The Market Ticker

First, you start pumping liquidity into a commodity boom.

Then, you insure that you have a bunch of financial institutions that are hiding losses. You facilitate this, so they don't have to take their marks and own up to who is and who is not solvent.

Then, when that's not enough, you start explicitly backstopping these institutions and setting up facilities of questionable legality, like LLCs to "manage" the debt of zombified institutions.

And finally, you engineer short-covering so your stock market goes up in price by continually "burning" short-sellers, so that people get euphoric - but, in fact, there are no assets behind any of the market gains any more, because earnings estimates are horribly overinflated and your market is trading at premiums to fair valuations of 30% or more.

What happens when you are enough of a retard as a Central Banker to do all of this?

"March 25 (Bloomberg) -- The dollar fell against the euro as a rally in Asian stocks encouraged investors to buy higher- yielding assets with loans in the U.S. currency."

Congratulations Ben, we just became a funding currency for carry trades, exactly like Japan.

I hope - rather, I pray - that the author of this article is wrong.

Because if he is not, we are on the precipice of a collapse in the Dollar.

See, The Carry is a particularly pernicious form of abusive trading in the world, in that the money borrowed doesn't go to any productive purpose in the nation where it is borrowed.

Instead, it is immediately removed and sent "somewhere else."

This creates incredible distortions in the nation who is subject to the "funding" dilemma, in that these "loans" are in fact a form of zombie finance. There is no productive purpose to the loan in the nation of origin, a tremendous distortion is put into the FX markets, and further instability is placed into the funding economy.

Japan suffered this in the 1990s and it continued up until just a short while ago, when their currency began to strengthen significantly. That placed incredible stress on their stock market during the unwind, and the paradox is that it did so on the way "in" to those trades too!

Now its our turn, it would appear, and this is very, very un-funny.

Might I remind people that the Nikkei has never been back where it was before their saga all began, nor is it likely to be any time soon. They have had an effective "Zero Interest Rate Policy" for years, yet have been unable to restart their economy, as their zombification of the banking system through refusal to force marks has institutionalized lack of trust, which then bled over into commerce. The rest has been the near-literal decapitation of what was once the world's growth engine, second only to the industrial revolution in the United States.

Despite rabid pumping of liquidity Japan has flirted between zero growth and outright deflation for more than a decade, putting the lie to Bernanke's thesis that "a determined central banker with a printing press can always prevent deflation."

Now it appears that our government, through raw mismanagement of the credit crisis that began last summer, is following in Japan's footsteps.

But unlike Japan we do not have strong personal balance sheets and savings with which to cushion the blow. No, our personal balance sheets are instead stuffed full of debt, with huge percentages of people literally in debt up to their eyeballs.

If Ben, Hank and the rest of the clowns do not immediately reverse course with the foolishness of the last months, including this insane bailout of Bear Steans, we are very likely to follow Japan right down that rabbit hole, just as we give the Japanese a way to climb out of the hole - by stomping on our heads.

What a tremendous ignobility it will be if we find ourselves in a situation where The United States is the one with a ZIRP and we take Japan's place. Our stock market will remain moribund for years, perhaps a decade, after grinding its way lower with a three-digit handle on the S&P 500 and a DOW deep into the mid-four-digits.

Say a prayer for a sudden burst of intelligence at The Federal Reserve, and a cessation of the foolishness in the immediate future.

This is a road we do not wish to walk as a nation.

I think I'm going to puke.

Economic news today:

ICSC Chain Store sales came in -0.4%; CNBC did not report it - not even a mention - at the time of the data release.

Freddie is taking more and more risk on its books as other lenders have gone "poof", and in my opinion the GSEs will be in serious trouble at best and are potential zeros, as I've said repeatedly for months (delinquency rate 71 bips in January .vs. 65 bips in December, up 9.2% in a single month. Oi!) The problem here is credit risk and balance sheet leverage; those who claim that "employment is the driver" behind foreclosures need to pull their head out of the ass as clearly that has had zero impact on delinquency thus far in this cycle. Instead, what's driving the foreclosure bandwagon is affordability and negative equity, neither of which is going to improve for at least the next year or two. Credit risk is the 900lb Gorilla that nobody wants to talk about and yet its the "real deal" when you're geared at 30, 40, 100 or 200:1 - the higher the gearing the more tightly-packed the china shop is, and the more likely the Gorilla starts knocking stuff over.

Thornburg appears to have "priced" their convert - with an 18% coupon - in a private placement. 18% eh? How do you make money when you pay 18% for your capital? Oh, preferred dividend suspended, detachable warrants exercisable at 1 cent are included, etc. Yikes. They'll be up big this morning at the open, but "big" is relative - from $1.25 an open around $1.50 is a big move percentage-wise, but I wouldn't touch this stock for love or money. No thanky.

Several regional banks reduced to sell this morning, including Capital One and Bank America (Hi Dick Bove, and no, that's not my call); Jason on CNBC also said he wouldn't be buying financials. (Neither would I, in fact, I think there are some pretty juicy short opportunities that are starting to ripen in that space, but with the vol, the risk is high. The easy money has been made here - now you're going to have to work for your bucks.)

Case-Schiller Home Price Index marked record declines, down 11.4%; anyone who thinks that yesterday's NAR-influenced pump job was reason to rejoice now has egg all over their faces. They mark home prices down 10.7% .vs. a year ago and down 2.4% in January alone. The 3-month rate-of-change numbers are frightening, -23% on the 20-city index compared with -10.7% annualized, indicating that we are accelerating down the slope, not near the end. While lower prices will eventually clear inventory the ugly is that huge percentages of the sales in the last month have in fact been foreclosures. This is a necessary process but the pain is NOT over folks, and those who are calling a bottom in the housing market will once again be proven wrong! Cramer, of course, is on CNBC this morning screaming that "the bottom is in". Yeah Cramer, and it was a great time to buy CROX, Apple was going to $300, and Google to $1,000, correct? None of those stocks was going to blow up in your face and take half your money or more, yes?

Google got whacked on price targets, revenue and margin estimates. (No, really? Late yet again Sir Analyst? This is one of those "duh!" deals guys - Google's largest advertising block has always been real estate and mortgage related; how well are those businesses doing nowdays?)

Consumer confidence plunged to the lowest level in thirty-five years; the March index came in at 64.5, a number matching the 1973 oil embargo! Small moves often mean little, but big changes like this, down 12 points with the expectations index down more than 10 points to 47 from 58, are STRONGLY correlated with consumer spending. In addition consumers are experiencing and expecting much higher price inflation while they are expecting their income to remain stagnant or fall. Oh, and CNBC's Liesman admitted that he was trying to get their interviewee from the Conference Board to say something positive (as opposed to simply reporting the news.) Thanks for admitting on national television that your job is to pump the financial markets instead of report Steve.

Oh, and today I was polled by the University of Florida on consumer confidence and expectations. I gave it to them straight, long and hard.

.... so this morning the "big news" is that now JPM/Chase is trying to work out an increase in their bid to $10!

Wait - bidding against themselves?

Uh, no.

See, it appears that Bear managed to stick a nuclear bomb (and its ticking!) in the "merger agreement." That, being a clause that survived even if the deal failed to close that obligated JPM to guarantee some of Bear's liabilities!

Oops.

Rumor is that Dimon was apoplectic when he discovered this and suddenly there was interest in renegotiation.

No, you think?

Needless to say this sort of thing is just more evidence of the raw malfeasance of involvement of The Government in this whole thing. On CNBC this morning we had a rare bout of "truth telling", which is that "Mr. Market" is going to get very unhappy with this sort of intervention-and-arm-twisting in a big hurry, and that The Fed apparently told JP Morgan to pay no more than $2/share, although there are conflicting reports in this regard - Liesman claimed that this has been "denied" (yeah, I'd deny it too, given that Bear isn't a Fed-regulated entity such a claim, if true, could get kinda interesting - like perhaps illegal-style interesting? Not that the law seems to bother any of the fine folks in our financial system nowdays, whether it be raw market manipulation or otherwise!)

In addition the usual practice when The Fed (or the FDIC) gets involved in a "forced merger" is that both the bond and stockholders get zero, or at least common stockholders get zero while bondholders get only residual value once the debts are paid off.

In this case we have an entirely different matter - The Fed basically came in and "crammed down" the transaction with the apparent inclusion of a bribe!

Oh, The Fed needed to step in and do a "cramdown" at $2/share eh, and thus they "greased the skids" with $30 billion smackers? This ought to be some awesome lawsuit fodder when there is now a renegotiation at five times the original price.

I can't wait to see the process servers show up at Ben's house - they're going to have to install a "take a number" box at his front door on this one.

Far from being a reason to rejoice that "the market worked anyway" this is just more fuel for the fire in the petition to impeach Bush and Friends for their involvement in this.

Yes, I said more fuel, not less.

Why?

Because the issue in terms of legality is that $30 billion "no recourse loan", which is not in fact a loan, sure as hell looks more than a bit like a bribe to me, and that sort of gameplaying is against the law!

Oh, and the "amended terms" do absolutely nothing to change any of this - $1 billion to be born by JPM? Oh give me a break. And now there's not only a bailout for bondholders, but a $29 billion backstop to get something for the common stockholders as well?

THIS IS UNLAWFUL AS IT IS CLEARLY A BAILOUT ON THE BACKS OF THE AMERICAN PUBLIC; EVERY SINGLE AMERICAN JUST GOT THEIR POCKET PICKED TO THE TUNE OF $300 FOR BEAR STEARNS BOND AND STOCKHOLDERS, AND IT WAS DONE WITHOUT A VOTE BY CONGRESS!

As if this wasn't enough, this morning on CNBC Jim Cramer said, when it was brought up that this was in fact a picking of American's pockets to the tune of $300 each, that the common man does not know jack!

In other words, just to be straight with everyone, JIM CRAMER THINKS ITS JUST FINE IF THE LAW IS IGNORED AND YOU, THE COMMON MAN'S POCKET, IS PICKED FOR THE PURPOSE OF DIRECTLY SUPPORTING WALL STREET AND ITS OBSCENE BONUSES PAID OUT OVER THE LAST THREE YEARS WHEN WHAT SHOULD BE HAPPENING IS THAT THERE SHOULD BE **INDICTMENTS** AIMED AT EVERY ONE OF THESE FIRMS - AND THEIR EXECUTIVES.

(Oh, he tried to backpedal - again - yeah, right. Jim Cramer, you need to be stuffed in jail along with the rest of these monkeys. Oh, and a 300lb convicted murderer who as a consequence has a "free PUT" for his second and subsequent murders needs to be put forward as your cellmate too!)

Liesman was parading around reiterating that The Fed cannot buy other than Treasuries and Agency paper. Oh really? Just like they can't issue PUT options either eh Steve? It appears to me that what is written in the black letter of The Federal Reserve Act is merely a suggestion from time to time when that black letter law is inconvenient for them eh?

Never mind that now it comes out that BLACKROCK is going to manage this $30 billion "facility"! What the hell? Now we've got The Fed paying private companies to manage a facility for them on top of the rest of the apparent illegality, plus taking it OFF BALANCE SHEET so we can't see how well (or poorly) it is performing?

Or shall we talk about the rumors being leaked from alleged inside sources at The Fed that the "collateral" that Bear will be posting is so bad that you'd need a geiger counter to warn you off before getting within 10 feet of it?

So perhaps someone can explain to me how it is legal for The Fed to UNILATERALLY decide that the TAXPAYER will effectively pay Bear Stearns shareholders $10/share, plus insure that Bear's bondholders are whole?

IS NOT THE PROPER ROLE FOR SHAREHOLDERS THAT THEY BEAR FIRST LOSS IF YOU MAKE A BAD INVESTMENT, and BONDHOLDERS bear SECOND loss?

The proper government organ to get involved here is Congress, and as more details emerge its open to question whether even Congress has the authority to authorize what amounts to a bribe using (arguably) a public backstop!

Withdraw that $30 billion "PUT" Bernanke and I'll shut up on Constitutional grounds, but not in the general case of "making up the rules as you go along."

In short, no, I don't think all is ok in the world if the $30 billion is withdrawn, although that would remove the reason to ask Congress to perform its due diligence and perhaps bring Articles of Impeachment.

In fact, I believe that Bear shareholders have plenty of reasons to sue people from here to Mars, including quite probably Bernanke and Buds, and I encourage them to do so.

Oh, in other news there are also rumors flying around that the very same JP Morgan (and UBS) have disclosed values of some securities backed by mortgages have lost thirty to ninety percent of their value in a suit related to Canadian Asset-Backed Commercial Paper, which has been locked up for months. One wonders - were auditors "clearly informed" of all of this before they signed off on the 10Ks for 07 filed recently? Hmmmm.... if not, they are likely to be rather rough with certain people. Never mind the obvious - is a security "AAA" if it trades at 30 cents on the dollar? WHERE ARE THE COPS?

A better question for the financials and specifically the investment banks is simple - is the entire model of the investment bank broken? It sure looks that way to me, and I bet that one of the outcomes of this, especially next year after the election of a Democrat to the White House with a Democratic Congress, is that investment banks come under the regulatory authority of some government organ.

That will be the end of the 30:1 gearing and almost certainly the end of "off-balance-sheet" games as well; if they are forced to reduce gearing to somewhere between 8:1 and 15:1 and stop the off-balance-sheet crap somewhere between 1/2 and 3/4 of their earnings power disappears!

This means that all of them are not "generational buys", but are screaming sells as their P/E suddenly looks damn expensive on a forward basis.

Analysts for the S&P 500 are now expecting earnings to decline 5.5% in the first quarter.

Gee, the market is cheap eh? Hmmmm... not!

Did you see THAT reported on CNBC today? Nope! Nor will you.

This is, by the way, the ultimate problem with the market - its not cheap. It is in fact very expensive, because estimates are entirely too high, just as they always are going into recessions - analysts always are behind the ball and always keep their estimates far too high for far too long, leading people to make "the market is cheap" calls that are utterly without foundation in fact.

This is a mistake I have seen time and time again, and if you're foolish enough to listen to these crooners you're going to get murdered.

Oh, you didn't hear CNBC's "let's pump stocks instead of reporting the truth" talk about the Chicago Federal Business Activity Interest, did you?

Guess what - it came in at -1.04 .vs. the previous of -0.68.

Gee, is that good?

And while the "home sales" numbers were pumped the fact of the matter is that year-over-year home sales were down 23%. OF COURSE sales are up month-over-month as the start of the spring selling season has come and in fact every single February in history has been up over January, but the year-over-year numbers tell the truth!

Don't expect to see that on CNBC either.

Financial reporting? Forget it.

Oh, and if that's not bad enough, Wachovia is still advertising Negative-Amortization mortgages into a declining home price market.

And why not?

There is no risk to them, only to you the American Taxpayer through the actions of unelected officials who act to spend your money without bothering to gain the prior approval of Congress, as the Bear Stearns SCAM has now proven conclusively.

Nor does it stop with Wachovia. Now that The Fed is putting taxpayers on the hook without a vote of Congress authorizing that spending, look who else is interested in sticking their fingers in your wallet? That'd be Wells Fargo, backing up the truck to YOUR wallet via the public teat:

"I would not be averse to a Fed-assisted transaction," Stumpf said in a recent interview with the San Francisco Business Times. "Fixer-uppers don't bother us."

Absolutely, and so long as you don't have to take any risk because The Taxpayer has your back via an unlawful Fed "PUT" (yet another allocation of funds by The Fed without Congressional action.)

Who's next? Better not look behind the curtain at Fannie, as I've been warning for quite some time:

"...Fannie Mae fell $1.10 or 3.2 percent to $33.29. On Monday, the government-backed mortgage buyer reported that its serious delinquency rate for home loans grew 0.08 percent in January to 1.06 percent of its $2.9 trillion in mortgages."

Psst - that's a 7.5% increase in serious delinquencies in one month. Of course it wasn't reported that way; they instead reported very small numbers, instead of the actual percentage changes.

I wonder why not?

By the way, 1.06% is 106 basis points. You might want to take a look at the amount of capital they have in reserve against that book, and extrapolate out a few more months.... or quarters.

Make sure you're sitting down.

And no, I won't do the math for you - I've been handing out plenty of fish and teaching y'all how to bait those hooks, its time for you to wet a few lines yourself.

GET OFF YOUR ASS AND IMPEACH THE ENABLERS OF THIS THEFT OR I DON'T WANT TO HEAR YOU COMPLAIN ABOUT IT LATER - HALF OF YOUR SO-CALLED "STIMULUS" CHECK HAS ALREADY BEEN STOLEN TO PAY FOR BEAR STEARNS, AND THAT AND MORE WILL BE UP SHORTLY AS WELLS WILL BE JUST THE NEXT IN A LONG LINE WITH THEIR FINGERS IN YOUR WALLET, AND THEN YOU WILL LOSE YOUR HOUSE TO FORECLOSURE AND YOUR JOB IN THE RECESSION!

Trade and invest at your own peril; as things stand here and now there are no honest markets to play in, and if this bothers you (it should) either shut up and go to cash or get off your ass and do something about it.

That we're a nation of whiners is why we're here in the first place.

PS: The Fed's "facility" for JP Morgan and Bear has been set - they've been given 10 years at the discount rate. That's outrageous, and a raw violation of The Fed's base set of terms, which limits repos to 90 days, or six months for paper backed by agricultural commodities. Go sign the impeachment petition - now.

"On or about March 16th, 2008, George W. Bush, both personally and through his Treasury Secretary Henry Paulson, caused to be provided to JP Morgan/Chase a bribe(1) ultimately flowing from the United States Treasury in an amount not to exceed $30 billion dollars US, via The Federal Reserve, in order to induce JP Morgan/Chase to assume the liabilities and assets of Bear Stearns and Company at a price not determined in the free market or via public bidding, in violation of the limitations expressly set forth in The Federal Reserve Act of 1913, 12 USC Ch 6."

(1) Bribery is defined by Black's Law Dictionary as the offering, giving, receiving, or soliciting of any item of value to influence the actions of an official or other person in discharge of a public or legal duty.

I have spent a solid week both reading The Federal Reserve Act of 1913 and thinking about the circumstances of this transaction trying to find a means under which "backstopping" Bear Stearns debt via The Federal Reserve is legally permissible.

Despite my best efforts I can't find explicit or implicit authorization for "a put", as differentiated from a loan, anywhere in The Federal Reserve Act. You can call something whatever you'd like but if in point of fact there is no recourse then it is not a "loan" at all; it is a "PUT" or a "conditional payment", and under The Federal Reserve Act such an action appears to these eyes to be a direct violation of the law.

It is widely reported that both Hank Paulson and George Bush personally "signed off on" The Bear Stearns "bailout" last Sunday. As such their direct and indirect actions, in my view, constitute a "High Crime and Misdemeanor" within the meaning of the United States Constitution and therefore subject George W. Bush to impeachment proceedings as proposed in the above sample article for same.

By the way, I'm not the only one who thinks this is an illegal transaction. John Hussman, of The Hussman Funds, has this to say in a letter with a publication date of tomorrow, March 24th:

"In my view, the deal would be palatable if J.P. Morgan was to remain fully responsible for any losses on the 'collateral' provided to the Federal Reserve, assuming shareholders were to consent to the buyout. As it stands, Congress should quickly step in to bust the existing deal and demand an alternate resolution, by clearly insisting that the Fed's action was not legal.

The Fed did not act to save a bank, but to enrich one. Congress has the power to appropriate resources for such a deal by the representative will of the people – the Fed does not, even under Depression era banking laws. The 'loan' falls outside of Section 13-3 of the Federal Reserve Act, because it is not in fact a loan to either Bear Stearns or J.P. Morgan. Bear Stearns is no longer a business entity under this agreement. And if the fiction that this is a 'loan' to J.P. Morgan was true, then the only point at which the 'collateral' would become an issue would be in the event that J.P. Morgan itself was to fail. No, this is not a loan. It is a put option granted by the Fed to J.P. Morgan on a basket of toxic securities. And it is not legal."

Finally, it appears that even the SEC Chairman, Christopher Cox, isn't sure that Bear was "done"; that is, this entire transaction might smell like dead fish:

"In what is likely to be a bit of a blockbuster, SEC chairman Christopher Cox sent a letter to Swiss regulators indicating the Bear Stearns (NYSE:BSC) did not have to go the way of all flesh. According to The New York Post "the fate of Bear Stearns was a lack of confidence, not a lack of capital," Cox, the head of the Securities and Exchange Commission, wrote in a five-page letter sent to a Swiss regulator.""

So there you have it.

Now, the question is, do our Congressfolk have the necessary will to stop this raiding of the public treasury for the enrichment of a private firm - if necessary, by bringing the above article of impeachment?

If you think they should, then I have a solution for you.

SIGN THE PETITION

to Congress for the purpose of raising debate on this exact issue and stop the mockery of our legal and regulatory systems.

PS: I'm a lifelong registered Republican, voted for George W. Bush twice, and have one of Gingrich's "Speaker's Gavels" on the credenza behind my desk, so before you go accusing me of being a "leftwing nutjob", think again. Nonetheless, what's right is right and I must stand for what's just, and when the political party I am a member of does something wrong, they must admit to it and face the consequences. Sorry Mr. President; I like you a great deal, but what happened here was, in my opinion, blatantly unlawful. The $30 billion "backstop" must be rescinded until and unless Congress explicitly authorizes that act through legislation and you sign same.

Ok, having spent a good part of the day (and all of the afternoon) in an hour-and-a-half phone call with Mr. Bove, and then following up with a bunch of emails, I think I understand the premise of his "buy bank stocks now" call.

I also understand where I believe his fatal errors of analysis lay, and why this will be borne out in the fullness of time.

Let's start with the premise:

"This is a generational opportunity to buy (bank stocks) on the cheap."

Ok, that's pretty clear on its face.

But what did he really say?

He also did say that the economic turmoil is not over.

In fact, on the phone with me, he admitted that he expects a "mild to moderate" recession - remember that while I (and many others) believe we are in one right now, you can't call a recession until you are deep into the middle of it, and often they are not officially called until they are over!

But what underlies this bullish call on bank equities?

Simple - the ability to earn cash as a consequence of "positive carry" due to the upsloping yield curve.

Now let's examine the underpinnings of the argument, and see how many trucks I can drive through it. (By the way, I'm emailing Mr. Bove a link to this; if he's interested in rebutting any of the arguments or I have misunderstood his position, I will be happy to append to this entry.)

Mr. Bove's assumptions are bold, italicized, and underlined. The rest is mine.

The yield curve is positive sloping and this will drive positive earnings reinforcement. True. Point to Mr. Bove.

Housing will bottom this summer and begin to recover in the fall. Oh boy. I'll take the other side of that bet. The argument is that in "previous housing recessions" this has worked out because housing tends to collapse fast, then plateau and eventually recover slowly. However, there is a problem this time, and its best represented here:



Now let's define the other housing tops. Specifically, according to Mr. Bove (who has done his homework in this regard) they are generally agreed to be 1904, 1926, 1950, 1972 and 2006, roughly. (He apparently doesn't count the mess in the late 80s out in California; I suppose there's an argument that this was regional and therefore shouldn't count, but you can clearly see it in Mr. Schiller's chart above)

Notice anything? All of those tops were in fact peaks (except for 1972), but they were very small peaks in terms of adjusted home prices.

But incomes will (do) make up for it. No they won't. In fact, since 2001 if you exclude the top 5% of income earners average household income has actually declined slightly on an inflation-adjusted basis.

We went from an indexed 125 (the maximum peak of previous housing bubbles) to 200 this time, and are just starting to roll over. The trough is in the 100-110 area on a historical basis; to assume that we will have a year of decline followed by stabilization when only 20-25% of the corrective move necessary has taken place thus far is hopelessly wrong. This is the largest housing bubble in the history of the nation and simply on that basis to assume that it will unwind in 2 years is pure folly.

Also note that we STILL haven't gotten entirely back to sound lending principles, which are 20% down payments, 36% DTI and a 30 year fixed mortgage. Until we do and prices adjust at that level we are not at a housing bottom.

The Fed has our back, basically. Really? The Fed has consumed about half of its balance sheet with the TAF, TLSF, PDCF and whatever other alphabet soup they have dreamed up thus far, oh, and about $100 billion in direct slosh (at present, less the TAF.) They do not have an infinite balance sheet with which to play. I'll deal with the "they'll print" argument below.

Bear Stearns was a sea change. Actually, no. I argue that Bear Stearns was both a raw violation of The Federal Reserve Act (for which The Fed may find itself in a bit of trouble when Congress gets done) and an indication of pure desperation. It may also have some element of a Jamie Dimon "jam job" in it but that's speculation on my part. Sea change? Only if you consider the tide going out before a tsunami strikes as a "sea change." Intelligent people run when that happens, not stop to pick up the seashells and fish!

Corporate balance sheets are strong. Point granted. Do you think perhaps CFOs and CEOs have some sort of idea of what is coming and as a consequence they have been raising cash?

Household balance sheets are strong. The hell they are. They are no more accurate than are the phantom "marks" on subprime CDOs that are allegedly "wrapped" by the monolines. Take out the phantom home price appreciation and suddenly household balance sheets don't look so good. Now subtract out of the stock market losses of the last three months. Guess what? The debt is still there, but the assets have shrunk. For most people their largest asset is their house, and it has "doubled" in value in the last five years. Fair and well, but if that "doubling" is in fact all phantom appreciation, what happens to the balance sheet when it comes back off? Remember, a house bought with 20% down is "geared" at 5:1 and one bought with 5% down is geared at 20:1. Hmmmmm.....

Bank balance sheets are strong and so will be earnings. Really? Prove it. Give me a value on all the Level 3 assets. And let's talk about accounting games; Lehman essentially took down liabilities and due to how accounting works that inures to "earnings", but in fact its a problem because it shrinks the balance sheet and further is unlikely to be repeated. Without that little accounting gimmick they would have reported a loss last quarter. While we're at it, shall we discuss the off-balance sheet liabilities? Didn't Bear Stearns come out three days before they blew up and tell us all they had a tangible book value of $80/share? Where did it all go in three days? Finally, if balance sheets are so strong then please explain to me why S&P just cut the ratings outlook on that very same Lehman (and Goldman!) to negative, citing a belief that profits may fall as much as 30%? (Psst - what if Lehman can't find another $600 million to play with next quarter in accounting moves? Hmmm... do they lose $400 million? I think S&P is overly optimistic.)

So long as bank cash flows are sufficient to cover expenses, all is ok. Really? How'd that work for Bear Stearns? Or Northern Rock, if you want to put not-to-fine a point on it? In reality all banks exist only because of confidence in their operations; this is a reality in a system where banks are allowed to fractionally reserve. If confidence fails then so does the bank, as Bear Stearns so vividly demonstrated, and that failure can come within hours. In today's world of ACH and wire transfers you can literally have your funds out of a bank in 15 minutes.

Commercial credit demand is growing and is generally very strong. Granted, although the rate of increase has slowed significantly in recent weeks. Now answer this - how much of that borrowing is FORCED as other means of raising money have slammed shut in borrower's faces? CIT drew down $7 billion Thursday; that shows up in C&I loans made but it was hardly a "voluntary" borrowing! This is going on everywhere as asset-backed commercial paper, auction-rate markets and others have seized tight. Forced borrowing being used as an indication of "strong" credit demand is similar to the mistake people made in counting "M3" growth in the last year or so - that too is forcible as "shadow banking system" money is forced out of that conduit and into the regulated system where it can be counted. This isn't an indication of "robust" demand, it is an indication of panic!

Foreign money is coming into the market (at least in Florida) and this is helping. Yeah, like it helped the fine folks from the land of sand who bought into Citibank eh? History is replete with people throwing their money down the toilet trying to call bottoms, and just because someone has a lot of money doesn't make him or her right in their call (Joe Lewis anyone?) Florida, south Florida in particular, is still outrageously overbuilt. The state bird down there is still the construction crane - I was on a cruise out of Miami this winter and was astonished to see empty condo buildings - literally empty, but complete. How do you know? All the units are dark at night!

That's the gist of the argument as it was presented to me. Now let me add a few more implicit assumptions which Dick may not have made, but I suspect he did, because you pretty much have to in order to arrive at where he landed. Again, these are MY assumptions, so I will un-italicize them to differentiate them from what he actually said in one form or another.

The economic impact of the housing adjustment will be reasonable. No it won't. Assuming Fannie and Freddie's estimates for home price declines plus Case-Schiller's existing index, we've seen 7% declines in home prices in the last year and Freddie/Fannie are assuming another 5-7% to the "bottom" (which they also claim they think will happen this year.) Assuming this figure is correct, it will wipe out 10-15% of the $36 trillion (roughly) value in our housing stock, for an economic impact of $3-5.4 trillion dollars. That wealth is permanently gone, never to return. If you use my "base case" figures of double that (30% peak-to-trough declines on average) then the economic impact is somewhat north of $10 trillion. The US GDP is $14 trillion annually, more or less. This WILL produce a permanent change in the standard of living in over 100 million US households, and our economy is 70% consumer spending. Now obviously, all this adjustment will not be taken to spending at once, but to think that it will not cause decided negative prints in the US GDP for some time is difficult to stomach. This contraction in household wealth, as it flows through to spending, then leads to decreases in economic activity (e.g. you don't buy as much stuff) which in turn leads to decreases in C&I loans - lending activity dries up from the demand end as well. We haven't even begun to see the impact of that on the banks.

Push comes to shove, The Fed can print. Sure, they can try. What happens if they do? Well, first, Treasury would have to print up some bonds to do that, which means Congress would have to raise the debt ceiling. By how much? Well, let's see, to absorb the entirety of the above, $4-5 trillion worth. The total public debt outstanding, by the way, is nine trillion. Anyone care to believe that The Fed (and Treasury) would get away with this without having real interest rates (set in the bond market) shooting up to 20%? Me neither. What happens if real interest rates go that high? Well, with the blended government borrowing costs running about 1/4 of that, interest rate expense for the Federal Government would quadruple, from $400 billion to $1.6 trillion a year, or more than half the Federal Budget. As the total budget is approximately $3 trillion dollars, its obvious that this would instantaneously destroy Medicare, Social Security, or some combination of the two. In short, entitlement spending would be severely impacted. Pitchforks and Torches would shortly appear from Granny's garage and descend on Washington DC. At the same time corporate borrowing costs would triple too, which would basically destroy those "nice and strong" corporate balance sheets. We get a depression this way via the wholesale destruction of The Federal Budget and private enterprise all at once. Congratulations.

Long-term interest rates can be held down around 4%, fixing the affordability problem. Nice try. Notice that that didn't happen even during the 2001-03 slowdown with a 1% FFT. We got close though - 5%ish. Unfortunately this time around we won't be so lucky. The last time we had a confluence of virtuous factors in play, including foreign governments needing to "sterilize" our trade imbalance; as a consequence they were heavy buyers of Treasury debt, holding down yields. Sadly this cycle has finished; the concept of "burying" our price inflation into emerging markets has come to an end. China is now faced with a horrifying inflation problem and a bunch of bad debt and is both raising interest rates and reserve requirements to try to deal with it. Currency pegs are being stretched all over, with Hong Kong being the latest to threaten an implicit breach (they refused to follow our latest Fed action.) That cycle is likely over for good, which means that the abnormally low interest rates of the last five years are over too. Historical average 30 year mortgage rates are near 8%, and should we return there that whacks another 25% or so off what is an "affordable" house price.

The only way we see long-term (30 year) money at 4% is with the 30 year Treasury Bond near 3% yield on a sustained (year+) basis. And the only way that happens is if we get an economic depression, thus crushing demand and inflation expectations (e.g. expectations are for deflation, not inflation.) Should that happen then yes, house prices under today's incomes are affordable, but the unfortunate reality is that in a depression 20% unemployment becomes a reasonable expectation too and so do huge haircuts to incomes for those who keep their jobs. 30 year money at 4% on a sustained basis is simply unrealistic under any other scenario, ergo, the call for this outcome is idiotic.

Timing wise, its a good time to buy because the bear market is (nearly) over. Like hell. Show me a bear market in the past 100 years that has lasted only four months and a recessionary market (with a REAL recession) that has fallen only 15% peak-to-trough. You can't, because on average bear markets last nine months and peak-to-trough valuations suffer a haircut of 30%. The last Bear Market was in 2001-2003, lasted about two years and resulted in a loss of fifty percent in the S&P 500 yet the economic conditions barely met the classical definition of a recession! That all happened without a credit and derivative bubble to do systemic damage! The only "short and fast" market drops like that were not associated with recessions - 1987 and the summer of 2006 being the poster children of examples, with the latter being a circumstance that I made an insane amount of money from buying hammered stocks very cheaply only to dump 'em in the early part of '07 when the overextension of this Bull became apparent.

Bottoms are accurately called by many market participants. Historically, it doesn't work like that. Bottoms happen when nobody wants to own stocks. In the 2000-2003 bear market CNBC called bottoms all the way down until the summer of 2003 - when they basically gave up. That was the bottom! At present we have Dick Bove calling a bottom, half the people on the floor of the NYSE and CBOT interviewed on CNBC daily calling a bottom, and Cramer alternating between calling a bottom and looking like he is about to blow his brains out on national television. In addition as I have shown a true bottom happens on a cross of the 20 Week over the 50 Week moving average by more than 1% - this is a timing signal that has worked since the 1930s. As of last week the gap between the 20 and 50 week moving averages continues to WIDEN, not narrow. This same signal on the XLF shows an unmitigated disaster. By the way, on the XLF that indicator went positive on the week of 6/9/2003, which was damn close to the actual bottom, no? It also called the top on the XLF around the week of 9/17/07. Not bad, not bad. Oh, the gap, as of Thursday, was 14%, which increased from the week prior.

The market is cheap. The hell it is. On a current market basis the S&P and Russell P/E have actually increased in the last year. The Russell is currently trading at a P/E of FORTY! That's ridiculous. While small-cap stocks frequently trade at a premium in terms of P/E, "premium" means somewhere around 20ish. That puts the Russell around 350 and currently it is right near 675! In addition current S&P earnings estimates are actually above last year's actual earnings. There is not a snowball's chance in hell that those earnings numbers will be met on a full year basis; analysts are always late to this party and as estimates come down P/Es rise which puts more pressure on equity prices. Reality should start to intrude on earnings in the first quarter, and really get some legs into the second and third.

The credit markets are "unsticking". Like hell. An IRX print of 3.0 (0.3% annual yield) is "unstuck"? More like absolute panic buying of treasuries. Now why would someone do that? They'd only do that if they were looking for somewhere that they were absolutely certain they'd get their money back! Realize that with an 0.3 or 0.5% yield annually investors who are parking their money there are willing to take a roughly 3.5% annual LOSS just to insure they get their money. If you have someone intentionally taking a loss they are either insane or well-aware of what is coming and this is the best of the choices available - which is a pretty clear statement that all the other choices are, in their opinion, WORSE!

There won't be a "mark" explosion. A bet I wouldn't take. MBIA/Ambac were important to the municipal market but far more important is the wrap they provide on a number of other institutions' holdings. The key item here is that bank reserve requirements against those holdings are based on their credit - an implosion by any of these firms could triple the reserve requirements against wrapped-and-held CDOs, CMOs and similar overnight. The result of such an event is likely to be extremely severe. There is no way these firms can possibly pay any but a minuscule amount in claims .vs. their book and there are rumors all over the street that defaults are being hidden by banks here and now rather than calling them out on it because doing so could precipitate a cross-default firestorm. Unfortunately, Merrill may have lit the fuse on this last week when they went after a division of XL Capital alleging exactly that - they owe 'em on a swap they wrote and are refusing to pay. XL's latest quarterly has an ominous statement in it related to capital adequacy should they be forced to pay off on too may of their obligations. Hmmmm....

We will get through this without forcing all the balance sheet games to stop, all marks to be taken, and all off-balance-sheet nonsense brought back into the open. If you say so. I don't believe it, because, as I've repeatedly noted, confidence is all that a financial institution has to sell when you get to the end of the day. Confidence is, at this point, basically gone.

That's it, in a nutshell.

We'll see who's right in a year or so.

Here's one other thing to consider - nearly all of these "market callers" have none of their own skin in the game. One of Bove's points to me is that he "pays" if he's wrong (because he might lose his job.) Well that's nice. Guess what? My money is where my mouth is, and if I'm wrong, I get to hand out shopping carts at WalMart since I live off my portfolio income.

And for the record, here's some real ink on the .COM blowup (heh they published late, but not never); I went to 100% tax-free Munis in late '99 and missed it all. Awwwww. My "buy point" for the broad indices was hit in 2003, at which point I purchased big positions in both SPY and the Qs (both of which were sold in 2007, natch.)

There is a big difference between someone who claims to call markets as an "analyst" and someone who makes his calls with his wallet.

The former risks his job but can always get another one among the Pigmen (and before you dispute this, tell me how Abby Cohen is still employed after her disastrous calls in the Tech Wreck?) The latter risks his house, his car, his boat and his retirement.

Who has a greater incentive to actually analyze and tell you what they really think.

Yes, I talk my book. Would you expect anything else?

Heh, if I'm wrong, I'm wrong. Toss the slings and arrows my direction; the real pain will come in my brokerage statements. But if I'm wrong then the entirety of history in the US Stock Market is also wrong, and just once, "this time its different" will prove out.

I don't like those odds.

Apparently Mr. Bove does not like my ticker from last night, and believes that I have been in some way "unreasonable" in my characterization of him, specifically this paragraph:

"The Truth: The "powers that be" (including the media, The Fed and The Banks) are absolutely beside themselves with the possibility that stocks, especially bank stocks, might decline in value. For "why" see the top of this blog entry. If you fall for this you will be wiped out. DICK BOVE PUT A MARKET PERFORM RATING ON BEAR STEARNS STOCK ON MARCH 11th - JUST THREE DAYS BEFORE IT BLEW UP AND (THE FOLLOWING MONDAY) WENT TO $2! You have NOT and you WILL NOT see CNBC or DICK BOVE take responsibility for the wipe out of SEVERAL BILLION DOLLARS IN SHAREHOLDER WEALTH - when he could have preserved YOUR MONEY if he had told you the truth about our financial institutions and that YOU SHOULD SELL ALL OF THEM AS THERE ARE AND WILL BE MORE EXPLOSIONS, ALTHOUGH NEITHER HE OR I HAVE NO WAY TO KNOW WHICH ONES AND NEITHER DO ANY OF THE ANALYSTS SINCE WE CAN'T SEE HONEST BALANCE SHEETS!"

He was kind enough to send me a copy of the full report which I have edited to remove his email address and phone number (at his request), but which is otherwise reprinted here with his permission.

You are urged to read the report in full and draw your own conclusions about whether the market perform rating was reasonable or not. Links are at the bottom of this post.

There apparently is one word he can legitimately complain about in my original ticker - the word "PUT".

In fact, he maintained a "Market Perform" rating on the 11th of March; the upgrade to Market Perform from SELL appears to have occurred in February.

You can find an archived copy of that story here. It says among other things, in reference to Bear and Lehman:

"He said private equity may once again be able to fund activities in the high yield markets, while adding that credit derivatives markets were unlikely to go lower, and that the mortgage business may actually be quite strong this year.

New York-based Lehman will likely recover faster than its peers due to the expected strength in mortgages, Bove said."

Ok, I apologize for the error in not noting that the actual upgrade apparently came a month earlier, not that I think its material, but when you're wrong, you admit you're wrong.

Mr. Bove, of course, didn't bother to mention when the rating was issued by him during our phone call, nor that when he issued the rating the price of the stock was even HIGHER (by nearly $20!) than it was in March when the rating was "maintained" (even though he claims it really wasn't if you read the narrative.)

Now let's get to the meat of the matter and why I raised a stink about it in The Ticker - the rating.

Dick claims that "anyone who read the report in full would see that I had told them to stay away from the stock."

After reading the report in full, I agree - the stock, by the narrative of the report, is indeed a sell - albiet a sell $20, or 25% of your money, too late!

But here's the problem - the report clearly cuts the price target from $90 to $45 (a 50% haircut!) and further is a reduction of 25$ (from $59 to $45) from the closing price on the day the report was issued.

The report is intended only for institutional clients who pay his firm, but it, like the report yesterday, was picked up and widely quoted in the media.

Take a look at the second page of that report, directly above Mr. Bove's certification, under the definition of "Market Perform":

"Common stock is expected to perform with the market plus or minus five percentage points."

So therefore we can conclude that one of two things must be true:

• On March 11th, Mr. Bove believed that the S&P 500 would fall between 20 and 30% from its price on the 11th of March, and therefore, Bear Stearns' would indeed be a "market perform." (And in all fairness, a 25% haircut, while grossly under representing the collapse that did happen, is a serious decline.)

OR

• The "Market Perform" rating is false.

Take your pick.

For the record, Mr. Bove told me on the phone (in an hour-and-a-half phone call that got quite contentious and left us with more disagreements than agreements) that he does not expect the S&P 500 to decline by 25% in the next 12 months

For the record, I do expect the S&P 500 to decline by that much.

Therefore, we get to the gist of the matter - the rating, according to his own standards, was unreasonably inflated.

Now in fairness I am compelled to also include that part of Mr. Bove's argument is that everyone who is reporting this stuff, including CNBC yesterday, is stealing from him and his firm since they're not being paid for the analysis.

My counter-argument is that I will be happy to accept his complaint of theft when I see lawsuits filed against The Associated Press and CNBC for their coverage of his call yesterday, which was partly responsible for that nutty ramp job post the SOQ in the indices.

That of course will not happen since Punk, Ziegel along with all the other analyst firms on the street love the free publicity that they get from these ramp-job rocketshots and controversial calls on the market, especially when they get mentioned 4 times an hour on national television without having to spend one nickel in advertising buys.

By the way, Mr. Bove really does believe that the banks are a "generational buy", and disagrees that the issues of excessive leverage and capitalized interest (in the case of banks like WaMu) will kill them, arguing instead that the interest rate environment will allow them to earn like crazy.

I've heard this before, and my counter-argument is that Japan thought that too and they wound up with a bunch of zombified banks because of the lack of transparency and mark-to-market.

He claims also to have been "right" on his calls in the banking sector since last year; I will leave that to the reader's judgment, as I am disinclined to go back through ALL of his reports, but I did note while on the phone with him that in fact I expected the financials to get hammered last April and have been writing about it since.

Mr. Bove is also quite upset about all the "hate email" he's gotten. I, for my part, pointed out that but for two little words he wouldn't have gotten any of that hate email, that under the black letter of his firm's disclosure he had every obligation to slap a SELL rating on Bear on the 11th, and that he and only he was responsible for those two little words. Sorry Mr. Bove, but I don't see how you can avoid the responsibility for the very things you type.

I have been on the receiving end of "hate email" for more than 20 years, having run an Internet company before there was an Internet, never mind The Ticker. It comes with shooting your mouth off in public. If you don't like that, then I would recommend that you find a job that doesn't involve shooting your mouth off, and you won't have to face derision from people who think you're a fool.

Taking criticism, even vehement or foul criticism, is part of the job description if you're going to publish things. Google me sometime if you want to see what people have said about me over the years, but be prepared to sit and read for several months.

I also pointed out that should he be wrong on his latest call of a "generational buy" that he's likely to get much more hate email than he did from this one!

We shall see who's right about his latest call in the fullness of time.

In the meantime I maintain that this report will prove to be one of the poster children of "grade inflation" when the books are written about this mess in our markets. We had a big dose of this nonsense back in the 2000 tech wreck, and, despite the protests, I stand by my original position - the stock was not a "Market Perform" on March 11th, it was a SELL and, it appears, the black letter of Mr. Bove's research report along with the disclosure page make clear that is exactly what the stock's rating should have been.

First page is linked here.
Second page is linked here.

I hope you're having a nice Good Friday :)