The Market Ticker

So Dennis Kneale decides he's going to cite me this evening on his show, claiming that I make a "decent argument" but fail to present numbers.

Well Dennis, I don't think I should have to recite the last two+ years of numbers, nor the litany of new Fed Credit programs, nor the consumer credit numbers which were released today and which your network reported this afternoon, when you're the one claiming that "the recession is over" and argue against the credit recession position I put forward.

But since you didn't bother with these nasty things called "facts", I'll do it for you.

Here's the consumer credit numbers that your network talked about today when they were released (click for a full-size window):

Now I want you to pay particular attention to the current total leverage held by consumers - that is, the total amount of debt, excluding mortgages.

In 2004 consumers held $2.191 trillion.  At the peak, they held $2.582 trillion.  Today, less than three quarters later, they have cut back by an astounding $62 billion dollars in total, or a whole 2.36% - an absolutely inconsequential amount.

Consumers have de-leveraged?  Uh, no.

In the meantime the claim is made that financial institutions have taken down leverage.  Oh really?

Let's start with this (click for full screen)

That's total credit market instruments, all sectors, and it is still rising.  In fact, it is rising fast - very fast!  Currently at $52.9 trillion dollars, up from $50.7 1Q 2008, and up from $31.9 trillion in 2002.  (For those who argue this isn't "very fast", what was the GDP growth, all-in, during that same period?  Less than the 4% that credit expanded, right?  That's the problem, in a nutshell - its called exponents!)

The Bank of International Settlements (BIS) says that the total amount of outstanding derivatives has reached a nearly-incomprehensible $1.28 quadrillion dollars.  Oh, and this does not include derivative positions related to the commodity markets.  Further, the outstanding amount has increased at a double-digit percentage rate over the last 12 months.

European banks are still geared at 30, 40 even 50:1.  Go look up the leverage ratios for Deutche Bank, among others.  Make sure you're sitting down.  Our own banks have refused to take their SIV and other off-balance-sheet garbage back onto their balance sheets, and thus are intentionally understating their leverage ratios.  Fannie and Freddie are still geared at over 80:1, although under conservatorship.

Our banks have de-leveraged?  Uh, no.

Now, The Fed.  Its balance sheet has more than doubled and is now approaching $2 trillion dollars - a near-100% gain in the last 12 months.

The Fed has de-leveraged?  Uh, no.

Our government is next up.  Let's cite the NY Times:

Through April 30, the government has made commitments of about $12.2 trillion and spent $2.5 trillion.

Our total outstanding public debt is about $6 trillion, up by a full trillion in the last year, and we're on-plan to add $1.8 trillion to our public debt this fiscal year - that's a 30% increase Dennis.

Government has de-leveraged?  Uh, no.

All these facts have been reported on your network Dennis.  I shouldn't have to list any of them, as you should know all these facts - they're literally "in your face" every single day.

We are in a credit recession.  We cannot get out of the credit recession until the conditions that led to it no longer exist.  The conditions that led to it are too much debt and too much leverage, and yet the prescriptions of both the Bush and Obama administrations are to add even more debt and more leverage to the system, shifting bad debt around and stuffing it under the rug in an attempt to hide systemic insolvency, rather than force it into the open and demand that the excessive leverage and debt be either paid down or defaulted.

Consumers are in a mad dash to pay down debt rather than default where they are able, but as you can see they've only managed to get rid of $60 billion - that's the shift in the "savings rate" you're seeing.  As I've noted consumers are not saving, they're paying down debt - but at this rate it will take five or more years before consumers alone are sufficiently de-levered, and that will leave all of the nearly $14 trillion dollars taken on in additional leverage by our government to prop up failed institutions outstanding.

No Dennis, the recession is not over, and until our government stops propping up the liars and thieves, preventing the bad debt from being defaulted and removed from the system, any relief from this economic malaise will be fleeting at best.

There's the numbers behind my argument Dennis - and the proof.

You're wrong.

Something really ugly popped up on Daily Kos yesterday late in the afternoon.....

And soon-to-be-broke, it would appear.

One particular clown decided to try to "deconstruct" the last point in my attack on Dennis Kneale, who I called flatly full of used dog-food.  His "logo" includes the title of this entry as the "grab line", and (rather humorously, given the accuracy of his call) includes a picture of a carny fortune teller, complete with booth.

There were several problems with his attack, chief among them the "curve-fitting" he did by adding conditions that were never at issue originally, then claiming "success" trading the inverse of a signal that was never put forward as a signal by myself!

The problem with removing an argument from its context is that you reach bad conclusions, and relying on technical analysis alone is like trying to determine which direction you should walk from a windsock - its giving you a piece of information, but only one piece, and must be interpreted in context (like, for example, "which way is north"?)

What was the primary point in my Kneale hit-piece?  This:

Recessions cannot end until the conditions that caused the recession are removed from the economy.  This is elementary logic and obvious to anyone with an IQ larger than their shoe size.

For an inventory recession growth returns when enough capacity is destroyed through layoffs and inventory selloffs to bring capacity and demand back into balance.  Employers then hire new workers and the economy recovers.

For a credit recession, however, there is a much larger problem: The reason real interest rates went negative is that debt has a carrying cost and consumes free cash flow; so long as the debt taken on in the credit binge remains the cash flow impact also remains.

Default and bankruptcy clears excessive credit (debt) from the system - if it is allowed to occur.  But if it is not, then the bad debt remains on the balance sheets somewhere and the cash flow impact remains in the economy.  Employment remains weak, capital spending restart attempts falter as demand fails to return and credit quality continues to remain insufficient to support new credit demand.

Now here's the problem - the "windsock" provided by technical analysis is always right, but only in context.

Ever notice how patterns sometimes mean the opposite of what they look like to those who blindly look no further than the pattern itself? 

Technical analysis calls this a "pattern failure." 

Nonsense.

The pattern didn't fail - you read it wrong because you failed to properly consider the context.

The most stubborn of "analysts" will not only refuse to look at the context of an argument and pattern, they will stubbornly increase positions into a bad chart, thereby deepening (perhaps by a LOT!) their losses.

Woodshedder has done exactly that.  On June 30th, when I made my argument, the SPX closed at 919.  It has since lost nearly fifty handles, or five percent, and I have been short for the entirety of it.

Why?  Because I look at the context of a pattern, not just the pattern itself.  And the context of the rise in the market since mid-March has told me that there is no way that advance was sustainable, it was not the end of the recession and it was not the end of the Bear Market.

How do I know this?  Among other things I know it because the NYSE credit and margin debt table continues to show that during the advance margin balances have increased while credit balances have decreased.  This is backward, and tells me how the advance has been powered.

See, if I buy 1,000 shares of some stock on margin and it goes up in price, my credit balance increases and my margin debt decreases.  Why?  Because my equity improves in the position as the price goes up, and thus my margin debt goes down while the liquidation value rises.

This is the normal circumstance in any advancing market.  Yet it is exactly the opposite of what happened.

Why?

This advance has been powered by people doubling into the advance in a furious (and futile) attempt to regain losses from last fall, increasing their leverage as the market rose!  This means they not only poured their "winnings" back into larger positions but in fact increased their debt load to "double down" at an even more-furious rate!

This is not bull market behavior.  It is the mark of irrational and extremely dangerous gambling.  If you've ever seen a guy at the blackjack table in Vegas who triples his bet every time he wins (that is, he stacks the winnings back on the button and adds more to it) you've seen this behavior in a casino, and in virtually every instance a gambler who does this will go broke.

So where does this lead us to today?

We have invalidated the "alleged buy" from the so-called "Golden Cross", having closed the SPX under the 200MA.  Worse, we're now solidly below the "entry" propounded by that so-called "Golden Cross"; I hope you had a stop and got stopped out without (much) loss.  The question now is, "which way Mr. Magoo?"

That's simple: This was a bear market rally, and there is a high probability it is over.  The Bulls will not give up without an attempt at a fight, however, and nothing goes in a straight line.

I expect the market to trend generally downward until somewhere around the 14th (to perhaps a week later), making a short-to-intermediate bottom in the area of 844, 811, or in the extreme case, in the high 700s around 770.

Why those levels?  They're Fibonacci levels from the rally off 666, the time relationships from the top around 955 are right, and they also are areas with strong volumetric chart support.  It would also not surprise me if we try to "kiss back" the broken neckline in the Head and Shoulders pattern that was confirmed the other day before the full extent of that downward move expresses itself.  Finally, this move could come faster than anyone would imagine, as that NYSE Margin Debt can easily turn into a MARGIN CALL, and cascading margin calls is how you get the sort of damage we had last autumn.

COULD we stop here?  Yes.  It is possible, and if I see signs of short-term stabilization or reversal I will pocket my short-side profit and saunter off on my way.  But this is not the odds-on play.

This move down has already sucked in a lot of people and will probably continue to - those who will bet on a break of 666 - here and now.  A big part of why I got moderately short is that I recognize the potential for the unwind of that margin debt to get very disorderly, and if it does, I don't want to be out, as there will be little opportunity for an entry.

Beyond that, I do expect one more good thrust higher; unfortunately for The Bulls I do not expect the 950 level to fall.  Those who bought up there are going to be grasping for that "get me out even" one last time as the real ugly comes back this fall when it becomes apparent that the entire so-called 'green shoots' game was nothing other than smoke and mirrors, and the stock market's advance was driven by nothing more than a tawdry attempt to play with leverage once again.

This, my friends, is why those who worship at the unbridled altar of technical analysis without looking behind the patterns on the chart will often find themselves on the wrong side of the trade, and if they're stubborn about it, ruinously so.

As for Dennis Kneale, he's still incapable of admitting he was full of it, and yet nightly tries to attack those in the "alternative media".  He still hasn't responded to my rebuttal, nor do I expect him to respond to this one - putting me on the air opposite him would force his lack of intelligence and analysis out into the open where it would be instantly visible to all.  That just won't do when your job is to bamboozle the public into hitching their capital to a losing proposition.

I publish my thoughts daily (well, most days) while the market is open over on Tickerforum, with limited free access to all and full access available to Gold Donors, as well as putting together a nightly recap video.  Come on over, sign up, enjoy the free areas (the majority of the forum) and see the FAQ if you're interested in donating to the operation of the system (and the enhanced access it offers.)

Disclosure: Short the broad market (still), ~20% position

The banks just never do quit, do they?

July 8 (Bloomberg) -- Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.

Morgan Stanley is selling $87.1 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody’s Investors Service, according to marketing documents obtained by Bloomberg News. The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group Inc. and managed by Greywolf Capital Management LP, an investment firm based in Purchase, New York.

Let's translate this into english for the less-financially-literate.

We're going to take this trash that was originally rated "AAA" by all the major ratings agencies that we bought the rating from (and paid for it too - booya!), got downgraded, and cost investors millions, and wave our arms around.

Through the magic of re-securitization (while extracting a few more basis points in a second set of fees for ourselves!) we will make this Baa2 (nearly junk) debt back into pristine "AAA" credit once again, according to the bought-and-paid for (again) ratings agencies, and then we will sell it to the same suckers that got ripped off the first time!

The sad part is that they will probably find people who are dumb enough to get screwed not once, but twice, even though the bank has managed to extract a second set of fees from the original credit margin in the deal.

Back to basics folks - when a set of loans are made the true risk-adjusted return is a fixed amount.  Every person who touches the deal demands something for their trouble, as nobody works for free.

Therefore the more levels of indirection and complexity are layered on the lower the total return of the deal has to be, because the fees have to come out of the total income stream.

It cannot be any other way; you cannot create more value than was originally there (claims otherwise are equivalent to claiming to have discovered perpetual motion) and as such there is no possible way in aggregate for anyone except the bank that does the securitizing to benefit from securitization, and in fact everyone who owns that "stuff" is giving up some of what they could otherwise obtain by buying this crap.

P.T. Barnum was right.

So California is now issuing "registered warrants" - a fancy name for IOUs.

This is occurring as a consequence of the cash flow finally catching up with them, and it serves as a warning to not only other states but also to The Federal Government - you can only lie about how much money you really have for so long; eventually you will start bouncing checks!

Major banks have said they will "accept" them through Friday.  How much of this "deadline" is a pressure tactic to try to force the legislature to solve the budget problem is unknown, but this much is known about their "acceptance" - if you deposit one of these things it is a recourse deposit - that is, not only is it subject to holds but in addition if the state defaults on it the bank will come back at you for the full face value.

Is that possibility really the stuff of fancy?  No. 

The simple fact of the matter is that tax revenues have cratered as our economy "resets" to a more sustainable level.  Nowhere is this more evident than in California, where the idiocy parade has been in full swing for more than two decades.

In the early 1990s Telebit Corporation tried to hire me to come work for them out in Silly Valley.  They had what looked like a decent salary offer, but when adjusted for the cost of living over what I was spending in Chicago, it made absolutely no sense - even then housing was insanely expensive.

Of course their "carrot" was lots of stock options - the currency of the idiocy boom from the Tech Bubble, which was just getting going.  Thank God I had more common sense than stars in my eyes, and knew, even then and 20 years ago, how to run a P&L for my personal finances.  While there was always the chance that I might have jumped to this or that "hot deal" and wound up with "founders stock" in Google or something similar, for every person who managed to pull that off there are 10 who wound up broke.

The problems with California are illustrative of those facing The United States as a whole.  The state has spent like a drunken sailor, believing that the "good times" of 10, 20 even 30% annual housing appreciation would stoke consumerism and thus tax revenues.  This in turn led the state to gold-plate pension and employment benefits for its employees, including most particularly their various unions, where every bleat of "but the chiiiilllllllldddrrreeeeeennn" has been answered with showers of money - whether it be schools, medical care or a fancy new fire truck (or fire station!)

At the same time the largess was codified in the form of "sanctuary cities" where lawbreaking (in the form of illegal immigration) became formal public policy.  With the welcome mat out, they came in droves of course, and soaked up all the "free money."

Reality now bites back - there is no free money and there never was.  The supposed "appreciation" was false; it was nothing more than piling up debt upon debt, pretending that we had prosperity and rapidly growing revenues, when in fact we had borrowed it all.

The entire "foundation" under this so-called "prosperity" was nothing more than a hoax and a fraud!

So now California is literally stealing tax refunds - that is, over-payments, and issuing "IOUs", never mind that those funds are not theirs.  In any ordinary business such a game (while there was any cash available) would lead to the proprietor being locked up for theft-by-conversion.

In addition so-called "entitlement" payments to some are being made with these "IOUs", which are in fact nothing more than a promise to pay next Tuesday for a hamburger that is supposedly owed today. 

In truth there is no hamburger; the cow was slaughtered and eaten six months ago.  It has long since been "recycled" into fertilizer, yet the charade continues onward for another day, with the sheeple believing that somehow these pieces of worthless paper make it "all ok."

The banks, assuming they stick to their Friday deadline, understand this.  They're saying "uh, you know, come October those things might not actually BE good!"  That's a problem, you see, as someone's going to be stuck with the bill if that happens.

A "trading environment" has almost instantly sprung up for these things, including on eBAY and Craigslist, which has led to rumblings that the government may have petitioned the SEC to deem these things "securities."  Huh?  Securities?  Like hell; these are nothing more or less than a post-dated check, and a potentially-rubber one at that.  But this hasn't stopped the government from trying to make sure that you, the person owed, are the one stuck with the worthless toilet paper, has it?

Even worse is the fact that if you're a small business and are being "paid" with these things it is illegal for you to pay your employees with them yourself.  Oh no - Wage and Hour laws say you must pay your staff with actual money.  This is more than a small problem as you're being effectively forced to take on the credit risk of the state!

If you're a vendor to California you had better figure this one out and fast.  My view would be exactly as it as when I ran MCSNet in Chicago and the city thought it would play "I'll pay you later" with our invoices for internet service to the library system.  After several warnings I simply walked up to the terminal and typed:

$ disable account_tag = Chicago_Library

When the terminals in the libraries went dark there was an immediate reaction - and threats - from the City.  Too bad, said I, I don't get "forbearance" on my parking tickets!  Pay up or no service.  Period.

An hour later - literally - a city employee walked into our offices with a check for the full balance, and that problem never happened again.

Those of you who "serve" California need to take the same position - pay now, pay in cash, pay from now on with order or COD, or no more goods and services - period.  If you don't, you're running the risk of being the bag holder, and if it happens, don't say I didn't warn you.

Finally, if that's not bad enough, there are persistent rumors flying around that these "registered warrants" are being counterfeited.  Beware if you're one of those "check cashing" outfits out there in the state, or otherwise are considering accepting these things, notarized bill of sale or not.  If they're phony guess who's going to eat it?  Yep - that would be you.

It is time for both California and the other states (as well as our federal government) to cut the crap, admit the truth - that this so-called "prosperity" of the last 10 years was nothing more or less than a scam built upon leverage and lies, and cut budgets back to 1990 levels immediately.

The problem isn't that tax receipts are too low, it is that expectations are unreasonably high, the so-called "economic growth" was in fact false and fueled by fraud, and like it or not the economy is going to contract to a sustainable level, which is almost certainly somewhere around 30-40% smaller than it was in 2007/2008.

Yes, this means things will get worse - plenty worse - before they get better.  But there is no way out of this mess that avoids going through the center of it and recognizing the truth, whether we like it or not.

The longer we delay recognition and acceptance the worse the damage to our economy will be.

Choose California - and America.