero?

C'mon guys, bankrupt me with phone bills.

I mean it.