The Market Ticker

Do we really need to dwell on how stupid people on Wall Street - and ordinary investors - are?

I think we do.

Thursday was a huge up day in the markets - the Dow was up more than 200, and the Russell breached a closing level that had not yet been seen during the rally off the January lows.

Significant moves.

Why?

• Retail sales didn't suck as badly as everyone expected (oh but suck they did, unless you were WalMart, which of course makes perfect sense - when you're damn near broke you buy from the cheapest place - bar none.)


• Bernanke started talking about a "stronger dollar." Not that anything that passes his lips should be taken for anything other than a bald-faced lie, given his behavior since August, and indeed, since early last year. I couldn't begin to count the lies at this point, going back to the "subprime won't effect the economy" mantra.


• Oil plunged as the dollar strengthened.

So what caused people to wake up Friday and hit the big red SELL button?

• Unemployment spiked 10% in a single month, the largest on record since statistics began being kept in 1948. Oh, you mean the economy really does suck? Gee, fancy that. And before you take off on the JPMorgan screed about it all being "teenagers looking for work", who spends 100% of their earnings? That would be teens, right? Perhaps some folks will finally look under the hood, find that insane "birth-death adjustment" to be the utter lie that it is, and decide they're not going to listen any more. Hope springs eternal.


• The prospect of Israel attacking Iran's nuclear facilities came back to the forefront. Gee, you think that after Imadinnerjacket says that Israel will "soon cease to exist" a few hundred times, then starts enriching Uranium, those folks within his "throw radius" with their crude missile technology might get nervous? This was news? Well, it shouldn't have been, but it sent oil up lock-limit briefly and to a new high. Oil has become both a currency and a global instability hedge - bad news - and this is entirely the fault of one Ben Bernanke. Make sure you send him your "thank you" card for what is now $4 and soon will be $5 or more gasoline.

What's astonishing here is that people bought into the crap just 24 hours earlier. But the real astonishment was how quickly they woke up.

Nobody with more than two firing neurons should have fallen for the original lie over the last couple of months, but when you have legions of cheerleaders such as Kudlow and the rest of the CNBC crowd playing "reporter", what do you expect?

As I noted Friday in The Ticker we have become a generation of idiots and we will run with the herd in any direction someone points and hollers, without a moment of critical thought being applied first.

This, unfortunately, leads directly to:

So before you go out and think "all is clear", you might instead want to glance upward and try to discern if you are in fact in the eye of a hurricane and about to meet the "back side" in more ways than one.

You want a bit of reality from Florida? Don't read Mike Morgan's entries in his blog. Here's the latest, entitled "Florida At The Precipice of Depression":

"I was going to call this "Banks March Us Into Depression," or maybe more fitting is . . . "Complete Collapse of US Banking System." Folks, that is what we are looking at. I don't see any way around it. What we're seeing here in Florida, is your crystal ball. And what happens here, is coming to a town near you . . . soon."

Of course you won't hear THAT on CNBC.

Mike is more pessimistic than I am, but not by much. Certainly, in his stomping ground, this is precisely what is coming. The only part he has wrong is scope - the regional and community banks that have funded the real estate boom (and guys, they're still building commercial and residential around here, believe it or not, in the Panhandle) are going to die. It is an unavoidable reality; you can't take 20, 30, 40% haircuts on mortgages and survive unless that part of your book is a minuscule part of the whole. The problem is that its not - with an average 7-year turnover in residential real estate, when you look back over the last seven years you find that about 30-50% of the "book" turned during the height of the boom years - which means that the real whack to value is going to be in the 10-25% area all-in on a gross basis.

This is enough to sink damn near anyone, in any business, simply because your overhead remains while your profits evaporate. Death in that scenario doesn't necessarily come fast, but it does come certain. But when you're a bank and geared from 10-12:1 (if you're not cheating with swaps and such) all the way to 40:1 (if you are, and most of them are) you're dead and gone with a 10% real loss against your credit book.

Apparently Gasbag (Gasparino) got pissed off at Naked Capitalism a few days ago - sufficiently angry with their calling of "BS" on the claim that Lehman was "all ok" to threaten them with litigation.

Well Charlie, here's my contribution to the pile-on fest: "Blow me."

Why do I feel this way about you? Because you among others "reported" based on an alleged internal document that you got your hands on.

Now it may be true that you came by that document through entirely legitimate means, but I wouldn't take the bet. If it was leaked to you, then the leaker violated his or her fiduciary and professional duty to the company. If it was intentionally leaked to the media by someone inside the firm with authorization of management then that's an SEC violation as well, and a serious one at that. If the document turns out to be "less than forthright" (and it well might) we'll be adding "compound interest" to those matters of "less than legitimate" dissemination.

Have you ever considered that you might be used by these firms for their own ends without a shred of actual fact behind any of what you "discover"?

How many times have we heard "rumors" that have proven to be patently untrue? Warren Buffett buying half the universe is the most obvious, but far from the only example.

You're welcome to claim that I'm "short Lehman" if you report on my blog - because I am. I hold a Bear Put Vertical on them at the present time, and in addition I'm short the S&P 500 as I write this, which (indirectly) makes me short the entire block of financials. I'm short for what I believe are very good reasons - 10Qs that don't match with the results presented during conference calls and earnings releases being just one of many.

The most damning reason to be short these firms, in my opinion, is how virtually every financial company has claimed (and your network along with others has dutifully "reported") "we don't need to raise capital", and then, sometimes within as little as 24 hours, they do.

Yet neither you or your media cronies spend any material amount of time raising hell about the fact that you were lied to just a few hours or days before!

Just how dumb do you think the public is Charlie?

My rule of thumb is this - as soon as I find out that a company is lying to me, I have a reason to be short their stock. It may not be a sufficient reason to actually short them, but its a valid reason to be short.

Speaking of Lehman, there were reports over the last week about them buying back their own stock to keep the price up. As I've repeatedly noted this is a suicidal action to take when the general trend is downward, because it screws your balance sheet twice - first, it removes cash from your hands (as you must pay the people you buy from) and second, it diminishes the value of the outstanding equity position (market cap) as you reduce the number of shares outstanding. While it looks neutral from a balance sheet perspective (you reduce both the numerator and denominator when you look at cash .vs. shares) it is in fact negative twice if the share price continues to decline, because you've overpaid for the shares.

An example will make this clear - let's say you have a $20 share price and 1,000 shares (t0 make the math simple.) Your "stock equity" (or market cap) is $20,000.

Now you buy back 500 of those shares from the market - you spend $10,000 of cash to support the stock price. You have reduced your cash position by $10,000 and your offsetting liability in the form of outstanding equity in the company by $10,000 - exactly equal, right? No harm, no foul. Or so you think.

But what happens if the stock price now decreases to $10? Your outstanding equity (market cap) is now $5,000. If you had not bought back the stock, you would have had double that amount, as the number of shares outstanding would have been twice as high. That sounds good - except for one small problem - you'd still have the other $10,000 in cash in the bank.

You just took a real $5,000 loss.

Down this rabbit hole can lie bankruptcy if you carry it too far. You cripple your balance sheet and outstanding equity doing this, and if your share price then declines and you are forced to issue more stock the amount of dilution your shareholders experience radically increases. In effect, the further decrease in your stock becomes an actual loss to the firm (you bought back the shares at $20 but they're now worth $10) and your capital raise to replace the cash you foolishly spent on overpriced stock causes further share price declines. This is precisely how many financial institutions killed themselves during the 1930s - the initial buybacks were cheered by investors, but it turned out to be a self-inflicted gunshot wound to the head over time.

Now here's the cute part - look at this chart and tell me what you think was going on Friday:



For the peanut gallery, firms are prohibited from buying back their own stock (trading for their own account) in the last half-hour of the day. It would certainly appear that sellers front-ran that by about 30 minutes, overwhelming the support, and then continued to really press home their advantage going into the bell, no?

Sure looks that way to me... but what do I know. I'm just a dumb hick investor.

Never mind that this morning Lehman announced a monster loss and $6b capital raise through dilutive offerings of both common and preferred stock.

Uh, didn't the company just buy back some $500 million worth of common stock to prop up the price, and now has to re-issue it?

Why would anyone buy into this garbage? 8.75% coupons on the preferred? Are you kidding me? After all the pontification from the rumormongers (aided by the media) that Lehman was had "excellent" liquidity and a "great" capital position, they announce a monster loss and then on top of it they dilute the hell out of their shareholders?

So Sir Gasbag - do you feel used yet? How's that "internal memo" look now?

How can any investor believe anything that comes out of these investment banks? The "kitchen sink" talk was out yet again - how many times can you use that tired metaphor? We're now down to the kitchen sink, garbage disposal and all the copper plumbing attached to it, and it sure looks like we're not yet done.

How can you do business with these institutions? Counterparty on your deal? Why? There has been zero truth in any of what's been going on here for months and I see no reason to believe that this will or has changed. Why should anyone believe any of it? And more to the point, if you're willing to say this sort of crap for months and then be proven wrong, what sort of risk does someone take doing business with you?

As long as investors eat the crap served up by these institutions it will continue. You'd think that there would be a revolt by now, nearly a year into the supposed "kitchen sink quarters", by investors - that people would simply refuse to play any more and sell their stock, giving up on management and declaring them liars. So far it hasn't happened, but the knife-catchers, including sovereign wealth funds who bought into this crap early, have eaten horiffic losses.

I will simply note - sometimes the shorts are right, and for every hour you listen to CNBC and their crooners on how its a "generational buying opportunity" in banks your IQ will drop by 5 points.

Oh, and it is possible for IQs to go negative.

And I do remember Lehman's Fuld saying he was going to skull**** the shorts.

How'd that work out Fuld?

Speaking of banks and insanity, I want to talk about the Bloomberg piece on Bank of America:

"The 65-year-old real estate investor from Toms River, New Jersey, said he hasn't had access to cash the bank invested for him in auction-rate preferred shares ever since the market seized up in mid-February. Even when Biddar agreed to sell $100,000 worth of the securities to Fieldstone Capital Group, Charlotte, North Carolina-based Bank of America wouldn't release the bonds, saying the transaction wasn't in his interest, he said."

Huh? I'd love to see this one go to court.

Unless there is something very different about this circumstance than the ordinary case of a bank or brokerage, the firm is a custodian of your assets, not the owner of same. If you direct them to sell to a willing buyer, they have no option but to proceed as you directed. To issue you a warning that "this isn't in your interest" is all well and good, but if you insist, that's that.

There is an allegation in that article that the reason for these refusals is in fact an attempt to prevent damages from being established - that is, determining what sort of "mark down" exists on these supposedly "safe as cash" instruments. If so, that's double-damning in terms of the danger that these institutions are taking, and with that allegation coming from the office of the Massachusetts Secretary of State, you better listen up.

But that's not all! These banks are also "offering" to allow people to borrow against these securities at interest rates higher than the coupon they're earning.

Huh?

I may not be the brightest bulb in the drawer but this sounds awfully illegal. You lock up someone's securities and refuse to allow them to sell even though they have a willing buyer, and then you "offer" to loan them money at a negative spread (thereby creating a net debit in their account) instead?

No wonder people are suing. I sure would be if I was trapped like this.

On the political front, Feinstein is predicting an Obama victory claiming that he will "win over Hillary supporters." For my part I think she got her brains from a CrackerJack box as the "surprise toy"; there's nothing difficult to figure out here. You could run Mickey Mouse opposite McCain and he'd win in a landslide, for the simple reason that McCain hasn't figured out yet that "its the economy stupid" and he is doing exactly nothing in the policy initiative area to address the fraud that permeated the Bush Years.

This election will not be about the war, global warming or any such claptrap. It will be about ramping unemployment, huge increases in energy costs and shrinking American wallets, all of which are happening right here and now due to the fraud and theft of the previous 16 years that has remained unaddressed. Clinton started it with destroying the last pieces of Glass-Steagall and Bush continued it through his administration stomping all over state regulation of mortgage brokers.

Before you go congratulate Chris Dodd for holding up Fed appointments because, as he said, they missed the housing bubble, you might ask Mr. Dodd when he intends to take personal responsibility for missing the bad effects of repealing Glass-Steagall, which happened through Congressional action, not to mention the other acts of loosening regulatory restraints that passed through his committee. Perhaps Mr. Dodd would like to elucidate how Fannie and Freddie should be able to maintain hedge-fund-like leverage ratios two years after Democrats regained control and chairmanship of the committees in Congress, along with bills that he supported that recently expanded that leverage rather than forcing it to contract?

Naw, that would mean taking responsibility for the mess that he was involved in!

Never happen.

Ambrose Evans-Pritchard is once again whining about how horrible it is that the ECB is talking rate hikes:

""There is now the distinct possibility of a simultaneous sell-off in global bonds, equities and commodities," said Jonathan Wilmot from Credit Suisse.

ECB chief Jean-Claude Trichet has "signalled" a rate rise in July to combat 3.6pc inflation, much to the fury of Paris, Madrid, Rome, Lisbon and Dublin. It is a perilous path for Europe's monetary union."

Oh please. It is about damn time we saw exactly that.

We are here because of the stupifying idiocy of The Fed, The Bank of England and The ECB. All three have fiddled and played "Alphabet Soup" after being responsible for creating this mess in the first place through intentional blindness to regulatory debauchery.

Had we actually seen margin supervision in the swap world, there would be no crisis in the monolines or mortgage markets, because these wraps could not have been written.

Without those wraps there would have been no insane burst of securitization of mortgages written to hairdressers that make $8/hour on $500,000 houses, and that $200,000 house would not have zoomed northward in price to $500,000 in the first place.

But no!

Regulators, including but not limited to The Fed, the SEC, OTS and OCC allowed hedge funds and monoline companies to write what amount to both insurance and speculative contracts without proving they can pay when the bets go bad, and then allowed banks, pension funds and others to claim that their investments were "AAA" based on the existence of these contracts.

This is the height of lunacy but it is exactly what all of these central bankers and regulatory bodies have done over the last decade.

Now the check is on the table for our foolishness and it must be paid.

Its about damn time, and if the people get pissed enough to do something about it, they should direct their anger at their elected representatives and central bankers.

That is where responsibility lies.

Oh, and to add to my screed about our "education system", you'll like this one - this time aimed at one of our "most esteemed" higher education institutions:

"June 8 (Bloomberg) -- Harvard Medical School doctors who helped pioneer the use of psychiatric drugs in children violated U.S. government and school rules by failing to properly disclose at least $3.2 million from drugmakers led by Johnson & Johnson and Eli Lilly & Co., a U.S. senator said. "

Nothing like pumping our kids full of psychiatric medications while receiving millions of dollars from the companies that make them, endorsing their use, and failing to disclose that you were "paid" in the process, right?

I have long been a critic of these drugs. Specifically, I am appalled at the use of psychotropic medications to treat "ADD" and "ADHD", and am an outspoken critic of same. My late nephew was medicated with these substances (he passed this winter from Leukemia, being barely old enough to drink at the time) so I have experience with them within my family.

It is my considered opinion that most (but not all) kids who are allegedly "ADD" and "ADHD" are more properly classified as being "a boy", and that nine times out of ten the real affliction is the home and school environments in which they are found are not conducive to their ability to learn - an ability that often is "skewed" violently towards the "traditional" view of "now.... lets... make.... it... real.... slow.... so.... nobody.... is.... disadvantaged...."

Most of these kids are insanely intelligent, and when held back like this they are literally bored to tears. That alone is enough but many of them also lack a thing called a "father" who is either present at all or is an effective force in their life. Put that together and you have one bored and often pissed-off kid - are we surprised that we get a bad outcome from this combination?

I sure as hell am not.

I will note for the peanut gallery that virtually all of the people who we can credit with things like the electric light bulb and phonograph (Edison), relativity (Einstein) and similar accomplishments would be subject to being drugged under today's "diagnostics."

EVERY LAST ONE OF THESE PEOPLE TO WHICH WE OWE OUR MODERN TECHNOLOGICAL SOCIETY would have been dumbed down under today's regime of "if you can't keep up with them make them as stupid as you are."

Edison managed to survive just three months of formal schooling yet went on to hold over 1,000 patents and form General Electric, one of the powerhouse corporations of our time.

It is much easier to drug a kid that has an extremely active mind instead of dealing with the reality of the situation both at home and in the schools (that is, he's almost certainly smarter than his teachers, and is bored stiff) just as it is easier to take a pill for diabetes when you're 200lbs overweight instead of getting off your fat ass, stop stuffing your pie hole and going to the gym.

We demand the "easy" solution to everything in our society instead of looking at the reality of a situation. How in the hell did we survive 200 years without psychotropic medications for our children? The paddle in the Principal's Office was called "The Board of Education" when I was growing up, and if it wasn't in the holder when you got sent there, you knew what was coming and you were gonna have trouble sitting down for a while.

At the same time the kid who truly is a "bright light" is intentionally dimmed so that his classmates don't feel "inferior".

Or is it really the teacher or, God forbid, school administrators, who are the ones that are afraid of being shown to be mentally inferior to those students?

So today stuffing chemical relatives of amphetamines in our kids is considered "appropriate"; it is in fact so "appropriate" that these are now some of the favored drugs of abuse among our middle and high school crowd and there is a hell of a black market for them in most school districts - whether they admit it or not.

Its a great idea to zombify some of our brightest kids, right? Isn't it great to make it easier for our teachers and stoke their need to feel "superior" - and "demand of respect"?

This way they don't have to actually engage their students in their studies of course - if Johnny is having problems it must be him - it can't be that the Teacher is playing "Recital from Harcourt, Brace and Wood" and he's literally falling asleep in class due to boredom!

I'm absolutely certain that given my history in the "public stupidification system" that I would be drugged within an inch of my life were I growing up now, and as a consequence I'm willing to bet that none of the things I accomplished as an adult would have come to pass.

And I've got nowhere the mental power of someone like Edison, Fermi or Einstein.

If we now have evidence that the studies that showed "good outcomes" from these drugs are tainted by conflict of interest, I'm going to be even more pissed off than I already am on this subject, and my advocacy in this matter will have to be stepped up a few dozen notches.

Maybe some of these kids who were involuntarily medicated by their parents and physicians will find a means to sue and bankrupt everyone involved, including the drug companies, their parents, schools and administrators who for years acted as de-facto "diagnosticians" for these "disorders." (To be fair, this has - mostly - stopped at this point, frequently as the result of state law, passed over the objection of school boards.)

More to the point, how many Edison's and Einstein's have we intentionally converted to mundane, ordinary people through a drug-induced stupor administered as a direct consequence of our fear of those who have more brainpower and are willing to display and use it?

And should we allow, as a society, this sort of nonsense, all engaged in for profit and personal aggrandizement, to go on at all?

Now there's something to think about.