Market Ticker

How Freedom Dies..... To Thunderous Applause...

noreply@blogger.com (Genesis) — Mon, 12 May 2008 17:01:00 +0000

Remember that line and where it comes from?

Good, because it took less than twenty four hours from the time I posted my last ticker pointing out the threat before enough flesh went on a "modest proposal" that would inevitably and immediately lead directly down that path.

I am going to take specific aim at one particular line of nonsense today that has been trotted out on the forum and elsewhere, and its proposed "solution" - that is, that "all fiat monetary systems collapse when the debt service amount exceeds the money in circulation."

This of course implies that we are irrevocably going to collapse, as there is $800 billion in currency in circulation and far more than that in debt service due, which then serves as the basis for a "solution."

The claim is flat out false.

A simple example will make clear what the truth is:

I loan you $100. You agree to pay me 6% interest, or $6, for one year.

To pay the bill you can either (1) produce $6 worth of "something" valuable (e.g. corn, etc) or you can tap some other stored value you own (e.g. a bushel of wheat you already have in your silo.)

So long as your assets plus production are not exceeded by your debt, in both principal and interest amount, you are not insolvent.

That's clear, right?

Ok, so we have a lot of debt.

But what is the asset base? It is everything that is owned and of value in the United States; that is, all the houses, commercial buildings, inventory, machinery, cars, trucks, improvements to the land such as utilities, roads, etc.

This wealth is vast and radically exceeds our debt.

So therefore, collapse is not inevitable. Period.

This does not mean that there will not be much pain and austerity necessary! Quite to the contrary - as soon as you have to start eating into assets to meet both your debt service and "operating costs" (e.g. your food, gas for the car, heating the house, etc) combined you are in serious trouble and the austerity involved will be extreme, as will your personal degree of pain!

In fact, America has run a "negative amortization mortgage" on its national debt since President Nixon! No President since - including Clinton - has run an actual surplus. (Clinton stole the Social Security receipts to "balance" his budget, as others have before and since; a claim of "surplus" is fraudulent misrepresentation.)

That negative amortization balance has grown to more than $9 trillion and the growth in balance has been tolerated by foreign investors because they have needed a way to "sterilize" the funds that come back into their countries when we buy the jeans they make for 25 cents/day, lest it fuel insane price inflation and ultimately civil unrest.

But now our economy is slowing and the pain has to be taken.

However, this does not, individually or collectively, mean that everyone, including the government, will go bankrupt.

Now let's talk about the dangerous part of this circumstance and how we can find ourselves facing Adolph Part II, another Benito, or something similar.

There are people running around talking about ditching our current monetary system and replacing it with a non-interest-charged, non-debt-bearing currency that is controlled and issued by the United States Government directly. This garbage has been "whispered" on the forum for a while but it finally got fleshed out in the last couple of days to a point that I was able to close the trap door behind the promoters as the foot finally went in the mouth.

Think folks - this inherently means that only the government would be able to make loans.

I guarantee you that if you're sitting there with a 30% credit card interest payment, this sounds real good to you, doesn't it? If you are sitting on a mortgage reset that is about to ruin your cash flow and force you into bankruptcy, this sounds like The Holy Grail!

Did you read the previous ticker about false Gods and people offering "solutions"?

Well go back and read it, then come back here and read the rest of this.

Let's explore what happens under such a model.

All existing "Federal Reserve Notes" (and money representing them digitally) is "replaced" with "Congressional Dollars."

Ok. If you have assets denominated in dollars, you still have them. Only "the pigmen" get screwed, right?

Well, so it appears.

But that's not the truth.

One day after this is done, you ring up the government loan office (GLO!) and ask for a loan. See, you'd like to offer "reproductive health services" in your community. Of course some women will come in there who are pregnant and don't want to be.

GLO tells you to go to hell (rather directly), stating that this is contrary to public policy, and thus, you can't have a construction loan. Your clinic does not get built.

You wish to work on stem cells. You get told the same thing.

You wish to build a church. You're refused the loan because of separation of Church and State.

You are running a business and need a revolving short-term line to cover receivables so you can make payroll. A new Congress is elected and your line of business is considered "evil" by the new Congress; your loan is denied. You are instantaneously put out of business.

You run a car factory. The government decides that you need to pay your union workers 10% more tomorrow. If you refuse, your operating line of credit "disappears."

You are a hospital. You can't possibly manage to treat all the illegal immigrants for everything they show up with. You're reasonably sure that the balance of payments will fix itself in a few years. You want to issue a bond to fund your operations in the private markets but can't, as that's illegal. You are told to either treat everyone, now, or all credit will be rescinded. You go bankrupt either way, and have no means of managing your exposure or selling off private debt to finance your operations for a while.

Now admittedly, some of these are rather extreme cases.

But do you believe that politics will not become the means by which funds are rationed if we were to go to such a system?

Now go back and read that previous ticker once again.

This is the precise sort of nonsense that I was warning about and it did not take long at all for it to appear. There will be many more similar entreaties to "fix" what has gone wrong with our lending, monetary and banking systems.

They all must be examined with an extraordinarily skeptical eye, with a key point being whether someone who is aggrieved can circumvent the roadblocks they attempt to put up.

If the answer is no, then the absolute control they vest is the path to immediate loss of freedom, and the person or persons promulgating these ideas must not be allowed to proceed, irrespective of how good it sounds when you first hear it.

There is an ulterior motive and the bad consequences are not theoretical, they are immediate and intentional!

Note that when I challenged the "people" running this on the forum and asked how they derived this as a "solution" or a "better way" and who else might be advocating this and/or who put the bug in their ear on this being a good idea I got in reply stony silence and excuses instead of answers.

Do not for a second think that I am in some way defending what has gone on for the last 30 years. I am most certainly not, and if you have read any of the previous tickers you know this to be true.

I am here to warn you - these sort of "false Gods" always - and I do mean always - appear in times of great social and financial stress. They always promise a "better way", but they never point out the "compromises".

Let me be clear - there is 5,000 years of human history that says that one does not go from a representative republic as a government form to something "more free" or "better" for the people.

Never in 5,000 years of recorded history has it worked that way.

NEVER.

If and when a democratic (by representation) form of government fails the nation involved always goes through fascism and dictatorship and only once the people are in bondage is freedom again achieved.

You cannot circumvent the steps in the center and in passage through those forms of government all that we currently enjoy and treasure as Americans will be lost!

We have two choices - we can either fix what is wrong in this nation but not give anyone the ability to destroy it, or we will with certainty pass through those other forms of government with disastrous consequences for freedom and individual liberty.

Do not be fooled, for down the promised primrose path is how freedom dies - to thunderous applause.

Desperate Men, Desperate Measures

noreply@blogger.com (Genesis) — Sun, 11 May 2008 19:59:00 +0000

Last February, when the Asian markets collapsed overnight and led to a 500 point loss in the Dow Jones, we heard that there was a minor "subprime" problem, but it would not spread to housing in general, or to the broader economy.

Through the spring and summer months, we were told that the economy was doing fine and housing was going to recover in the back months of the year.

There was no risk to the markets or the broader economy.

Bear Stearns disclosed punishing losses in two hedge funds, wiping out their investors assets in those funds. The market began a precipitous decline.

The Federal Reserve, facing a potential waterfall collapse in the stock market, launched a "surprise" cut in the discount rate on the morning of options expiration, trapping thousands of index option owners - and arresting what was destined to be a certain plunge.

But they told us there was no risk to the markets or the broader economy.

Into the fall, we continued to hear that the housing market was getting worse - much worse - and dozens of lenders folded their tents, going out of business wholesale. Countrywide Financial's stock slid day after day, and the stock market underwent a sickening series of lurches higher and lower. Oil climbed higher as the dollar went lower.

But they told us there was no risk to the markets or the broader economy.

As the holidays approached the markets rallied as is usual, but it was more tepid than we had seen in past years. Evidence of consumer slowdown was all around us, but the cheery-eyed commentators on national television continued to predict good times ahead. Oil continued its climb, while the dollar continued to tank.

But they told us there was no risk to the markets or the broader economy.

On December 26th the markets began a precipitous slide, with daily news items of monoline insurers potentially going bust, lenders having billions of dollars of exposure to bad mortgage and other paper, and billions of dollars of losses related to complex instruments like CDOs were reported. The DOW lost nearly 2,000 points in the space of one month, or almost 100 points a trading day.

But they told us there was no risk to the markets or the broader economy.

Then Bear Stearns blew up and The Fed "rescued" them, forcing the firm into the hands of Jamie Dimon and JP Morgan, all at our (the taxpayer's) expense.

But they told us there was no risk to the markets or the broader economy.

Since then we have seen a ferocious rally in the markets. Is it over?

Let me point out a few things that you, as Americans, need to be aware of.

First is the general principle that desperate men will take desperate measures.

Look around you. You may know someone who was a "home flipper" or "speculator" in the real estate market, and if you don't, you certainly can find the stories in the media. As these people got closer and closer to imploding financially, they took more and more risk - levered up higher and higher in a desperate attempt to pull the one ace remaining in the deck to avoid the certainty of bankruptcy and ruin.

We've all seen the stories of people who take their last $1,000 and go to Vegas, betting it all on "00". Or the lady who, facing foreclosure, buys $100 worth of Powerball tickets - with her last $100.

Or how about John DeLorean, who set up an "upstart" car factory and got into trouble? His version of "desperation" turned to putting up $1.8 million to bring 100 kilos of cocaine into the United States, a deal that promised (had he not been caught!) $24 million in profits - and the salvation of his company. He, of course, got caught, although he was later acquitted.

But it seems that wasn't the limit of his desperation. He was indicted and charged with income tax evasion, mail fraud and wire fraud and, while not convicted, was ordered to reimburse investors to the tune of $9 million. In 1995 he was hit with unpaid legal fees of $10.3 million, and in 1998 a New York Jury ruled that DeLorean's accounting firm owed DMC investors $46 million, plus $65 million in interest.

Funny how that $1.8 million "mistake" multiplied itself nearly 50-fold as desperation festered and, ultimately, consumed John DeLorean.

Why do I recount all of this, and point it out?

Because we, as Americans, face a critical choice at this juncture.

We know that there is much desperation out in the markets today.

You see it in your daily life.

The housing speculators and families facing foreclosure; those who took on more leverage than they should have, those who lied outright about their incomes, or those who in some other way were less than honest about their financial and personal circumstances.

The "financial media" continues to pound the table for you to "buy" - but why? Do they have your best interests at heart? Or do they know that should you not have a reason to buy, you also don't have a reason to watch, and will turn off the Boob Tube? Who runs advertising on Bubble TV?

Bank CEOs confidently claim they do not need more capital, and then, within days, issue more stock, more debt, more "convertibles" and other financing instruments to prop up their balance sheets - in short, doing exactly what they said they did not need to do.

Corporations, such as Linens-N-Things, hang on by a thread, negotiating furiously trying to stave off bankruptcy. Some succeed, some fail. Some, like DeLorean, might even cross a line or two.

Hedge Funds, facing margin calls, lock themselves down, refusing withdrawals from investors in a desperate attempt to prevent liquidation.

Hank Greenberg as just one example has filed a lawsuit against AIG, accusing the firm of intentionally hiding losses. Their claim is that "if they knew they would have sold their shares" ahead of the bad news that tanked the stock. Desperate?

Now sit back and contemplate this.

If we, as citizens of the United States, allow our Federal Government in any way, shape or form to bail out the people who are now desperate for a solution to their problems, then The Federal Government will have transferred that desperation onto itself.

Consider that we already know that Hank Paulson, Ben Bernanke, and others in the government are well aware of the risks in the broader economy. The FDIC has been hiring and "calling back" bank examiners like madmen. Chris Cox at the SEC is now making noises about forcing investment banks to disclose to investors what they hold, and initiating "probes" into various firm's exposures in "subprime."

Treasury published a damning report last week pointing out that we are - right here and now - going to run a $500 billion deficit this fiscal year.

We know that people like Bernanke and Paulson are and have been lying about the risks to our financial system and our economy. Paulson often stutters when on TV at a rate that would make a woodpecker bow in awe.

They are desperate men, and their desperation arises just from observing what may happen in the private portion of the economy.

We know that more than half of all "ALT-A" loans had some element of fraud in the claimed "income" of the borrower, that fraudulent appraisals were as common as fire ants in Florida, and that this bad paper is spread through the system.

We know that Fannie Mae is "offering" to refinance underwater mortgages - where the owner has negative equity. Why would Fannie do such a foolish thing? Because in many states a purchase-money first mortgage is "no recourse", but all refinances are recourse loans. They won't tell you this up front, but if you refinance such a mortgage you throw away all protection for your future earnings power in that they can (and then will!) come after you if your attempt to keep your home fails in the future.

These are desperate men and are taking desperate measures, refinancing unsound loans on their books in a crass attempt to get borrowers to sign away their legal protections against wage garnishment!

If we allow the Federal Government to proceed with their mission of bailing out the private economy then we run a very real risk that Washington DC becomes the "desperate man" to top all others, as foreigners increasingly shun our US debt and pull away from what they correctly perceive to be a Ponzi Scheme that is destined to end very badly.

The Federal Government spent $430 billion on interest in 2007 and is projected to spend $500 billion or more in 2008. To put this in perspective, in 2000 the government's interest expense was $361 billion, and in 1990 it crossed $250 billion for the first time. In December of 2007 alone it spent more than $100 billion - on interest payments.

It is absolutely critical for the fiscal stability of the United States that the government be able to finance its debt on attractive terms - meaning that government debt costs must come down, not go up.

Should the government take on an attempt to "bail out" people in the markets there is a very real risk that a rapid and uncontrollable rise in the government's funding costs will result.

There are already signs in the market that this shift may be starting, with Treasury Auctions finding decreasing bid-to-cover ratios and foreign ("indirect") interest over the last six months, and rumblings of organized protest (e.g. a "national moratorium" on paying mortgages) that are likely to take root should further injustices be heaped on the 80% of America that neither profited from or committed fraud during the bubble years.

As government debt costs rise increasing desperation will take hold and basic social programs - Medicare, Social Security, Food Stamps and others - will be unable to be funded.

In the end someone not-yet-known will inevitably appear and proclaim that they have the answer to end all the pain.

But, they will announce, there will be a necessary compromise.

The "compromise" is likely to be our American way of life.

History is replete with examples. Wiemar Germany gave birth to a politician who claimed to have a solution for all that ailed Germany. He had one all right - "the final solution."

How about Benito Mussolini? He too was hailed as a hero of "the people." After being invited to form a government and placed in power by Parliament, he altered the electoral process and imposed strict censorship. The rest is history.

Now of course nobody can be certain that such a negative outcome is in store.

But desperate men turn to desperate measures; should we, as Americans, take the risk that our government becomes desperate?

What is the alternative?

We must choose, as Americans, to "circle the wagons" around our government when it comes to this economic crisis.

We must make clear to our Congressmen and women, daily if necessary, that they must not commit any public funds, in any way, shape or form, to bailing out any part of the private and commercial credit markets.

We must stop the Housing Bill that was reported out of the House.

We must not have any more "stimulus" bills.

We must not allow The Fed to commit one more dollar to bailing out financial institutions, and in fact we must insist that they withdraw the "TAF", the "TSLF" and other similar "alphabet soup" machinations, forcing banks to hold real reserves, recognize losses, and allow interest rates for private debt to float to wherever they are most appropriate, based solely on perception of risk.

We must insist that financial firms report all Level 3 assets, what they are, and how they are valued, without exception.

If that results in some firms being declared insolvent, then so be it.

We must make clear our demand that fraud be prosecuted vigorously, irrespective of how much money the fraud-committing party might have "given" to political action committees.

In short, the federal government must insure that it too does not become a "desperate man", and therefore compelled to search for desperate measures - even as portions of the private economy are and do.

We must pester our Representatives and Senators daily until we have confirmation in the form of bills and votes, not platitudes and barely-on-topic form letters, that they not only heard us, but that America is and shall steer this course.

The choice is ours.

We can insist that the Government "ring fence" itself, refusing to bail out any element of the housing market or the knock-on effects in the greater economy. Those firms, including banks, that are "bust" will go under. Homeowners will lose homes they cannot afford. Businesses will see spending contract and, should they be unable to meet their obligations, they will fail. Private borrowing costs will rise and may rise dramatically, especially for weaker firms.

But our American way of life will go on.

The government will remain a safe place to invest one's money, and the system, as a whole, will survive.

The Federal Government will be able to finance its operating needs.

Or, we can either insist The Government step in and provide bailouts or remain silent while others advocate for that option.

We can transfer the desperation of the American Speculator, whether they be a house flipper, investment banker or corporate executive, many of whom made millions from fraud and deception and are now facing "tough times", to The Federal Government.

Down the latter road lies the very real possibility of a credit market dislocation that will cut off the government's ability to fund the programs that we, as citizens, find essential.

This will, in turn, lead to calls for "a solution."

At that point, someone yet unknown will emerge with the promise to "fix it all."

History says this is inevitably what happens when desperation replaces optimism and hope.

Is this a risk we are willing to take in order to provide "help" to those who made millions during the preceding years by intentionally abusing our trust and ripping us off?

I say the answer to that must be "No", and that we, as Americans, must rise now and give our Representatives and Senators one simple message:

"We will not tolerate one dime of public money being spent to 'bail out' the housing crisis, irrespective of who gets the bailout or why. This is a private market matter and, other than prosecuting wrongdoers, of which they are many, the government must stand back and stand tall as the safe and secure place where money can be invested."

The future is in our hands, and time is running short to make our decision and act.

Those howling for bailouts have made their demands known.

What is your response?

Fried Friday

noreply@blogger.com (Genesis) — Fri, 09 May 2008 12:22:00 +0000

Well, well, well.

Yesterday the SEC says that banks will have to disclose that which they'd rather not tell us (what they have and how they priced it) in the United States.

Now, its the Japanese!

"Japan's Financial Services Agency has called on major banks to disclose details of assets and losses related to subprime mortgages before they announce full-year earnings, Nikkei English News reported, without saying where it got the information."

Oh so now Japan gets it? Gee, how long did it take? 20 years?

I do have to give the Japanese credit - they listened to Einstein. You see, they tried "hide the truth" 20 years ago, and it resulted in a "lost decade" in their economy. The Nikkei has never seen the levels it once traded at, their economy has been moribund for over a decade and their currency became the funding source for a vast arbitrage play instead of a medium of exchange.

All of this adds up to raw mockery of a nation that just a few years prior was the pride of Asia.

Of course Bernanke is hellbent and determined to try a re-run of the Japanese experiment, as he has demonstrated exactly zero propensity to force banks to tell the truth, and neither has Congress. That Chris Cox and the SEC have stepped up and decided to make a run at the truth is to be lauded, but don't rest on your laurels America - there are still 535 clowns in Washington DC collecting campaign contributions and one Fed Chairman who are pushing as hard as possible in the opposite direction.

The "alphabet soup" of various funding facilities that require zero disclosure of who's tapping those "sources" along with what they're putting up and how its being valued is all the evidence you need. If we lived in a nation where honest accounting and truth was paramount every security put forward to The Fed for credit would be identified by CUSIP, its source and composition published, its valuation by The Fed made public and the organization tendering it named. Thus we would see what The Fed thinks of it on a 28-day basis in terms of "value", which would be a tremendous improvement in disclosure.

I fully expect both our politicians and The Fed to continue to "hide the sausage" right into a re-run of the 1930s, with the truth being forced out into the bright light of the sun only when these institutions fail outright.

Oil is basically $125 now, and yet people keep insisting that the markets won't care - and it won't impact consumer spending. Pull the other one. The recent increase in fuel prices will take at least 1 and probably closer to 2% off consumer spending on discretionary items, which is a huge haircut no matter how you slice it. If oil keeps going - and until and unless we suffer a fairly-severe recession it will - the bite will continue to get worse and worse.

This is part and parcel of our insistence on "not in my back yard" with regards to oil discovery. Yes, I know, its all Cheney's fault.

Uh, no, its our fault. We think we can avoid the nasty, smelly business of oil exploration and refining, but we want to drive our SUVs, boats, and RVs. We want the ability to keep our homes at 75F in the winter and summer months, without regard to the fact that we expend 20-30% more energy doing so than if we kept the house at 68F in the winter and 80F in the summer.

All this is fine in isolation, but see, we didn't do that either. We exported our production (to "save money") to China and India, and they, of course, saw all of those nice DVD players and wanted one. Oh, and a car - instead of a mule, bicycle, or pair of feet.

This of course has driven up their energy consumption but heh, we still won't go get our oil!

The basics of supply and demand say that the price will rise as demand does, and gee, guess what - it has. Now add to that speculative "hot money" and $200 billion in "excess liquidity" courtesy of our Federal Reserve, injected into the system in a vain attempt to drive down the trading rate of short-term commercial credit and prevent a recession, and you have just established a feedback loop that drives the price of energy higher - which of course threatens a deeper recession. The more you flood the system, the higher prices are driven, and the greater the amount of money removed from discretionary spending - that is, the greater the recessionary pressure.

Thanks Ben.

Citibank will identify up to $400 billion in assets it may sell off in an attempt to de-leverage its balance sheet. This is amazing stuff, if you think about it - yet another bank that's "ok" so it says, then out they come (once again) with major restructuring and balance-sheet shrinkage.

For how long will investors listen to these clowns when every one of them claims they're "just fine" in terms of their balance sheet and liquidity position, and then nearly the next day announce yet more job cuts, balance sheet shrinkage or yet another equity or debt offering? I simply cannot get my arms around why anyone would want to own these stocks, yet these guys, just like Fannie and Freddie, seem to have no problem finding suckers, er, "investors" to take on yet more of their debt. Amazing.

AIG reported a disaster for a quarter, losing double what was expected, or nearly $8 billion net, with losses in its portfolio of over $15 billion. They said:

""The severity of the unrealized valuation losses and decline in value of our investments were beyond our expectations," said AIG Chief Executive Martin Sullivan."

How about this Martin? Don't buy crap (or originate and retain it) and you won't end up eating it!

The house approved Barney Frank's latest display of abject stupidity, in which there is allegedly going to be FHA refinances offered to stop 500,000 foreclosures. Mr. Frank said in an interview:

"'We're in a recession and a major cause of that recession is the subprime crisis,' Frank, chairman of the House Financial Services Committee, said today on the House floor. 'We do not see any alternatives to this bill to try to work on that.'"

No Mr. Frank, we're in a recession because you and your friends, from Congress to The Federal Reserve, refused to accept the natural consequence of the tech bubble (which was a fairly nasty recession) and instead played games, causing a speculative hot-money bubble in residential housing.

You were warned it would happen, you removed the constraints on banks that would have tamped it down, you preempted state regulation that would have helped prevent the worst of the abuses and you intentionally ignored multiple communications, including a petition with 10,000 signatures on it, advising you of abuses in the appraisal and lending industries.

The cynic in me says that you and rest of the 535 have done this specifically because you've been bribed, er, you've had "campaign contributions" made via PACs controlled by these institutions. Bluntly, these policy positions have been purchased, and the voters are too stupid to recognize it and throw every one of the bums doing so out of office.

Now, having done all that for the last eight years, you wish to put a bandaid on a gushing femoral artery, when you provided the chainsaw that severed it in the first place!

Display the utter lack of intelligence on display in this bill (and by Mr. Frank generally) he said the following in a Bloomberg interview:

"'Some people make bad job choices -- we give them unemployment compensation,' Frank said today in a Bloomberg Television interview after the vote. 'We are in an interconnected economy.''"

That's a lie.

And since Mr. Frank must be aware of how unemployment insurance works, I must assume this is not stupidity, it is an intentional falsehood.

See, I have run a company. The government doesn't "give" anyone unemployment. Employers pay an unemployment tax, which goes into a pool and forms the capital base against which unemployed people draw. Your tax is computed based in no small part on your history of laying people off or firing them without cause; the more you do that (up to a point) the more tax you pay. Thus, in a crude sort of way, if you tend to cause people who had jobs to lose them, you pay more tax. Perhaps a bad system, but at least there is some accountability.

Mr. Frank was also on Kudlow trying to defend his bill, an appearance I witnessed. At one point he was challenged on whether this would stop or slow price declines and he made a comment that "while I should lose 20 lbs, it would be bad to do so all at once."

I must take exception to this Mr. Frank. All we would have to do is open the top of your skull and extract the 20lbs of rocks that inhabit your cranium, inserting in their place the brain of an ordinary field mouse. You would lose 19.8lbs instantly and at the same time your IQ would go up by several points; I believe, objectively, that would have to be considered an improvement.

Now that's rather strong criticism, and probably deserves some justification, which I am more than happy to provide.

The key item here is that the FHA "reform" contained in this bill does not prohibit the sort of "down payment assistance" that non-profits have abused, it does not require 85% LTVs be maintained, it does not bar seconds and HELOCs (even instantly upon closing) that would immediately violate those standards and it leaves entirely at the FHA's discretion what loans to accept. At the same time it does not require the FHA to maintain an "at or below X%" default rate on its paper, which would force sound underwriting principles.

The FHA, for its part, has seem ramping default rates and losses, and as a consequence has demonstrated an inability to manage its own credit book.

As a "reward" for this lack of prudence Frank's bill allows them to lever up further!

This is simply another case of "we'll lose a little on every transaction but make it up with lots and lots of volume!" with the sucker in this case being the US Taxpayer.

Let's hope President Bush sticks to his threat to veto this bill.

Were I President I would exercise my veto power by using the bill as toilet paper and sending it back in "used" condition.

Next up in the stupidity mill is The Democrat's Windfall Profit Tax ideas on oil companies.

I know its popular to hate "Big Oil", but the facts are what they are, and the facts are that "Big Oil" isn't the problem.

We are.

Oil companies make from 8-10% profit margins. That's a fact, and one look at a 10K or 10Q proves this beyond all doubt.

Since 8-10% is in fact less than one can make with a passive investment strategy, one must wonder why you'd want to run an oil company at all? There's no particular entrepreneurial reason to do so, since the margins are not conducive to anything fabulous.

To put this margin in perspective, firms like Microsoft have margins in the 30-50% range. And before you say "but Microsoft doesn't produce anything that's a "hard good" I will simply note that Intel has a pretax operating margin in the 50% range, and they make physical devices.

Record source prices of course lead to record sales and that leads to record profits in dollar terms, but in margin terms this is a terrible business.

The reason oil is expensive is that both sides of the aisle have insisted on refusing to take our recessionary lumps from 2000 when they came due, and that pressure translated directly into monetary and fiscal policy. This resulted in a loss of relative value in the dollar, and since our oil comes from other nations, those nations have (quite reasonably) applied a discount to the present value of the dollar when pricing the product (oil) that we wish to buy, seeing no indication that we are going to return to sound fiscal and monetary policy at any time in the future.

At the same time we've spent the last 30 years refusing to develop any of our own petroleum resources, despite having very significant amounts of resource that can be recovered for our own consumption.

This, plus rising demand fueled by our stupidity in believing that we can have people sew jeans and assemble DVD players for 25 cents/day forever, and they will never demand better wages or working conditions, nor will they want a car, scooter or even a refrigerator in their house, has led to the circumstances we find ourselves in with energy prices.

This bill, which Bush will certainly veto (but Obama or Hillary will just as certainly sign) will bring back an old 1970s standby - gas lines. Why would you bother investing in more exploration when you can't drill anywhere, and if you manage to make more money the government will simply tax it away? The obvious outcome of such a bill will be lower production, not higher, and that will translate into shortages.

Count on it.

If you think the "stimulus checks" will spark a recovery in the economy, better read this first:

"The Bush administration's tax rebates won't prevent the U.S. economy from stagnating in the second quarter as soaring food and fuel bills hurt consumers, a Bloomberg News survey showed.
'Consumers have gone into the bunkers,' said Ken Goldstein, an economist at the Conference Board, the New York-based research group that tracks confidence. They 'fear that their budgets are getting squeezed tighter and tighter.'"

Note that while the conclusion of the article is correct it does not cite the real reason that they never work.

The fact is that such "rebates" are a circle jerk. The "money" to pay them did not come from production, it came from debt issue (we're running deficits) and the "spending" thus is not actual GDP expansion (productive output in excess of debt.)

As a consequence the net impact of such "stimulus checks" is always negative, because once the money is gone the debt overhang and service requirement remains, exactly like the HELOC and housing craze produced not sustainable GDP growth but rather debt overhang and a subsequent economic crash.

Isn't it time that we expected journalism to actually deliver news, and economists to recognize the basics of mathematics in their pronouncements?

Have you heard this from any of the mainstream media? CNBC? The Wall Street Journal? Bloomberg?

Why do we allow so-called "journalists" to continue to pronounce that 2 + 2 = 56?

We have become a nation where "put it off until tomorrow" is the name of the game - for more than 50 years. "Great Society" does not, did not, and cannot work. It is predicated on the idea that you will never have to pay the check on the table as you can always find a way to get someone to loan you the money so you can defer that until tomorrow - indefinitely.

This is just as fanciful as believing that people will sew our jeans for 25 cents/day forever, but never want a pair of those jeans for themselves.

Reality has a nasty way of intruding into our economic fantasy island game in both Washington and on Wall Street, and today we saw that in our trade deficit numbers. While some people cheered this, the internals told a story that is not being reported:

"Demand for goods from China suffered the biggest slump last month, helping to narrow the trade gap with that nation to $16.1 billion, the smallest in two years. At the same time, exports to China were the second-highest ever."

Pricing pressure (upward) as their standard of living rises at the same time our demand softens.

Oil, of course, will drive trade figures the wrong way, but the real story is softness in imports, which means softness in consumption, which means a falling GDP over time, as the consumer is 70% of our economy.

Unfortunately there is no "go vote for the right guy" trade you can put on, because all of the candidates and both political parties are divorced from reality.

As a consequence your choices are between dumb and dumber come November, which isn't exactly the "stuff" that a solid economy - and thus stock market - are made of.

SPX 1070 anyone?

In one hint of intelligent acts Homeland Security and ICE appear to be ready to actually start enforcing the law:

"Employers should be prepared in the coming months for immigration raids on scales never before staged by the federal government. The stakes for employers will be especially high if the courts give a green light to the mailing of Social Security no-match letters."

Ding ding ding. I've been advocating this for years.

There is absolutely no reason not to use this information to solve the problem. When I ran MCSNet we were required to report all new hires within a very short period of time, including the workers social security number. If the same number appears in two places at once in a fashion that simply could not be someone working two jobs (e.g. you're not employed in San Francisco and New York at once!) then send ICE out to both places and deport the guy who used the falsified credentials. If the SSN was never issued (its just plain false), do the same thing.

To those who claim that this is somehow "wrong", did you rail about the original purpose of this data matching? That was to find "deadbeat parents" and insure that they would be served withholding orders so their child support would get paid! Well, if that's ok, how come this isn't?

I hear all sorts of people bleating about how unfair it is to enforce immigration laws, but nary a peep was heard when this law was passed over a decade ago for its original purpose, nor has there been any attempt to block that usage up until now.

Hypocrisy knows no boundaries.

Thievish Thursday

noreply@blogger.com (Genesis) — Thu, 08 May 2008 13:00:00 +0000

"Tending to larceny....."

So what sold off the market yesterday?

Having to cease tending to larceny:

"There is simply no provision in the law that requires investment bank holding companies to compute capital measures or to maintain liquidity on a consolidated basis. Nor does the law provide for a consolidated supervisor that is knowledgeable in their core securities business, and that would be recognized for this purpose by international regulators.

...
At the same time, without waiting for new internationally accepted standards, the Division of Trading and Markets has strengthened the liquidity requirements for CSE firms relative to their unsecured funding needs. They are closely scrutinizing the secured funding activities of each CSE firm, with a view to lengthening the average term of secured and unsecured funding arrangements. And they are currently obtaining funding and liquidity information for all CSEs on a daily basis, and discussing with CSEs the amount of excess secured funding capacity for less-liquid positions. There will also be more disclosure of actual capital and liquidity positions of the CSE firms in terms that the market can readily understand and digest. The CSEs will institute public disclosure of their capital ratios computed under the Basel Standard later this year, and then phase in additional disclosure related to concentration of exposures."

Ding ding ding ding ding.

Let me translate into one sentence:

"You're gonna have to tell us what you hold and how you're valuing it, and that is going to be publically disclosed."

That this resulted in a two hundred point selloff in the Dow, with every financial stock getting hit in unison when this ditty crossed the wire, says more about our capital markets than anyone can put into print.

It should wake every single member of Congress out of their somnolence right now.

If you don't get this, as investors, as regulators, as Congress, as President Bush, as Treasury Secretary Paulson, and as Chairman Bernanke, you're either blind, stupid or both.

Probably both.

The market has gone up over the last two months, since Bear Stearns was bailed out, because companies are lying and the "regulators" have been explicitly allowing them to lie.

In fact, that is exactly what Bloomberg reported:

"Data on capital and liquidity will be required this year 'in terms that the market can readily understand and digest,' Cox said in a speech today before the Securities Traders Association in Washington. The SEC already collects much of this information without giving it to the public, he said.
The five biggest Wall Street firms had their largest share-price declines in at least a month. Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, led the way, losing $2.67, or 5.8 percent, to $43.64 as of $:31 p.m. in New York Stock Exchange trading."

There 'ya go, reported by the media - the threat of having to tell the truth resulted in the largest selloff in more than a month.

Never mind Merrill "we don't need more capital" Lynch who has a CEO that loves to repeat his mantra every time there is a microphone within 60' - and then immediately turns around and - you guessed it - raises more capital.

"Tending to larceny....."

Or shall we count JP/Morgan that pulled the same stunt, selling $1.6 billion in hybrids @ 8%. Heh, that's great - I can get a mortgage at a lower coupon! So tell me, is Mr. Dimon's firm in worse financial shape than I am, since they have to pay a higher interest rate for a shorter maturity (their notes can be called in 2013; my 30 year mortgage could not be.)

"Tending to larceny....."

If that's not bad enough, I have to hammer on Fannie again, this time using their Press Release:

"The initiatives include 1) a new refinancing option for up-to-date but "underwater" borrowers with loans owned by Fannie Mae that will allow for refinancing up to 120 percent of a property's current value."

Oh that's rich. Fannie proposes to allow borrowers to instantaneously saddle them with at least a 40% loss should they default? (20% underwater plus another 20% in foreclosure, rehabilitation and marketing expense)

This is part of Fannie's "great idea" speech for how to navigate a market that they have admitted is bad and getting worse?

OFHEO and Congress are allowing this sort of manifestly-unsound nonsense?

The very same practice - having an outstanding balance that exceeds the value of the property - that is now causing massive numbers of defaults?

Add to this that Fannie claims 11.2% of their credit book is ALT-A. Their credit book, in total, exceeds two trillion dollars.

So that's $200 billion, roughly.

Let's run some assumptions:

Their ALT-A exposure will default at 1/2 the rate of the WaMu securitization ("we're better than the other guys")
Recovery will be 50.

This puts ~15% of their exposure into default, and with a recovery of 50, results in $15 billion in losses on their ALT-A exposure alone, and that assumes no more price declines (its reflects only what has happened thus far in these securitizations!)

The firm itself is projecting not one but two more years of trouble, with 2009 being worse than this year.

Should the firm's own projections, along with extremely conservative loss ratios for that "ALT-A" book prove up Fannie would have a "Fair Asset Value" that is negative by an amount roughly equivalent to their current market capitalization.

If OFHEO and/or Congress does not step in right here and now and stop this stupidity Fannie is, in my opinion, absolutely a short to zero.

Unless their projections either prove horribly pessimistic or they raise several times the $6 billion they claim they intend to I cannot see how, within a year or two, they do not end up collapsing with the result being a 100% loss on shareholder equity, significant losses for bondholders, and the need to nationalize the firm.

OFHEO's "dropping" of Fannie's "excess reserve" requirement borders on criminal stupidity. Lockhart must resign now; this act, if it is allowed to stand, essentially guarantees that the taxpayer will be saddled with huge credit losses - and we haven't even started to talk about Freddie yet, who is likely in no better shape!

Since OFHEO won't take action Congress must step in and stop this. Not next year - by then it may be too late. This simply has to be addressed immediately, or the ticking nuclear debt-device's timer may reach "00:00" with not-amusing consequences.

Specifically, Fannie must be immediately forced to:

Stop buying any paper that does not have at least 15% homeowner equity, with no "assistance" or kickbacks being permitted (Nehemiah anyone?)

Stop buying any paper unless the DTI is under 36% and the loan is fully-documented.

Go through its entire credit book and where any element of fraud can be found in any loan being held, immediately force the repurchase of that paper by the party that tendered it to Fannie, so that the firm doing the tendering eats the loss instead. When not possible (the tendering firm had no intermediary investment bank and/or is insolvent) then these loans must be identified and segregated, with details of same released to the investing public.

To the extent that Fannie is holding any seconds or HELOC paper, segregate and total any amount that exceeds 100% LTV at current market values.

Raise at least $20 billion in additional core capital, plus 50 cents for every dollar of loan face value that has fraud inherent in its issue, plus one dollar for every dollar of underwater 2nd lien or HELOC, via issue of common stock (not preferred which carries a coupon!), and eliminate the dividend entirely (or reduce it to 1/2 cent/share, if the desire to keep it as a "dividend paying stock" to prevent divestiture is a key part of what management believes is necessary.) Yes, this will be extraordinarily dilutive (like equal to 100% of the outstanding market cap - at least - and perhaps significantly more.)

If this is not done - and soon - I see no way for Fannie to avoid cascading losses that will smother its operating and "core capital", ultimately resulting in the firm being rendered insolvent.

Lockhart came out (perhaps in response to justifiable questions about Fannie) and said:

"Mortgage financing giants Fannie Mae and Freddie Mac could face further problems if home prices continue to plummet, but a taxpayer bailout is not likely, said the federal regulator charged with overseeing the two firms."

He is prepared to let them go bust? That would be cute.

Thanks for the "short list" James.

Let's move on from larcenous (or just plain stupid) corporations (and their regulators) to even dumber (or is that larcenous) governments.

You want a mortgage in New York? You're gonna have a hell of a time getting one unless you've got 30% down. Yes, 30%. Why? This bill:

"If members of the New York State Assembly have their way, lenders and investors with loans in New York state will soon have to contend with a one-year moratorium on foreclosure activity in the state. Members of the state Assembly passed a legislative package of four housing-related measures Wednesday, one of which would force a one year delay between the moment a notice of default is filed through the foreclosure sale itself."

That will instantaneously devalue all existing mortgage paper written in the state and "adjust" (guess in which direction) the risk premium on new mortgages. Yes, your government at work.

All this in yet another crass attempt (see Fannie's 120% LTV example above) to keep housing prices from adjusting to the maximum sustainable 3x incomes. It not only won't work it will cause an even greater crash because the loss of value in that paper will create an immediate spike in interest rate demands for all new loans in the state.

Nor are they first - Taxachusetts got in front of this one by days. That wasn't a surprise. That New York would attempt to follow them is. Expect lawsuits, by the way, over existing mortgage paper, although the ability to prevent this for new mortgages via court action is unlikely to succeed.

The NY Legislature's new refrain: "If I only had a brain....."

Moving on to the next "Forest Gump" candidate we have...... the American Consumer!

The Fed's G.19 credit release showed that Americans last month not only spent their stimulus checks before they got them, but levered up even more, charging up the plastic at a prodigious rate. Indeed, the annual rate of increase in revolving (credit card) debt was nearly 8% in March, more than double the annualized rate of increase in wages.

"Heh honey, our HELOC got recalled. Think we should cut back?
Naw, get out the plastic - its time for another pair of $600 shoes!"

Ya.

Indeed, store comps out this morning say that is exactly what happened, with strong increases across the board.

Oh, never mind that our great Congressfolk and Ben Bernanke would never advise Americans to actually pay down debt! Why no! In fact quite the opposite - all the talk out of Washington was to spend spend spend! We have to keep the economy going!

The futures did not respond materially to the news flow - heh, you think Wall Street might have figured out how compound interest works?

Now, after all these years?

This much is certain - there will never be a shortage of stupidity in the universe, as we have an ample supply of it between Congress, The Fed and American households.

Got KaPUTts on Credit Card and auto loan issuers?

Their turn in the wood chipper is coming.

The pure artistry of TickerForum folks is amazing.... I thought I'd share this one with you... I like it a lot..... come on over to the forum at http://tickerforum.org/ and look in "User Presentations" for more.

I didn't create this, but I do like it.... a lot!

Washboard Wednesday

noreply@blogger.com (Genesis) — Wed, 07 May 2008 13:50:00 +0000

Ok, let's start with Fannie.

They have a horrific loss, right? Fair value of their assets cut by 2/3rds? Dilution out the ying-yang?

So why does the stock take a rocket ride north?

Simple - OFHEO (their regulator) loosened their capital constraints.

Now wait a second. Fannie did say that their credit losses were expected to significantly increase through 2008 and 2009!

So let me see if I get this right - Fannie is going to increase leverage into a declining credit environment - lever up into worsening economic conditions for their business?

Is it just me or does that sound particularly insane to anyone else? Never mind the idea of buying a stock when the company says they're going to pull something like that?

That, by the way, sparked a broad-based rally in the markets. It wasn't strong, but it was there, and it turned what was a red tape into a green one.

The idiocy of this market knows no boundaries.

Let me remind you that if you're betting that the government will "bail out" Fannie if they blow up, that they "bailed out" Bear Stearns too, and it got you 1/10th of your stock price in the process. How's a 90% loss - or worse - sound? Not good? Then what the hell were you doing buying the stock?

"Heh, the house is on fire!! I know - I know - let's put it out with this bucket of GASOLINE!"

Now let's talk about the next ticking nuclear device - FHLB "advances". The FHLB system is the Federal Home Loan Bank system, and has been the funding source for hundreds of billions of dollars worth of mortgages since the secondary markets seized - including a huge amount out to Countrywide, which of course, as we know, made a lot of "liar loans" and didn't tell anyone that's what they were. The other big participants? Banks like WaMu and Wells. Oh boy, all the poster children of California and Florida.

I wonder how much RISK the FHLB system is under right now? They do have a "superlein" against the assets of said banks....... but......

Minyanville updated their famous ALT-A tranche from WaMu. I'll let the delinquency numbers speak for themselves, because quite frankly, I'm close to speechless:

January - 19.3% delinquent, 13.5% foreclosed, 1.83% REO
February - 22.69% delinquent, 11.62% foreclosed, 3.56 REO
March - 25.3% delinquent, 13.35% foreclosed, 4.44% REO
April - 29.07% delinquent, 13.87% foreclosed, 6.21% REO

Notice a few things - this cesspool was originally nearly all "AAA" credit, although only 11% of the loans were "full doc". In one year, 30% of the loans are at least 60 days behind.

Absolutely nothing without full-documentation should ever be rated AAA. Do we need any more evidence? Mish does a nice job of digesting the rest - have a peek.

Now where is the action by the bond rating agencies to withdraw all ALT-A ratings?

Oh, we wouldn't do that now that we've been found to be massively wrong, would we?

And where is Congressional (or prosecutorial!) action to go after these clowns who claimed this was "AAA" credit when the very standards necessary to rate that credit were simply invented rather than measured? You know, made up out of whole cloth? Manufacturered? Or, to be less polite, "fraudulently inflated"?

Speaking of cesspools, there is some resistance building to all the "bailout NOW!" screaming coming from Congress on housing. At least in a few places:

"The Bush administration signaled it will veto foreclosure-prevention legislation being advanced by House Democrats that would offer states $15 billion in grants and loans to buy and refurbish abandoned homes."
and
"The House tomorrow will also consider Frank's plan to let the Federal Housing Administration insure up to $300 billion in mortgages after loan holders agree to reduce the principal. That legislation drew sharp criticism today from House Republicans at a news conference in Washington.
'What we're talking about here is a $300 billion bailout for those who were scamming the market,' said House Minority Leader John Boehner, an Ohio Republican. The lawmakers offered an alternative plan including a one-time homebuyer tax credit of up to $10,000."

My God, Mr. Boehner has a brain! Congratulations dear Sir; you're one of the few.

Institutional Risk Analytics penned a beautiful note on Countrywide being acquired, echoing what I (and today, Chuck Schumer!) have said about valuation:

"Given the outline above, our view is that the equity of CFC is worth $0."

The full analysis is worth a read; its pretty much how I see it. Contingent liabilities are going to be insane and BAC has to be nuts to accept that risk. I wouldn't.

Countrywide, for its part, is now "promising to improve" its foreclosure and billing practices. Uh huh. The allegation leading to this "promise" comes from lawsuits and complaints over their conduct in bankruptcy court when homeowners run out of rope! The not-amusing part of that, of course, is that a big part of how those people wound up in bankruptcy in the first place were loans that they claim they didn't understand and shouldn't have been sold, as they were clearly unsustainable. I've spilled my share of digital ink about the stupidity of allowing DTIs beyond 36%, qualifying on other than the fully-amortized rate, and what the true intent of these "loans" was - what you won't find me doing is shedding a tear for these clowns now that some of the blowback is hitting them in the face.

Next up, UBS is now facing a tax-evasion probe (!)

"One senior bank employee was 'briefly detained' by U.S. authorities as a 'material witness,' the firm said in an e- mailed statement."

So in addition to packaging up crap loans and intentionally ignoring risk management guidelines (acts they admitted to in their self-published "audit") UBS might have been helping US Citizens evade paying the IRS their fair share? That's rich. Nor is it confined to America, apparently - the German Authorities are also sniffing around.

Gee, do ethical problems in one place perhaps signal them in another? Nawwwwww....

The Fed's Hoenig gave a very hawkish speech last night in which he stated that the inflation was at "unacceptably high levels." He's talking about price inflation, of course, but gee, how come its happening? It wouldn't be a $200 billion "hot money" blob that Bernanke and crew (yes, I realize you're a non-voting member, but....) have stuck out into the market to tamp down the trading range on Fed Funds, would it? Alphabet soup anyone? Just don't ask how much it costs!

Goldman Sachs now says they expect oil to hit somewhere between $150 and $200 in the next 6-24 months. I'll take "under" on that one for time. Unless Bernanke drains the swamp there's no reason for people to pull their commodity bets, as that trade is going in exactly one direction - north - and I see no evidence that Ben is going to do the right thing, nor that Congress is going to force his hand.

Welcome to $4 gasoline, and if we get one hurricane in the Gulf this summer or that $150 prediction proves up, better make that $5.

Vallejo, CA has voted to file for bankruptcy, in what is like the start of a trend. This bodes very poorly for municipal debt; the problem is shrinking revenue from delinquencies and forced lower home prices. Local and state governments were imprudent during the housing boom, ladling on the spending when they got the increased tax revenues, but with no plan for when the worm turned, as it always eventually does.

Now the problems are showing up, and this will spread. The highest concentration will be in California and Florida, of course, but it won't be limited to those states. I warned months ago to get away from Municipal Bonds in mutual funds, as your ability to control risk is limited, and to be very careful if you're buying individual issues. In particular, only bonds backed by "general revenue" are reasonably safe, and even those are not immune. If you hold a fund you're taking a terrible risk as the hit to NAV can be particularly severe if you get unlucky with the mix of what blows up. Since these funds are usually bought with the intention that you'd never lose principal, you have to think long and hard about what you're doing getting involved in these funds at the present time.

Europe saw consumer spending decline by 1.6% in March, a huge knock that came from price inflation in necessities. Of course we've got the same problems - and more - here in the US, but what we don't have is a Central Bank that seems to give a damn. Yeah, I know, Hoenig made noises last night.

That's all these are, and my money is on there being zero follow-through, because draining the liquidity swamp (which needs to happen NOW, not in a year or two) means the end of the "great levitating act of 2008" that the hot money slosh-bubble created.

It appears that the SEC is trying to drive a knife into the claim that "swaps" are "above the law." In what is arguably a seminal case, they are going after people involved in a tawdry Jefferson County Alabama bond fiasco where there are allegations of outright bribery in the process of contract awards. Market participants have claimed for years that these are "contracts" and not "securities", and thus outside regulatory scrutiny.

Nuts, says the SEC. Let's hope they win this one; a little jail time sounds good to me. Make sure he gets "Bubba" as a cellmate, and give the guards earplugs.

CISCO reported after the bell Tuesday and beat expectations by a couple of pennies but Chambers, being his usual honest self, gave a somewhat-dour outlook:

""We're continuing to see our U.S. and some European customers remain cautious in their views about their own economies," he told analysts on a conference call."

I've worked with these folks before; they're not sandbaggers. If they say things are soft, they're soft, and a 5% order growth in the US is soft. Especially when you consider that government orders in the US grew 20% - take that out and then go back and re-run those numbers.

They're barely positive.

Disney (NYSE: DIS), on the other hand, managed to get people to show up at their theme parks - at least thus far. No doubt a good part of that was foreign visitors - we live within an easy day's drive, and have noticed that as the dollar has tanked, the foreign contingent has increased radically at their Orlando properties. This is ok for Disney, but is it good for Americans? Well, if you work for Disney, it keeps you in a job, but.....

One thing I find amusing is that Eiger, their CEO, claims that 75% of their hotel rooms on-resort are "value" or "moderately" priced. I don't know what Eiger calls "moderate", but I certainly don't consider their resorts to be either value or moderately-priced, especially not when one considers what you get for the money. In fact, we have stayed on-property exactly twice - and only when we found outstanding "last minute" deals. Quality off-resort rooms at places like Hampton Inn are essentially always cheaper, the rooms have walls that aren't paper thin, the people aren't packed in like cattle, your car in the parking lot isn't a 45 minute walk from the front of the hotel and amenities like Wifi Internet are included in the price. I don't see the "value" in the on-property resort accomodations - sorry.

This is, I suppose, good for Disney, as out-of-country visitors simply don't know better. But their "value" resorts in Orlando, in my experience, are both overpriced and under-featured. I will give their staff fair credit in being helpful and fair - that they are, in that the one time I had a problem on-property they took care of it efficiently and fairly - not something you're assured of off-property. But serious folks, there's a Hampton Inn just out the back gate in Lake Buena Vista that frequently can be had under $100/night and IMHO its both more comfortable and convenient than dealing with the on-property "2-hour bus ride" game.

Legg Mason, "legendary" Bill Miller's employer, reported crap earnings - negative $1.81/share. Bill Miller has become somewhat of a Wile-E-Coyote in recent months, having earned the badge of "great investment" for buying stocks like Countrywide last summer before it blew up. In fact, over the last year or so if you shorted anything Miller bought you'd have done very well. One wonders how he manages to do worse than a dartboard, or why investors in his funds tolerate this sort of thing. Yes, I know he has a winning record, but when you make that many bad calls in a row over the course of a year, isn't it time to change the horse you're riding before it breaks both front ankles?

Yesterday there was a rumor started that Yahoo's CEO had been "benched" and other executives tasked to "reach out" back to Microsoft to try to restart talks. This, of course, led to an immediate and strong rocketshot in the stock.

This morning we get actual news that Bill Gates has said "nuts" to the idea of anything further with Yahoo - they've made their decision, wasted their time and money, and are done.

In other words, the rumor was likely total horseshit.

Now the question - will the SEC investigate and prosecute those who promulgated that false rumor with the clear intention of spiking Yahoo's stock price? After all, its obvious that a lot of Hedgies (and others) got caught with their pants down on the wrong side of that trade. Look at the volume on Yahoo CALLs going into last weekend and what was going on is obvious - there were huge bets placed on that deal happening, and they turned out to be wrong.

Rather than suck up the loss, the next move was market manipulation. Felonious, but heh, it only gets investigated when it makes stock prices decline, right?

Its all ok if people get screwed so long as the price goes up? Never mind that trading is a zero-sum game - for everyone who wins on a price increase someone else loses, either by being short or being the person who sold and missed the price increase.

But those folks don't matter...... isn't that right Chris Cox?

Someone bought a buttload of May VIX 25 CALLs yesterday. A LOT of them. It may have been a hedging transaction, but still, it gives you pause. Those expire in two weeks, and you have to wonder - exactly why would you do that? I didn't catch the other months, so I don't know if it was a calendar spread, but my first reaction when I saw it was "huh?" To put this in perspective for the VIX to go from 18 to 25 would be a huge move upward - and be accompanied by a monstrous sell-off.

Pending home sales were down 20% y/o/y and 1% monthly, off a downward revised last month number. Price targets now claiming to be down 2.4% for the year, which is about 1/4 of what Fannie predicted. Gee, would you expect that Realtors would be less or more bullish on the price of homes in their predictions?

Obama won the primary in North Carolina, adding more to his delegate and popular vote counts. Absent skulldruggery, it looks very likely he will be the nominee. This is something you really need to pay attention to as an investor, as Obama has basically guaranteed that your Capital Gains and Dividend tax rates will double if he is elected.

Gee, is that good for stock prices?

The Fed is asking for permission to pay interest on bank reserve balances on deposit with them. This is being played as a "not big deal" but in fact it is. Whether it has a positive or negative impact is open to question; the immediate difference is that it would eliminate some revenue to the Treasury, but not much.

A bigger issue is what it would do to the debt trading markets. Most other nation's central banks do pay interest; we are the outlier. However, this does "decouple" areas of policy and action at The Fed that have been coupled before - exactly what impact it would have is not clear.

Let's hope Congress doesn't "rubber stamp" this, and insists on some sort of formal, public explanation and comment period (yeah, right - like Bear Stearns, yes?)

First Quarter Productivity came in up 2.2%, with unit labor costs in up at 2.2% as well. This sounds good, but you need to be thinking about what squeezing employees does to spending. See, the way this usually happens is that employees are prodded to produce more while costing less, which is great for the employer but not good for the employee. Real hourly compensation is negative, down 0.7%.

So where did this productivity gain come from? Squeezing hours and demanding more out of employees for the same dollar in wages. The numbers don't lie.

The crooners keep calling this "great" for profits, but what happens to consumer spending? Great? Well, c'mon. Let's be straight with people - there is a major problem with shifting these costs in a fashion that makes more money for business in that 1/3rd of the CPI is housing costs, but 70% of GDP is consumer spending.

The yield curve continues to move upward. Uh, what happens to mortgage rates if the yield curve moves up, especially on the long end? That's good, right?

So you squeeze both ends of the curve to goose profits and Wall Street cheers the data release, but how long will it take before people start to think - wait a second, how long will those "great profits" last when the vast majority of people get it from both ends? Hmmmm.... so our spending all goes to gasoline and food, shifting away from iPODs and trendy "toys".

What happens to corporate profits over time, and aren't stock prices supposed to be based on forward looking profitability?

Now there's something to think about.

Troubling Tribble Tuesday?

noreply@blogger.com (Genesis) — Tue, 06 May 2008 14:00:00 +0000

Last afternoon we got the Senior Loan Officer Opinion Survey from The Fed.

It was Tribbling, er, troubling.

Highlights included:

55% reported tightening of C&I terms to large and middle-market firms.
50% reported tightening of C&I terms to small firms.
80% reported tightening of Commercial R/E terms.
60% reported tightening of Residential residential mortgages.
70% reported tightening of HELOC terms.
50% reported tightening existing HELOC terms.

I don't see "loosening" anywhere in the report.

Debate swirled around Bank of America's acquisition of CFC, and after the market closed yesterday BOA released the following:

"'The transaction is on track to close in the third quarter as agreed to,' said Robert Stickler, a spokesman for Charlotte, North Carolina-based Bank of America, in a telephone interview today. "

Now c'mon. What we didn't get is a press release, and of course a "telephone interview" can be disclaimed as "you misunderstood me." So where's the press release? Most of the time that's the format of such a "response", because you can be held accountable.

Yahoo's Yang commenced whining immediately when his stock got hammered after Microsoft told him to go to hell. Awwwww....

"Yahoo, the most-visited Web site, turned down a $33 a share offer from Microsoft, which withdrew its bid on May 3. The company was cut to 'sell' by Citigroup Inc. and ThinkPanmure LLC analysts today, and its stock dropped 15 percent."

Yeah, and you closed under $25. From where I sit you flushed $8/share down the toilet.

Betcha another $6 comes off in the next couple of weeks.

Idiot.

In the "moral hazard" department JP/Morgan appears to have "rented" out its access to the TAF to Target!

"Target Corp., the second-largest U.S. discounter, will sell 47 percent of its $8.2 billion in credit- card loans to JPMorgan Chase & Co. for $3.6 billion to raise cash for stock buybacks and reduce its exposure to consumer defaults."

Anyone care to bet if that credit-card paper will immediately wind up in the TAF?

You don't think Dimon would have created an arbitrage opportunity for himself via his seat on the board of the NY Fed, while (further) contaminating The Fed's balance sheet with crap credit card paper, do you? You don't think Dimon has been negotiating this with Target while debating the extension of those credit facilities as a board member of the NY Fed, do you?

Oh, and Target then uses this money to buy back stock, thereby propping their stock price, and offload the risk of consumer defaults to the taxpayer!

Both Bernanke and Congress are now permitting The Fed to essentially create a stock buyback and credit support fund for a retailer?

You're kidding me, right? We're not just "backstopping" banks but are now creating the ability to factor consumer credit card debt?

Excuse me while I go barf in Bernanke's shoes.

There are plenty of folks who write options (you know, the guys that get rammed when they're wrong?) that believe this rally is a "sucker bet":

"Investors are currently paying the highest prices relative to earnings since March 2004 and 15 percent more than when the S&P 500 reached its all-time high in October."

Yeah, and PUT Implied Volatility is about twice that for CALLs on the indices.

While the options market-makers are occasionally wrong, the facts from OCC and the CBOE say that if you think you're smarter than they are as a retail investor, 80% of the time you're the one who gets the reaming, not them.

If you're buying this rally, how do 'ya like those odds?

UBS reported a stunning $11 billion loss and decided to play "hide the sausage" with BlackRock, with the latter hoping to find a bigger set of suckers for UBS' "potentially bad" subprime paper factory. Someone is going to get creamed in this one, and my guess is that it won't be Blackrock or UBS. My money is on Blackrock setting up a "bankruptcy remote" SIV to dump all the crap in and then peddling it off to retail investors, soaking them when it goes "boom" while earning their management fees. Nice eh? Don't go anywhere near this one kids, no matter how much glossy paper is used in the offering prospectus.

Fannie was expected to lose $1.48/share, but actually lost $2.57, cut the divvy and announced intentions to sell both common and preferred to raise capital. They also said they believe 2009 will be worse than 2008 in terms of credit losses, which rattled people materially. While many people think they're "well positioned" to deal with the credit issues, I'm nowhere near as sanguine, as I've noted before. My biggest problem with both of these firms is that I believe both have absolutely no idea how much credit risk is on their book - both explicit and implicit.

The whole issue here is all the 'liar loans" that were taken on by these folks without being compensated for same, and in many cases, I suspect, without their full knowledge and consent. The "Fast and Sleazy", er, "Easy" loans are just one of many examples. Since both of these firms are levered to an insane degree very small changes in credit loss can result in stunning - and perhaps fatal - financial losses.

Fannie and Freddie have also been cheating in their accounting, in some cases refusing to declare a loan "non performing" on their book until it is two years late!

That's outrageous, but heh, when you're operating with a government regulator that acts like a LAP DOG and licks your privates instead of doing its job......

Accounting? What's that? 2 + 2 = 6 (or is it 60?) so long as we have the government to prevent us from going to jail for pulling that sort of nonsense, right?

Of course now that Fannie has demonstrated that it is incapable of estimating its credit book losses and has thrown the concept of prudent declaration of non-performing paper out the window, OFHEO loosens the leash around its neck. That's right, our "regulator" that is supposed to provide security and safety for these agencies (and the taxpayer) instead allows them to lever up even more into a declining market, booming credit losses, rigging of the "non-performing" loan numbers and an admission that they can't manage their own credit risk demonstrated by a loss that's double estimates.

At least the Mainstream Media has figured out how to use a calculator:

"'We’ve taken tremendous risks by loosening these companies’ purse strings,' said Senator Mel Martinez, Republican of Florida and a former secretary of housing and urban development. 'They could cause an economywide meltdown if they (Fannie and Freddie) got into real trouble and leave the public on the hook for billions.'
.....
Though the companies' main regulator, James B. Lockhart III, director of the Office of Federal Housing Enterprise Oversight, has voiced strong confidence in the companies, a high-ranking member of his staff said some officials had begun considering the worst.
'It's not irrational to be thinking about a bailout,' said that person, who requested anonymity, fearing dismissal."

No kidding? So now if you talk about what you actually believe in government you get fired?

Gee, that's nice. Lie lie lie lie and then lie some more.

Senator Martinez, you need to start hollering a lot louder. You're one of my two Senators, and you've been getting my Tickers now on a near-daily basis for the last few months.

Are you going to put a stop to "The Corruption Of Wall Street and Washington DC, Part MMVII" or be a part of it? Those are, in fact, your only two choices, and the impact on the taxpayer's balance sheet if and when they do blow up will be in the hundreds of billions of dollars.

Let's do the math as a "back of the envelope" exercise; all rounded off here, all combined:

Fannie and Freddie's credit book exposure (guaranteed paper) is about $3.5 trillion
Their outstanding debt is $1.5 trillion
Their held mortgages (as investments) are another $1.5 trillion
Their core capital (that which they have to operate on and cover losses on any of the above) is $80 billion

Now let's apply some estimates. If 2% of the credit book exposure (mortgages + guaranteed paper) explodes and has a recovery of 50%, it will generate $50 billion in direct losses. This is approximately what Countrywide Financial is reporting on its conforming paper at present.

But remember, Fannie and Freddie have an unknown exposure to liar loans - subprime and ALT-A paper that was not fully documented, had appraisal, income or asset fraud involved in the "underwriting."

If that "performs" similar to some of the WaMu securitizations that we've been able to to dig into via a Bloomberg terminal, then these loss estimates are insanely optimistic. Some of these securitizations are showing 20%+ of the loans in the pool REO'd, foreclosed and disposed or in bankruptcy within six months of origination! It is entirely reasonable to expect that losses on those pools will exceed 15% of the principal value, assuming that 30% ultimately foreclose and the recovery averages 50%. Any HELOCs or second lines on these loans are zeros - guaranteed.

The question then becomes one of their mix - that is, how much of that crap is on their balance sheets and has been guaranteed?

The contamination potential here is serious, it is real, and it is under appreciated. If, for example, 10% of their credit book is contaminated in this fashion, it will roughly double the losses ultimately taken, completely wiping out these firms' core capital.

In other words, it will bankrupt them both.

$6 billion in new capital being raised? Ha! Fannie and Freddie need to double their core capital in order to be reasonably certain they can weather this storm, and they also need to cease accepting anything other than fully-documented paper with no more than an 80% LTV and 36% DTI - no piggybacks, no PMI, no games, no nothing.

Let me repeat: It remains my contention and belief that Fannie, and likely Freddie as well, are both "short to zero" candidates as I do not expect either of these firms to take these actions, nor do I expect our lawmakers to force them to both recognize losses as they occur and act prudently in what they buy.

When your cash flow runs out you're dead (games or no games), and when your credit book is over $2 trillion.....

Therefore, my position on their stock is that they're a potential short to zero (but fraught with risk due to the tremendous "sticksave" games that are likely to be played) and if you own any of their bonds you better get rid of them now while they're both liquid and likely to fetch par, because once the truth of their "non-performing-but-we-call-it-performing" paper turns on them and devours their free cash flow you'll take an enormous haircut, and you sure as hell didn't buy this paper with the intention of taking risk!

Oh, and for those who say that gambling and especially foreign gamblers will "save the US", you better not talk to Tropicana:

"Struggling casino operator Tropicana Entertainment LLC is expected to file for bankruptcy protection as early as today, said two people familiar with the matter. It would be the largest corporate bankruptcy of the year, and the latest blow to Las Vegas, which has seen gambling revenues decline and major building projects canceled or delayed in the last few months."

I thought the house always won?

The worst news out of the market Monday was not the fact that The Dow fell nearly 90 points - it is that the bond market is starting to price in the massive issuance of Treasuries to cover the burgeoning debt that the government is taking on for all the handouts - a cacophony that is almost certain to continue. As it does, if Treasury's projections are right, we will be well north of $500 billion in the hole this year - more than three times last year's deficit.

A stronger economy? Ha! As the curve flattens the "vig" or spread available to banks goes away, and if the entire curve shifts upward (and it might from all the supply) then we're in big trouble economically because this will immediately and directly translate into higher long money (e.g. mortgage) borrowing costs.

And while you're at it, don't talk about valuations. At more than 25x earnings the SPX is now at all-time highs in terms of valuation. Gee, how's your breathing doing up here when the supplemental oxygen gets shut off?

We've also got big trouble on the election front - we certainly will have a Democrat Congress, but it is looking increasingly like a Democrat in the White House is a lock, as all of the "hide the sausage" games are not only failing (and must, mathematically) but worse, have sucked retail investors back into the pool only to be devoured by the Sharks of Wall Street, and the blame for that, along with the mess in the first place, is, will and should fall on The Republican Party.

In short, The Republican Party is and has squandered its opportunity to force all the fraudsters out into the open and lock more than a few of them up, with Hanky Paulson being one of the worst offenders in the "look the other way on purpose" department.

A three-house Democrat sweep would mean a serious and immediate increase in taxes, especially capital gains and dividend tax. The bond and stock markets will both tank immediately if that becomes apparent, with the stock market being far worse because a revocation of the "better" treatment for capital gains and dividends will be front-run by people selling ahead of the end of year to take advantage of the breaks while they still exist. This also changes the "fair value" computations for the stock indices, and if people are consistent (who knows if they will be) would result in a roughly 15% immediate "discount" being applied to all of the American indices across the board.

And you though the bear market was over......

Misallocation Monday

noreply@blogger.com (Genesis) — Mon, 05 May 2008 12:37:00 +0000

Who's the misallocator?

Of assets, that is.

Steve over at Microsoft? Looks like he took my advice to heart (although I'm not audacious enough to think that he really listened to "little old me") and told Yahoo to get stuffed.

IMHO, that's the right choice. What does Yahoo really bring to the table? Buying eyeballs? Ok, but for that amount of money? Why? Doesn't Microsoft have something else they can spend that sort of coin on that has a better ROI?

You don't buy a business in decline for a premium, and Yahoo has been in decline for years compared to its competitors, primarily Google. Never mind that on a "per pair of eyeballs" basis this looks like a roughly $1000 per deal to me; if Microsoft wants to buy eyeballs they could easily focus on sites where you actually get unique pairs (like Tickerforum!) rather than Yahoo where, especially on their message boards and email system, the sock puppet problem and anonymous nature of their signup procedure means that you're paying double or even triple an awfully large percentage of the time.

This morning everyone and their brother is telling people to buy Yahoo because "they'll do a deal with someone." The M&A stupidity is back; gee, you think these guys might be angling for some of the M&A work? No, they'd never do that, right? Pull the other one guys.

Last night out of the middle of nowhere we had a huge downward spike in the futures market. Much time and effort was spent trying to figure out if it was a fat-fingered trade (as occurred in January), but Globex said no, and the trades stood.

The interesting thing about this was that it didn't have the appearance of a "fat finger" mistake at the time; it was across all markets, including Treasuries and The Dollar, Gold, and the futures in all three primary indices, and was accompanied with real volume.

Was that someone bailing on a long or getting aggressively short ahead of a potential explosion? Its impossible to know with certainty, but we never did see an actual mushroom cloud, so its difficult to know what was in the mind of person(s) involved. But a 15-handle move in seconds accompanied by volume in the overnight session certainly wakes you up fast when you're casually glancing at your computer!

I'll note that the last time we saw this sort of "overnight dislocation", which at the time was claimed to be a "fatfinger mistake" by Globex (and resulted in thousands of busted trades), we started a precipitous decline in the market that spanned several days the next morning.

This morning CBOE had a "problem" with their consolidated data feeds. Why is this important? Because among other things that prevented anyone from seeing the VIX, which incidentally was up a lot on a day when the indices were treading water. A concerted levitation attempt or just random chance?

I don't know, but there is a disturbing pattern here where data feeds have this funny way of disappearing at the most inopportune time, and it never seems to happen when the market is skyrocketing higher, only when it is threatening to tank.

The love-fest was out in force in Omaha this weekend with Berkshire's annual meeting, but those with more brains than fanboyism should pay attention to the results instead of the gushing admiration. Specifically, the monstrous miss that Berkshire posted for its quarterly results, and the forward guidance from Warren that "the easy money has been made", along with his prediction that 10% returns for the business will be difficult to achieve and should be considered "excellent" going forward - for the next several years.

This comment ought to frame reality for anyone who thinks it will all be ok going forward:

"Billionaire Warren Buffett castigated investment bankers, home lenders and regulators for letting the financial system spin out of control and causing a run on Bear Stearns Cos. that almost brought down more of the biggest banks.
'Wall Street is going to go where the money is and not worry about consequences,' Buffett said during a news conference yesterday, a day after his Berkshire Hathaway Inc.'s annual meeting. 'You've got a lot of leeway in running a bank to not tell the truth for quite a while.'
Buffett and investing partner Charlie Munger also lambasted credit raters, bond insurers and policymakers for two days as a record 31,000 attended the annual affair in Omaha, Nebraska. In between scoldings, Buffett told investors more damage lay ahead and dropped hints about where Berkshire is looking for purchases abroad as the dollar falls."

Not tell the truth?

Lambasted the credit raters?

Oh, you mean like Moodys, which Berkshire holds a huge position in? Tell me Warren, if you're so concerned about Moodys, how is it that with 20% of the stock under Berkshire's control you haven't either divested yourself of that holding or started a proxy fight to get the clowns running that joint out of there?

The key is to "watch what they do, not what they say." And in Berkshire's case that means paying attention to the fact that they have profited tremendously from the "intentional inefficiencies" in the market - that is, lying.

That has made Berkshire a lot of money, and I don't see him giving any of it back to those who got screwed. While this may be ok if you're a Berkshire stockholder, its not so good for everyone else. (As an aside, Berkshire stock is off about 2% today; given the size of the miss its surprising the street carnage wasn't worse.)

ResCap says that in June they may default on their obligations:

"ResCap, the eighth-largest U.S. residential lender in 2007, today began offering as little as 80 cents on the dollar to exchange or buy back $14 billion of bonds to extend maturities and stave off bankruptcy. To finance the restructuring, ResCap is seeking a new $3.5 billion credit facility from GMAC.
'There is a significant risk that we will not be able to meet our debt service obligations, be unable to meet certain financial covenants in our credit facilities, and be in a negative liquidity position in June 2008,' ResCap said in a filing to the Securities and Exchange Commission today. "

The credit crunch is over? We've seen the worst of the risk from mortgage exposure to financial companies? Uh, perhaps you can explain why the words "stave off bankruptcy" are in that little ditty?

UBS comes out with a $11 billion first-quarter loss and says they may lay off 8,000 people. Given that last year they made about $3 billion in profit, this is quite impressive - a year's worth of profit in losses in one quarter? That's gotta hurt when you sit down:

"'UBS is scaling down investment banking,' including reducing trading bets and giving up off-balance sheet units, said Frankfurt-based Landsbanki Kepler analyst Dirk Becker, who advises clients to 'reduce' holdings of UBS. It is 'realistic' to estimate that the company will fire one tenth of its 83,000 employees overall, he said."

Getting rid of off-balance sheet exposure is a net positive over time, but the key question for today is "where is the value on these stocks?"

That is, what is the native earnings power of an investment bank when they can't play the games that have goosed returns for the last dozen years?

Federal Prosecutors are turning up the heat in the subprime mess; saying:

"The U.S. attorney for the office, Benton J. Campbell, who supervises about 150 prosecutors, said the group will look into potential crimes ranging from mortgage fraud by brokers to securities fraud, insider trading and accounting fraud."

Yeah, ok. I'll believe it when I see it.

The fact of the matter is that The Feds preempted state regulation of mortgage initiation during the bubble years, and no amount of attempting to hide from the record will succeed on that count. Nor is the record on the SEC's misfeasance open to serious question; they have turned into a lapdog of the highest order, going from being a regulator to an organization that hands out Lewinskis to anyone on Wall Street who asks.

Indeed the SEC's latest "dislike" of the short-selling hedge-fund community is particularly curious, given that during the entirety of 2007 the game was to start false rumors that were positive, after buying huge numbers of CALL options. This was widely reported almost on a daily basis in the media and yet nothing was done about it.

But when some short-sellers buy a lot of PUT options and then go after Bear Stearns, that's worthy of a criminal investigation.

I personally believe that all market manipulation needs to be investigated and, when the law was broken, prosecuted. This applies to both "short" and "long" rumors, not just those that cause price declines.

Of course that would mean locking up half the hedge fund and investment bank population in New York.

Deutsche Telekom is allegedly looking into buying Sprint/Nextel. I'm not sure how that works out, given the wide differences in the protocol and plant that both systems use. Sprint/Nextel use PCS and iDEN, while DT's T-Mobile is a GSM-based system. While GSM is headed to "3g" (and is in fact being rolled out "silently" now, if field reports I have are to be believed) exactly where this leaves Sprint/Nextel in terms of its plant is less clear. This much is certain - trying to force customers to convert equipment usually is a losing strategy, and those carriers who have attempted it in the past have wound up with huge losses in the customer base, AT&T/Cingular being one of the better examples.

My inclination would be not to do a deal like that, were I at the helm, and instead I'd draw a bead on Sprint/Nextel with the money I'd have spent on an acquisition and go customer hunting at their expense. Given the cost of an acquisition I suspect that DT could raid them quite effectively, especially with the recently-acquired 3G spectrum in the US. Bang-for-the-buck that would likely be a better investment.

One of the problems I continually see among businesspeople is the insatiable appetite for "mine is bigger." Growth via acquisition is fraught with risk, with the most serious being that you piss off existing customers during the integration process and lose them, making your acquisition too expensive - yet if you price for that loss when you make your bid, odds are that you get told to go to hell because the acquired company has those customers and doesn't forsee losing them at all.

This inexorably leads to you overpaying for what you get in order to get the deal done, which is ultimately destructive to shareholder value.

ISM Services came in at 52, which was better than expectations. You'd think the market would rocket higher on this, but it didn't. Why? Commodities - up went oil, more than $2 this morning, and the commodities long trade looks to be back on, dampening enthusiasm. Add to this that the new orders number embedded in the ISM fell slightly while prices paid was up significantly, both going the wrong way.

The internals in that report are pretty nasty, despite the better headline number. 59 straight months of price increases, with the rate of change increasing (bad), and inventory sentiment going the wrong way at an increasing rate - for 131 months straight.

When you take serious price inflation, top it with inventory mismanagement but then wind up with services that aren't totally in the toilet you get a market that isn't quite sure what to make of it all.

Bank of America's deal to buy CFC appears to be in serious trouble. A FBR analyst has cut his target to $2 on CFC and has changed his view of valuation of the deal to $0-2. Yes, the low end of the range is zero! That was my read on the "value" of their business back last year, and again in January. Funny how it took FBR six months to bother to read the balance sheet and apply a few realistic assumptions to both liabilities and assets......

If you want to know why the market has been "levitating" the last couple of months you need only look at the "depth of analysis" that these people apply when they come out with their calls.

It was absolutely obvious back in April of last year that these "liar loans" were going to be worth little or nothing. Recoveries were clearly going to be in the 50-60 cent range on a good day for firsts, and significantly less on seconds. This crap paper was clearly being sold for years into every channel on the planet, including Fannie and Freddie, and was going to lead to serious problems for them.

Yet even today, more than a year after the point in time where no excuse remains for ignoring the truth, we still have six month time lags on "analysis" of a major lender's portfolio and a viewpoint that their liabilities almost certainly exceed enterprise value; ergo, the stock is a potential zero.

Why do people listen to these clowns? Does nobody remember 1999 and 2000, when the likes of Cramer and Blodgett ran around pounding the table on technology stocks that in the end proved to have zero real earnings potential, ran out of money, and went bankrupt?

Last April I started analyzing WaMu's earnings reports, for example, and wrote in the Ticker about their capitalized interest "earnings" game - removing that from their report left them with insufficient earnings to pay their dividend! Yet the "market callers" kept rating the stock a "buy", citing their earnings "beats", even though those "beats" and "meets" were predicated on "earnings" that you can't actually spend.

Ultimately my view was proven correct and the stock price collapsed by more than 50%.

How hard is it guys? We all read the same balance sheets.

Or is the truth something more sinister? Is not the truth the same as it was in 2000, where the game is "access" and if print what you really think you'll get "cut off" from the company? Reg-FD is supposed to prevent that sort of "favoritism" from happening, but we know that is a paper tiger and has never been enforced.

Whatever the case may be we continue to have a market that trades not on hope, which is always present among humans and is part of the game, but outright falsehood.

Let's quickly examine a common claim - "The Market is a discounting mechanism for the economy 6-12 months out."

What did the market tell us being at an all-time high on the SPX in October of 2007?

That six months out the economy would be in great shape and that the "Subprime Slime" would not spread.

Was that prediction correct?

If not, why is the rise in the market off the January lows now considered an accurate prognostication of a recovery by the end of the year?

I rest my case, and would advise that, in my opinion, anyone who believes that "the consumer will be just fine", and therefore we should buy stocks related to either consumer spending or expansion of commercial activity (gee, like, for example, Google, RIMM, Apple and Amazon?) needs to do some serious thinking about the predictive value of the stock market.

Are you buying a historically-accurate prediction or are you throwing darts?

As for the calls of "The Financial Crisis is Over", perhaps you can explain the call out from FBR today for CFC to be a zero (or damn close to it), and today's news that ResCap may default on their debt in the next month.

Over?

That is quite possible for those firms - you can't be dead more than once, right?

But how about the rest of the market?

Now there's something to think about.