Commentary

October 13, 2008

"PIMCO’s Investment Committee to a man (no women yet) believes that capitalism is the best and most effective economic system ever devised, but it has a flaw: it is inherently unstable." ... Nothing to Fear but McFear Itself by Bill Gross of PIMCO.

This is the latest word from Jay
Steele.

"We believe that we are now either at or very near a significant Low Risk juncture in the markets. With the Nasdaq McClellan Oscillator now hitting the critical juncture of -400, we now believe the risk will begin to start leaning more towards the Bears than the Bulls."

Red and White D sends this link to 'How to capitalise the banks and save finance', by George Soros.

He also sends this link to 'Swept Up by Insanity of Markets' , by Joe Nocera.

Ben Smith sends this link to 'Gold: The Last Carry Trade' .

I found this link to 'Monday Morning Quarterback: Salvation Lies Within', by Todd Harrison on Minyanville.Com.

I read Jay Steele's words this morning and realized I just had to violate part of my own trading plan. I had to get more money into the market in a long postion. So I threw some money into UYG. I have started waiting for SKF to fall down to where I could buy it again. UYG is the exact opposite trade. It stands to reason that for SKF to fall...UYG must rise.

Note that I still have half my monies in cash right now. I still want to be in a large short position soon because we have more downslope to negotiate. But for right now, we could get a sharp rally here. I don't expect to hold UYG more than three days. I may only hold it for 24 hours.

October 12, 2008

In the interest of fairness, here are Duncan's latest comments.

"October 10, 2008 - The Democrat Party has finally achieved what the terrorists failed to do on 9/11/01. They have succeeded in almost destroying the American banking system and the economy. And who gets the blame--Republicans as usual. I have to admit that I did not think a few foreclosures would have this much of an effect on the markets. I forgot about the fractional banking system and how highly the banks were leveraged, especially the investment banks. However, buying for the long term is usually a good idea at this kind of market capitulation.

(This page will not longer be available after October 31st since AOL is eliminating this feature for their subscribers.)"

October 10, 2008

October 9, 2008

October 8, 2008

Here are two interesting articles.

The first link was sent over by Lar. It is 'Why globalisation will yield to regional fiefdoms', by Carl Mortished of the London Times.

The second link was sent by Ben Smith. It is 'Dow and S&P 500 Capitulation Pre-Alert', by Bob Hoye of 321Gold.Com.

I think Mr. Hoye may be ahead of himself. Here is why. I have been following four short funds very closely lately: SKF, SRS, SIJ, and DUG. Not only have they been looking toppy lately. They all put revealed black hammers today in their bar graphs. Yeow, that's a down signal if there ever was one. So if short funds are headed down...and I mean starting tomorrow...the markets in general should be going up starting tomorrow. You read it here first. We are in for a short but sharp rally here.

October 7, 2008

Here is an excellent read sent by Red and White D: 'How to Ruin the U.S. Economy', by Ben Stein on Yahoo.Com.

And here is another good one: 'Debt Crisis vs. Liquidity Crisis', by Kevin Depew of Minyanville.Com.

October 5, 2008

Red and White D writes this note.

"Bender,

From a french/english dictionary:

tranche Noun, feminine slice of meat, cake, bread, rasher of bacon; edge of a coin, book; section, tax band, bracket, credit instalment, time slot; ~ de boeuf beefsteak; couper en ~s to slice

Seems funny to me that the wizards of wall street resorted to a foreign language to disguise and market their wares. Based on what I've read about this whole debacle the scheme ended up isolating the collateral from the ultimate lender so the lender really never knew (and probably didn't care) what he was buying. He only cared about return. He trusted the seller to worry about risk.

The whole deal was based on a trust relationship between buyer and seller. A trust that ended up being misplaced. When real estate prices started to fall and that bond of trust was broken when the poop started to fly.

It's hard to imagine how long or what it will take to re-establish that bond of trust between buyers and sellers.

All business relationships ultimately depend on trust. We don't need 730 billion dollars to restore our econonmy. We need trustworthy people."

I found this article to be very timely: 'Snowball From Hell', by Jeffrey Cooper on the Minyanville.Com site. I quote it below.

"he last pivot high for this market occurred on September 2nd. An eerie analogue. I think it is wise to respect the message of history and the notion that panics tend to play out over a certain periodicity of 49 to 55 days before being tempted to jump in because stocks look like they are down too far, because stocks look cheap. There is no such thing as fair value when someone big is trapped and forced to sell and they cannot wait. There is no such thing as fair value when hysteria is running rampant."

I have sworn off any more long positions until the last week of October. By then it MIGHT be safe to to long again.

October 3, 2008

REACTIONS TO YESTERDAY'S COMMENTS

Duncan rightly took me to task for implying that it was the Republicans who were mostly to blame for the mess we are in. Here is a link he sent me to: 'How the Democrats Created the Financial Crisis', by Kevin Hassett of Bloomberg.Com. I quote it below.

"If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.

But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.

That such a reckless political stand could have been taken by the Democrats was obscene even then. Wallison wrote at the time: 'It is a classic case of socializing the risk while privatizing the profit. The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing.'"

I would note that the above article refers to a bill in the U.S. Senate in the year 2005. I do not recall the particulars surrounding this bill. If, as the article claims, the Democrats in Congress killed the bill (and that may have been the way it happened), the Dems must have had some Republican help. The Democrats did not take over Congress until January 2007.

Here are other good links also sent by Duncan:

'The Long Road to Slack Lending Standards'

'The Rise and Collapse of Wall Street's House of Debt'

'15 Things You Need to Know About the Panic of 2008'

'YouTube - Shocking Video Unearthed Democrats in their own words Covering up the Mortgage problem'

Another reader wrote:

"I am not sure where the popular idea that free market ideals include allowing lack of regulation, e.g. monopoly is specifically mentioned in his (Adam Smith's) most famous works. This information is easily available to anybody who would do a simple internet search today. (Implying I should do such a search.)

I generally enjoy this site, but I have seen this (terrible) mistake over and over. It is well known by free-market, conservative economics 'fans' that anarchy is not what is meant by a free market."

The Orange Section wrote:

"A few additional rules I would add to your post:
• 1) Re-engage the limits on Oil Futures. If Oil is of such critical importance to a modern economy then speculators should not be able to run up the price on contracts whose notional value in barrels of oil dwarfs reality.

• 2) Change the Pension laws that allow for easy dissolution of pension liability during tough times and shift the focus back in on corporate accountability. One of the unsung casualties of the 90's bull was that companies and their stocks did so well that they conveniently forgot how to manage a pension liability. In the aftermath many employees have seen their life's work sold down the river and sent to the Federal government to be managed for pennies on the dollar. That is outrageous. Corporate Executives should have far more accountability and regulation to deal with before shedding a pension.

  In terms of the credit crisis, I think it is very easy right now for us to over shoot the regulation. Structured finance and securitization are good things for the market. They were tools of the lenders who were issuing loans under poor credit management practices. The credit analysis and due diligence is what was lacking and lead to the crisis. Derivatives get a bad name in times like this and I think people should recognize that Derivatives are just tools, it is the person using the tools that was at fault in this mess."

Ben Smith sends along this Jim Cramer Link. I quote it below.

"Whether there's a bailout plan or not, there's a crash looming on the horizon according to Jim Cramer. He said that every company that exports commodities or helps ship commodities is in big trouble. Cramer said it's as if the countries of Brazil, Russia, India and China, or BRIC as he calls them, have completely dropped off the map. These countries, once ravenous importers of commodities like oil, coal, steel, fertilizer, iron ore and aluminum have seen a sudden downward turn in demand, leaving U.S. exporters holding the bag. "It's impossible to know how low these commodities will go," said Cramer, but for companies like fertilizer maker Mosaic, it's a stunning turn of events. Cramer said these stocks, along with railroad companies such as CSX and Union Pacific, are now the targets of relentless hedge fund selling as the commodities keep falling and fund redemptions keep growing. Cramer said even with a federal bailout package to save the U.S. economy, these export and transport stocks won't be saved since they're levered to the economies of the BRIC countries. Indeed, he said the only international stocks he would recommend are defensive and soft goods names like Heinz, General Mills and Colgate-Palmolive."

Wow! Well, I should have picked on all the deregulators, not just those in my own party. But if this event were WWII, then deregulation of the Savings and Loans was WWI. The first event should have taught us a lesson, and did not. It illuminated a mindset toward regulation that was destructive and irrational. It was a fine example of the Average American getting walloped by the back of Adam Smith's 'invisible hand' of the market. It was the disruption and severe weakening of the Savings and Loans through deregulation that brought Fannie and Freddie to carry a much heavier burden in the mortgage world, which led in turn to this current debacle.

I, for one, am pretty disgusted with Congress in general. Its approval rating is now deservedly in the single digits. Members of both parties have labored mightily to achieve this. I wouldn't mind if the voters threw all the rascals out and we started all over again. I think an equal number of fifth graders could do a better job.

I am assuming that Cramer (see above) is right about the BRIC countries, and commodity prices are falling off the shelf, and have a long way to fall. This is very disturbing when one considers what has been happening to the Dollar. Ben Smith sends these links to 'Dollar's Recent Strength has Little to Do With U.S. Economy' and to 'The Source of the Dollar's Recent Strength'.

Over a year ago leadership in the U.S. Economy passed from the Consumer to Exporters. U.S. exports began to pick up when the Dollar began to fall. Our exports have been holding everything together. Now the customers, the BRIC countries, are dropping faster than we are. That spells doom for exports and insures that the Recession we are already in will grow deeper yet.

Starting in August I took on a new trading stategy. It was an unfortunate choice. I chose to take a longer term approach to the market with an eye on longer term gains by the stocks in the top ten in my system. Now I am swinging the other way. I want to be mostly on the short side of things. That's the way I will play it from now on.

October 2, 2008

I have not heard from Duncan lately. Today, he sent in this link to: 'What happened after yesterday's [Tuesday's] close?' a blog on the MotleyFool.Com site. I quote it below.

"What happened after yesterday's close was pretty simple: There were a few sellers (volume was not particularly heavy), and no buyers. These transactions therefore get absorbed by market makers, who ended up playing counterparty on tens of millions of dollars in trades. It seems no one wanted to buy into the howling of the overnight. These marked-on-close transactions had the effect of further distorting an already rattled market. It happens every day on Wall Street. Usually, there isn't so much volatility for investors to notice."

Yes Duncan, it seems the Specialist System is still alive an well. Those boys seem to select their targets carefully. Tuesday was not only the end of the month, but the end of the trading quarter for a lot of hedge funds. It seems the Specialists got into some of the Hedgy's back pockets.

The Orange Section sends along these comments.

"I have been reading your comments and I would like to pose an additional question: Who, if not the Legislative Branch of the Federal Government has the power needed to regulate the credit providers? Obviously there is something to be said about self regulation and responsibility, but that didn't happen. So in the case of this event, who or what could have prevented the debacle?

I look at the bail-out as moral question of capitalism. Congress isn't just bailing out Wall Street. They are covering their own mistakes. That is the real tragedy in all of this. What will happen to the do nothing politicians that let this fly as lobby dollars flowed in? Nothing. So if we are to provide aid to banks and lenders under the guise of helping the economy and preventing losses how are we fixing the problem? We inject capital into a system that is still controlled by the same decision makers and regulators that let it break in the first place.

To me this is asinine. We are here because of people that were unscrupulous with the rules and enforcers who were willing to be bribed. These are fundamental flaws of leadership. Capitalism works because it gives people the freedom to succeed and the freedom to fail. This is the very essence of Adam Smith's Invisible Hand. Any scenario that does not provide for full reconciliation of all the players prevents failure and thus enables inefficiency and instability. Capitalism needs consequences. There needs to be a wolf at the door in case something slips or gets out line. The wolf prevents excess and greed, he punishes irrationality by destroying capital. A free market system cannot survive without a wolf. The whole point of this bail out seems to be to feed one group to the wolf while insulating another.

As Macabre as it might be, I think we should let the dam break. There will be pain, but just as a forest must occasionally burn in order to survive so must capital be destroyed in order to preserve a free market's opportunity for prosperity."

Yes Orange Section, in 'protecting the economy' Congress is covering its collective ass, covering the lack of oversight and regulation that should have been in place all along and which probably would have prevented a lot of this mess.

The problem with Adam Smith's Invisible hand is that it swings so wildly that the Average Joe gets smacked by it coming and going. The whole goal of naked raw capitalism is not a level playing field, but the avoidance of one in the first place or the destruction of one if one already exists. Pure capitalism, I will state again, results not in a panacea, but in five guys owning everything, absolutely everything: your house, your clothes, your car, the air you breathe, the water you drink. Pure unfettered capitalism is the destruction of creativity and innovation.

The deregulators in my party (the Republicans) got their way, and that is how we got to this place. What we got with deregulation is opacity in place of clarity, the inability of anyone to price certain securities. With deregulation we got the Shadow Mortgage Industry which behaved with predictable irresponsibility and which grew to tremendous size and influence in a short time. Who thought (You and I certainly did not) it was a good idea to allow this level of gambling to go on with what is the American family's biggest financial asset: its home? And why was it a good idea to allow the Shadow Mortgage industry to exist in the first place?

The other thing Congress is doing, with the bailout (and it is a bailout - make no mistake) is saving themselves from having to explain to voters why it is that we slipped into a '29 kind of Depression with the DJIA somewhere south of 3000 and virtually everyone's pension plan wiped out. I think that is what the consequence would be of the bailout's failure.

Even with the bailout there is going to be pain. It is going to be drawn out longer. But banks are still going to have to do a lot of write offs and write downs. We are still in a recession and the economy is still slowing and joblessness is still going to keep rising.

So now what?

Here are some things I would like to see:

• Rational Payment: I want to see a plan for how this is all going to get paid for. One group of Congressmen has proposed a reinstatement of an old trading tax, a small amount of a percent of every trade. It would raise enough money in three to seven years to pay for the bailout. I like the sound of this because it taxes daytraders heaviest, and therefore Hedge Funds the heaviest. I think brakes need to be applied to the markets to ease volitility, which I believe is too high to be healthy.
• A 'Big Enough' Priciple: I want to see the adoption of a rule of thumb, a principle as it were, that basically would state that if you get big enough, whether you are a company or an industry, to affect the health of the economy (and therefore the value of of my pension monies), you get regulated. Period. I guess this rule would apply to the Hedge Funds too.
• An 'Uptick' Rule: I want to see the re-adoption of the old uptick rule, which says you can not short a stock unless it has gone up in price. Freefalls in stocks are ugly.
• A 'Short Limit' Rule: I want to see adoption of a rule that only allows up to 70 percent of a company's outstatnding shares to be short at any one time. We have seen in the past two years more shares short in some companies' shares than were outstanding...and not by a small percent either.
• A loosening of Rules that now prohibit what Companies that are under a massive shorting attack can do: Companies under a shorting attack have been hobbled in their ability to fight back even when they had the cash to do so. That is not right.
• A 'Clarity' Rule: I want to see adoption of a rule that forces sellers of any 'paper' to clearly spell out the risk on that paper and to post that statement online for the world to read.
• An 'Inability to Pay' Rule: I want to see adoption of a mortgage rule that makes it a jail-time crime to knowingly write or arrange for a loan that that average person would know could not be paid. The time for $480,000 mortgage loans to guys making $30,000 a year simply has to stop, now and forever. Under my rule, not only would the banker do jail time, so would the realtor.

  AND LAST - BUT NOT LEAST

• A 'Pay For What You Get' Principle: I want to see governments and individuals to slowly back away from credit, to begin saving, and to begin to balance budgets. I think that if we are going to enjoy something in our lifetimes, we should pay for it in a third of that amount of time (half that time for mortgages). And if we can't pay for it in that time...we should not have it or do it.

October 1, 2008

Here is a link to 'Recession now certain, economists say', by Rex Nutting of MarketWatch.Com. I quote the article extensively below.

"'Anyone who's wondering if there's a recession should stop wondering,' said Nigel Gault, U.S. economist for Global Insight, which will release its updated forecast on Monday.

'The recent data were deteriorating sharply' even before factoring in the latest impact of the credit squeeze.

Global Insight doesn't think the recovery will be quick or powerful. The economy will likely contract for three quarters and then show weak growth in the second quarter next year.

If the recession lasts from December 2007 until April 2009, as Gault suspects it will, it would be the longest since the Great Depression. And the recovery, when it comes, won't feel anything like a boom.

...In the past year, most of the GDP growth has come from increased exports and a reduced appetite by Americans for foreign-made goods. Consumer spending, which typically accounts for 70% of the economy, has contributed only about 40% of the growth over the past year.

And consumer spending seems almost certain to decline in the third quarter, which ended Tuesday. We won't see September consumption data for another month, but the trend through August was horrible. With auto sales dropping to a 16-year low and chain-store sales weak, September may have been even worse."

September 30, 2008

Red and White D sends these links from The Guardian:

http://www.guardian.co.uk/world/2008/oct/01/japan.japan

'Crap sandwiches on Capitol Hill by Simon Tisdall', I quote this one below.

"Like noxious fumes leaking from a corpse, the controversy over the failure of the Bush administration's unpopular emergency financial bail-out plan is infecting every aspect of government and the 2008 presidential election campaign.

Eminent reputations lie in ruins; the august institutions of Congress, the Treasury and the Federal Reserve tremble; the presidency itself is shaken. From America's year of living dangerously, few will emerge unscathed.

The consensus view, if there is one in so divided a nation, is that the US has suffered a calamitous, across-the-board failure of leadership. The bankruptcy is political as well as economic. This conclusion is widely held among both supporters and opponents of the bail-out."

I will share this note from Rich Kolon

"Hi Bender

Back in June I asked the rhetorical question: 'What is a rational observer suppose to think about this? The situation is getting worse for the banks in trouble. They are getting more desparate for cash.'

At that time the loans were 'just' 75 billion every two weeks for 28-day loans.

Well now they will be getting even more.

http://www.federalreserve.gov/ newsevents/press/monetary/20080929a.htm

And there's the talk of a $700 billion bailout package we all heard about.

The problem with the short term loans is that they don't solve long term problems. It's like the borrowing banks are addicted to maxing out their credit cards with the government.

With individuals, the solution is to minimize future credit. Or there is bankruptcy.

The right thing is no different for banks who tried to screw everyone else and even their own stockholders to enrich a few executives using phony baloney statistics and false ratings.

Rich"

September 29, 2008

No one ever made a dime panicing....James Cramer.

Look around. There be bargains out there.

Lar sends this link:

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3094318/Bailout-failure-will-cause-US-crash.html

Ben Smith send these links:

http://www.youtube.com/watch?v=cSPSiDX0Xnk&feature=related

http://www.youtube.com/watch?v=EoB4BS7CGAw

http://stockcharts.com/h-sc/ui?s=$VIX&p=D&st=1996-01-01&id=p32297436139&a=151454916

http://stockcharts.com/h-sc/ui?s=$VIX&p=D&st=1996-01-01&id=p32297436139&a=151454916

Red and White D sends these links:

http://mail.trib.com/Redirect/money.cnn.com/2008/09/25/news/economy/sloan_crash.fortune/index.htm?postversion=2008092610

http://finance.yahoo.com/expert/article/yourlife/109609

http://mail.trib.com/Redirect/www.dallasnews.com/sharedcontent/dws/dn/opinion/editorials/stories/DN-economy_25edi.ART.State.Edition1.26b31c6.html

No Thanky to Paulson and Bernanke

The hidden implication in the above article is the problem of the President's own credibility. The House Republican leadership responded to his call for action and the House rank and file saw them as gullible. These are the same folks who got sold Iraq in a hurry, weapons of mass destruction and all, and they still have the taste in their mouths. But now that they have revolted from their own leaders, who is left to lead? And with whom do the Democrats negotiate?

September 22, 2008

Here are two links from TheStreet.Com:

'Oil Soars 20% Ahead of Expiration', by Chuck Marvin

'Cramer's 'Mad Money' Recap: Finding Refuge in Gold by Scott Rutt'

September 21, 2008

"The irony of the current conundrum is that many of the institutions in peril are the same companies that repackaged risk, engineered exotic products and built the derivative structure." .... Todd Harrison on Minyanville.Com.

Deregulation, that is what is at the heart of our current woes. It has been the mantra of many in the Republican Party (my own party) for decades now. It was the panacea, the pot at the end of rainbow. And even after deregulating Saving and Loans and the seeing resultant problems, Deregulation remained the Holy Grail of the hardcore of the party. And these people posessed extraordinary skills that allowed them to actually grasp their long-wished-for Grail.

This current administration is being visited with its own self-reported worst nightmare. This administration's unwavering pursuit of deregulation is to be the stimulus, the cause as it were, for a wave of regulation that is going to sweep Corporate America.

...............

I know that hindsight is always much better than foresight. Even so, I wonder if much of this disaster could have been avoided if the Fed/and or/Treasury could have set prices for the distressed mortgages and securities, say ten or twenty cents on the dollar; and then if the Fed/and or/Treasury could have started buying them at that rate, much of this turmoil could have been avoided.

Also, it occurs to me that the worst thing that could happen if a home is foreclosed is for the bank to be forced to put it right back on the market. Foreclosed homes should be taken out of the market for a year. Maybe the former owners could rent them reasonably and be given first crack at buying the houses back when the year is up.

September 19, 2008

The Orange Sections sent these comments along.

"I read your comments yesterday, I have slightly different take. I blame the US Government. The rating agencies are certainly culpable, but in the end the Government and the Federal Reserve were the ultimate regulators. Finance is far from being a self regulated industry. If you want to start blaming people for this, blame greedy Washington insiders who would not pass responsible legislation limiting this kind of lending practice and slowing down Fannie and Freddie.

This is a classic story of Greed at every level. While the Corporate Managers are certainly despicable they at least have some semblance of an excuse in the sense that they would have been fired by greedy shareholders for not reaping the profits . (a systemic issue) Government Regulators have no such excuse. They did nothing either out of their own greed or utter incompetence. Either way they failed their constituents.

This bailout is just the latest example of pay it forward politics. They are going to spend massive amounts of money that they will borrow in one way or another and then pay it off over the years. It has gotten so bad that Joe Biden is out claiming that it is unpatriotic to not pay more taxes. Every member of the Boston Tea Party must have vomited in heaven when he said that. What has happened to the quality of leadership that founded this country?"

Links to older commentary:

News 82, 08-08-08 to ?

News 81, 06-18-08 to 08-03-08

News 80, 03-27-08 to 06-16-08

News 79, 02-03-08 to 03-24-08

News 78, 12-23-07 to 02-02-08

News 77, 11-16-07 to 12-20-07

News 76, 10-14-07 to 11-12-07

News 75, 08-19-07 to 10-10-07

News 74, 04-30-07 to 08-17-07

News 73, 10-24-06 to 04-23-07

powered by web site analytics software.