NEWS #77

From October 16, 2007 to December 20, 2007

December 20, 2007

Hurry, hurry, hurry, this way to the egress
There's a sucker born every minute.......... P.T. Barnum

Naked people have little influence.....Mark Twain
But naked institutions have much.......The Bender

Figures don't lie
But bankers sure can figure............The Bender

If being extra clever got you, and us, into this mess,
Why can't you be even more clever and get us out?....The Bender

Real estate values never go down
Land is the one asset that is the exception
to all rules of risk.....common thinking after
folks lost their shorts when the tech bubble burst

Don't worry about the price,
it (tulip bulb, barrel of oil, house) will be worth more tomorrow
........universal thinking during a mania

I think I will quit my job and become a:
Gold prospector
Wildcat oil well driller
Uranium prospector
Gambler in Vegas
Mortgage Broker......universal thinking during a boom/bubble

We are giving money to people
Who risked the health of the nation's economy
By stupidly, but knowingly, and 'cleverly', loaning money
To people too stupid to know they could not make the payments
And this is a good thing?.......The Bender

If that's the way it is,
Give me the money
I promise I be just as stupid with it!..........The Bender

All we are saying,
Is give stupid a chance!.......Parody of old peace song

Everybody ought to have an ARM
It's good to be king....What Mel Brooks might have Greenspan say

If we can execute people for unacceptable behavior,
Why can't we execute corporations?.......Jim Hightower

And if we could execute corporations,
Wouldn't that be too good for Moodys and Standard and Poor?
Wouldn't we have to dream up something even worse for them?....The Bender

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

Here is a link sent by the Red and White D to 'Barclays sues over sub-prime losses', by Andrew Clark of The Guardian. I quote it below.

"In addition to Bear Stearns, the suit targets the Wall Street firm's senior managing director for asset management, Matthew Tannin. A third defendant, fund manager, Ralph Cioffi, is already under investigation by US federal prosecutors for withdrawing his own money from the hedge fund while assuring investors not to worry.

'The defendants entered intentionally into a relationship in which Barclays placed trust and confidence in them,' the suit says. It describes Bear Stearns' conduct as ' wilful, malicious, reckless and without regard to Barclays' rights and interests'"

December 17, 2007

I had to do some serious tap dancing today. I sold two and bought two. Richard Kolon suggests it might be a good time for bond funds. I have already been thinking along similar lines as Rich. Here are some good Bond Funds:

PMF - PIMCO Munic. Income
PCQ - PIMCO California Municipal Income
PML - PIMCO Munic. Income II

Here are some Short Funds:

PSQ - Short QQQ
QID - Untrashort QQQ
SBB - Short Small Cap
SDD - Ultrashort Small Cap
SJH - Ultrashort RUT Value
SKK - Ultrashort RUT Growth
SZK - Ultrashort Consumer Goods
SKF - Ultrashort Financials
SIJ - Ultrashort Industrials
SRS - Ultrashort Real Estate

December 16, 2007

Here is a link to 'Implications of Commercial Real Estate Collapse', by Mike Mish Shedlock of Minyanville.Com. I quote it below.

"U.S. office sales fell 70 percent in October from a year ago, industrial sales declined 24 percent, and retail and apartment sales dropped 50, according to New York-based research firm Real Capital Analytics Inc. The declines are the biggest since the company began keeping records in 2001."

The Red and White D sends this link to 'Citigroup bails out $49bn of mortgage-related investment vehicles', by Andrew Clark of The Guardian. I quote it below.

"The extent of the credit-related liabilities faced by the banking sector remains uncertain. But Citigroup made clear it hopes to get a grip on the problem by bringing its exotic investment ventures closer to home.

The value of the SIVs has fallen from $87bn to $49bn since August. Bringing them onto its balance sheet further stretches Citigroup's already low capital adequacy ratio, which has fallen under the bank's internal target of 7.5%.

...Citigroup's voluntary action could spell the end for a plan by the US treasury secretary, Henry Paulson, to create an $80bn industry-wide fund to bail out troublesome SIVs. Several financial institutions, including HSBC, have joined Citigroup in deciding they cannot wait for the fund to get off the ground."

The last link was sent by Ben Smith to an article titled 'Schultz sees an apocalypse now', by Peter Brimelow of Marketwatch.Com. I quote it below.

"Shultz's latest letter, just in, is absolutely apocalyptical: 'A financial tsunami is upon us,' he says, caused by lax credit and complications introduced by Wall Street's derivatives craze.

Among other interesting ideas raised by Schultz in his intense, somewhat terrifying introduction: recession, possibly depression; bank failures; exchange controls; housing prices down by 50%; credit card company failures; money market fund dangers; tripling of U.S. jobless numbers; federal bail-outs for Fannie Mae (FNM) and Freddie Mac (FRE)."

December 10, 2007

Market Segments Go Their Own Way

Continuing a line of thought from yesterday, here is a link to 'Investment Theme du Jour', by The Minyanville.Com staff. I quote it below.

"The investment theme du jour is "decoupling" - equity markets have decoupled from debt markets, emerging markets have decoupled from developed markets and the U.S. dollar has decoupled from just about everything.

Short-term government securities have acted as a safe haven for money in transit. Interest rate traders have bet that the U.S. yield curve will steepen as the Fed cuts short terms rates and the long end reflect fears of inflation. European interest rate may follows as economies weaken responding to a U.S. slowdown and a stronger euro.

Debt is distinctly out of favor. The problems of structured credit, secularizations, Collateralised Debt Obligations ("CDOs"), Structured Investment Vehicles ("SIVs") and ABS conduits are well documented. Lack of transparency, poor liquidity and concern about the meaning and validity of credit ratings has led investor to switch to other assets."

In a 'decoupled' environment it should be possible to make money being bullish in some market segments, even while other segments tank. That is how I intend to play 2008.

Mortgage Mess From the Other Side

The British point of view is always interesting. Red and White D sends this link to 'Hard choices are crucial for soft landing', by Larry Elliot of The Guardian. I quote it below.

"With all their assets about to be seized and their seats on the commodities exchange forfeited, the Duke brothers work out that the only way out of their predicament is to indulge in another bout of speculation. 'Turn those machines back on' goes up the cry.

Hollywood being Hollywood, the bad guys get their just deserts. In real life, things are different. Ever since the world's financial markets were plunged into crisis as a result of their own reckless stupidity, the cry has gone up: 'Turn those machines back on.' And they have been. The problem is that the solution doesn't seem to be working.

...One option for US and UK policymakers would be to admit that the economies they have helped construct over the past quarter-century is a Potemkin village, built as it is on the premise that people can always spend more than they earn, consume more than they produce and borrow more than they can safely pay back. That would require a radical rethink of the prevailing economic and financial orthodoxies and a willingness to accept painful readjustment to a world with less debt and a financial sector cut down to size. So, what the heck, let's just try to re-inflate the bubble."

The whole Potemkin Village scenario would actually work if, and this is the big IF, wages and inflation actually cooperated so that real earnings actually did expand to keep pace with inflation and increasing personal debt. That is not what has been happening. Instead, we have lived through an economy expansion based upon workers taking out bigger and bigger mortgages and second mortgages, while the Feds and the FED lied through their teeth to us about the real levels of inflation. A practice they seem hell-bent on continuing. The expansion, real though it may be, is built on the idea of higher and higher levels of individual debt without any real increase in earnings. While this is not the Bush Administration's fault, per se, it has happened on their watch; and one of the biggest cheerleaders for it, perhaps its chief architect, was Alan Greenspan. Ultimately, we are headed for a recession even though we're not technically there yet.

It seems to me that some new financial devices are going to have to be created. One that I would propose would be a 60 year mortgage with a straight and fixed interest rate. If a holder of a mortgage about to reset at much higher levels could be supplied with a 60 year mortgage, then then money could be had to pay off the CDOs and SIVs. The holders of that debt should be grateful.

Another practice that banks and mortgage companies are going to have to take on is: encouraging their mortgagees to refinance, whenever possible to SHORTEN their paybacks from 30 year loans to 20 year loans, etc. This higher payback should ease the shortfall the institutions find themselves in, and ease the cash hoarding they all seem to be doing now. Institutions are relcutant to encourage mortgagees to shorten their payback times. But experience may yet teach the institurions that it is the wise thing to do.

Ultimately, what the mortgage granting institutions are going to have to do is foreswear issuing loans that, when times get tough, are not likely to be paid.

The delicate relationship between freeze and fraud

Ben Smith sends along this link to 'Interest rate 'freeze' - the real story is fraud', by Sean Olender of the San Francisco Chronicle. I quote it below.

"But unfortunately, the 'freeze' is just another fraud - and like the other bailout proposals, it has nothing to do with U.S. house prices, with 'working families,' keeping people in their homes or any of that nonsense.

The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth."

That is a definite possibility that needs to be considered.

The Orange Section takes exception

I sent a link to 'Where is Debt Being Stuffed?', by Mr. Practical of Minyanville.Com, to the Orange Section, just to get a reaction from him. Here it is.

"I have some issues with that article you sent. The author is leaving out facts to prove his point. I did an analysis of the domestic credit derivative market for work a few months ago and one of the more striking findings was the balance of notional outstanding. The amount of notional is numbered in the trillions, but the balance is measured in the billions. That means that for the vast majority of derivatives issued there is an offsetting contract somewhere else. From the International Swaps Dealers Association:
'The ISDA[3] reported in April 2007 that total notional amount on outstanding credit derivatives was $35.1 trillion with a gross market value of $948 billion.'

So only 2.68% of the market is actually not offset. This is the fact that evades a lot of people about the derivatives market.

This is not to say that there are not big problems with how the financial industry is using derivatives to spread risk around, but in the article you sent me the author implies that the entire weight of the derivatives market is one sided in order to support the author's point. That premise is not accurate. Derivatives create leverage which amplifies the negative effects of volatility. The volatility in the credit markets in not being caused by leverage, it is being caused by poor credit standards and lending practices. The leverage just makes the effects worse.

The real issue that credit market derivatives present is the fact that the notional outstanding far exceeds the amount of actual credit that the derivatives are deriving their value from. Thus, if the sub prime market makes up 7% of the market, the amount of liability present by derivatives might actually be equal to 50% of the debt in the system due to excessive leverage. However, as was stated above, while the outstanding notional is very large, the net balance (Debit vs. Credit) is actually a very small fraction of this amount. In other words, most of the notional has an offset somewhere. The risk is that a particular entity or group holds a large portion of one sided risk. This can set off a domino effect should such an entity be unable to support its obligations. This is part of what is going on with Citibank right now and also part of the source of the negative rumors we hear coming out of the various agencies. (FNMA, Freddie Mac, GNMA, etc.)

An additional omission is the statement that the Fed cannot do anything about the other 2 layers. The Fed can and does conduct open market operations involving swaps, repos, reverse repos, as well as more traditional treasury security trading. Here is an excerpt from the Minneapolis Fed Glossary on Swaps:

'Swap Arrangements:

Short-term reciprocal lines of credit between the Federal Reserve and 14 foreign central banks as well as the Bank for International Settlements. Through a swap transaction, the Federal Reserve can, in effect, borrow foreign currency in order to purchase dollars in the foreign exchange market. In doing so, the demand for dollars and the dollar's foreign exchange value are increased. Similarly, the Federal Reserve can temporarily provide dollars to foreign central banks through swap arrangements'

So the premise that they can only effect the first 2 layers is not entirely accurate. They may not directly trade in the credit derivatives markets, but they can and do effect the that layer of the financing structure. The article Bill Gross wrote essential states that Bernanke had a meeting with the Hedge Fund managers to learn more about how the Fed's maneuvering effects the derivatives elements in the structure.

As I've said before the Sub Prime panic is more about fear than anything else. The real issue for the economy is the declining housing prices and how that source of debt deflation will effect consumer spending over time."

December 9, 2007

Tonight I will say nothing about mortgages. Here is a link that Duncan sent to 'Bush Boom Continues', by Larry Kudlow. Kudlow makes some good points. Here is a quote of one of them.

"Here are the facts: Americans are working. The 4.7 percent unemployment number remains at an historical low. On a three-month rolling basis, the U.S. economy has added over 100,000 jobs. Meanwhile, the household job count shows that an average of 303,000 jobs have been added in the last three months. This is noteworthy because it suggests that the job market is turning around.

Hours worked are growing more than 1-percent annually, while workers' wages are running 3.8 percent, a full percentage point ahead of inflation. As for this week's productivity report, it was nothing short of spectacular: the 6.3 percent productivity gain was the best in four years. A rise in productivity is good for growth. It's good for profits. And it's good for low inflation."

It certainly is not all gloom and doom out there. The fact is, I am all into the markets right now, playing the Santa Rally for all I am worth. Also, I think it is quite possible that segments and individual stocks could do quite well even the rests of the markets do not.

Ben Smith sent the following links for all you gold bugs out there.

http://www.321gold.com/editorials/hoye/hoye121007.html

http://www.321gold.com/editorials/chan/chan121007.html

Gold may soon form a bottom. I will be looking out for that.

December 7, 2007

It seems that I missed the crucial meaning in yesterday's link to 'The last closing bell?' by David Weidner of Marketwatch.Com. Here is another quote.

"He is now urging floor specialists to become 'designated market makers.' He's also applied to the Securities and Exchange Commission to eliminate trading restrictions on specialists. Under the new system, former specialists will buy and sell stocks, or 'make markets,' not unlike the system at rival Nasdaq......."

Specialists have to adapt to new ways to shear the sheep. And they will. Trust me. You'll come out of this a bit lighter, and it won't hurt a bit.

Here is a link to the best thing I have read about the mortgage crisis: 'Straight talk on the mortgage mess from an insider' by Herb Greenberg on Marketwatch.Com. Greenberg's most important idea is that the subprime loans at risk only make up about one quarter of all the at-risk mortgages out there. This is truely a scarry article.

Here are two other mortgage articles:

'Little hope for hope now alliance' by Mike Mish Shedlock of Minyanville.Com.

'Hope is a sucker trap' by Mike Mish Shedlock of Minyanville.Com.

My own thinking is that Bush, Paulson, and Bernanke are all whistling in the dark. They hope that their efforts, even if unsuccessful, will give the markets and consumers some hope. Emotions are where people really live, and if investors and consumers have hope then there may be some chance to prevent a recession. They are playing the confidence angle.

All the rescue plans and rate lowerings imaginable are for naught if:

Housing prices keep falling!

If you have little or no money invested in a house and its value falls through the floor, you have no interest in keeping up the payments. Why should you? The losses that accrue to default and foreclosure are not going to be your losses. They are going to be someone else's.

December 6, 2007

Here is a link to 'Three Systemic Risks to Watch For' by the Minyanville.Com staff. I quote it below.

"The second risk area I see is municipal credit. Beyond the now well-reported Ambac (ABK) and MBIA (MBI) solvency issues, and the State STIF fund, SIV problems are looming a large property tax shortfall. Whether it is a function of home borrowers' inability to pay or borrowers' ability to pay lower taxes due to successful assessment appeals (lower property tax payments due to lower home values), I believe local and state municipalities are in for a very hard time. And without serious, immediate cuts in services, municipal debt ratings are likely to fall (and if AMBAC and MBIA fail, fall hard).

...Since the advent of the swap market in the early 1980's there has not been a systemic credit crisis anywhere near the proportion of the one we are currently experiencing today. And the biggest question to me is what happens when counterparties begin to default on their swaps. Could, for example, Goldman, which is held out today as being the preeminent risk management firm, be right in its hedges, but wrong in its selection of the counterparties providing them? And then what?"

Duncan sends this link to 'The last closing bell?' by David Weidner of Marketwatch.Com. I quote it below.

"An important symbol of American capitalism, the New York Stock Exchange trading floor, could be gone in a matter of months. There is ample evidence of its demise. Its two main participants, specialists and floor brokers, have seen their ranks thin to skeletal proportions. Three of the exchange's five trading floors have closed.

Van der Moolen Holdings (VDM), one of the exchange's biggest specialist firms with 308 company listings, gave up on the business Tuesday, handing it over to Lehman Brothers Holdings Inc (LEH). About $5 million changed hands, but it was essentially a giveaway. Less than a decade ago, the specialist businesses were valued in the billions.

Bear Stearns Cos. (BSC), which had a dozen brokers on the floor last year, now has just three. Bear is also considering the shutdown or sale of its specialist unit, Bear Wagner. Overall, the total number of specialists on the exchange floor has been halved since 2005 to about 200."

The specialist system of the NYSE is dying. Let us hope that the evil it represented dies with it. In order to be competitive the NYSE had to jetison this time-honored way to fleece investors. Having specialists made the NYSE less competitive with the other exchanges. That's what happens when you allow folks to syphon off profits from virtually every trade. It is a good day to be alive.

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

I bought back into FSLR today. It seemed to be bouncing off a level of support.

December 5, 2007

Here is a link to 'Wall Street Firms Subpoenaed in Subprime Inquiry', by JENNY ANDERSON of the New York Times. I quote the article below.

"Mr. Cuomo recently subpoenaed Freddie Mac and Fannie Mae in a broad look at what he called 'widespread collusion' between real estate appraisers and lenders, including Washington Mutual, to inflate home prices. He filed suit against First American Corporation, alleging they artificially inflated appraisals to win Washington Mutual's business."

This begs the question (and I have asked it before): If appraisers and lenders were colluding, how could realtors have possibly been left out of the collusion? Does this mean that when the pie was being divided, the noble realtors did not claim their slice? Are we in Kansas or in Oz now. It's growing fuzzy now and I am having a hard time telling the difference between the two.

Red and White D sent me this link to 'Innovating Our Way to Financial Crisis', by Paul Krugman of the New York Times. I quote it below.

"'What we are witnessing,' says Bill Gross of the bond manager Pimco, 'is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.'"

And here is a link to 'Paulson Strikes Out', by Mike Mish Shedlock of Minyanville.Com. I quote it below.

"Why stop at seven years? Why not 22 or even 50? And while we are at it, let's rob the mortgage owner of his right to opt out of the plan by passing a 'safe harbor from legal liability.'

Democratic Representative Mike Castle is acting to prevent what Caroline Baum spoke of as a 'Lawyers' Free-for-All.'

'If you think getting mortgage servicers and investors to agree on an outcome is tough, just wait until the lawyers get involved.'

'The modification of existing contracts, without the full and willing agreement of all parties to these contracts, risks significant erosion of 200 years of contract law,' said Joshua Rosner, managing director at Graham-Fisher & Co., an independent research firm in New York.'

Does anyone really believe Paulson when he says 'The plan does not, and will not, include spending taxpayer money on funding or subsidies for industry participants or homeowners'?

Fixes on top of fixes on top of fixes are being proposed and none of them will work because it is in the best interest of those underwater on their loans to make sure the plan fails. And if that was not bad enough, Fannie Mae and Freddie Mac are going to be negatively impacted by the bailout and one of the proposed fixes does not even seem constitutional."

Looks like the curtain just got pulled back to reveal the real wizzard.

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

The followers of the Bender Paper Portfolio know that through most of November I was holding increasingly large amounts of cash. They also know that I through most of that money into the markets before the end of the month.

It occurred to me at the beginning of November that we would probably be seeing our normal October in November. That means, I think, a shortened year end rally. When I throw money at stocks like that I try to pick a handful of the best stocks in my system. However, I do not expect that every bet I make will be successful. One, in fact, has already failed: RIMM. One has been successful: FSLR, and I am looking to get back into it again soon at my price. The rest were up nicely today. I will try to be long, and all-in through the end of December.

December 3, 2007

The Orange Section wrote a note I will share.

"Bender, I read your most recent comments. 'Thrift' as your friend calls it, is considered a deflationary force by the Fed. Tragically ironic, but savings are bad for a fiat money system that is essentially based on credit expansion. The system thrives on people spending, spending, and spending some more. As Red and White D points out, this is not good for the average Joe. The Kool-Aid the Fed has been selling basically attempts to convince participants that not spending is worse. Obviously this is fallacious for anyone who wants to have a meaningful amount of money saved so they can be financially independent and solvent.

A few years back Bill Gross quoted one of his colleagues in describing the U.S. Economy as being in 'unstable equilibrium.' This was an analogy to the concept of the domestic U.S. Economy being equivalent to a tight rope walker, trying to balance Inflationary and Deflationary forces. The topics your friend is talking about are certainly valid and true, but they will serve to 'weight' the deflationary side for our tight rope walker. Fed Policy, never being an exact science, will at some point need to counter this weight with some pro inflationary policy (cutting rates, etc.) Basically they will try to make putting money in your savings or other extremely conservative investments less appealing than riskier ventures via the rate cuts.

At the institutional level this is where the thrifty lender has gone. Now this lender is looking at his bottom line as part of a multi billion dollar organization. The Fed cuts rates and suddenly, for his earnings to look good (i.e. make his spread), he needs to be participating in ventures that return higher than the conservative investments of 'thrift.' The problem is that while the rates might be lower, the credit quality may not be any better. Thus you have the decision that likely faced our sub prime lenders several years ago: Do you stop lending since the quality of the borrowers has all but dried up or do you keep lending and keep your earnings up. Wall Street won out over Main Street and here we are today.

As I have said previously, to me the real questions are on the back side. We know how we got here but...

• Did the bad lending practices spill over into other arenas of Credit? (this question is a good explanation for some of the Fear we see in the markets right now). And...
• How and when will Borrower Quality come out of it's 'recession'?

  This 2nd question is probably overly simplistic. Many things can happen. If home prices tank now, all borrowers may be just that much better. The Fed can slash rates, artificially enhancing credit quality across the board. The labor market could improve, raising real wages, thus improving ability to pay. I think the point here is that something is going to have to give in order for things to get better. This scenario is exactly what Greenspan spent the latter part of his career trying to avoid. Now Bernanke gets to pay the piper. The real question for investors is: how and when the Piper gets paid."

December 2, 2007

A friend, whom I shall call the 'Red and White D', sent me this note.

Bender,

"I picked up on this article on RCP today. ('The Gathering Storm', by Clive Crook on the National Journal site.)

It made me think about old George Bailey, the Jimmy Stewart banker character in Its a Wonderful Life. The savings and loans of long ago have morphed into something different today. I don't know what, maybe credit unions with corporate owners/managers.

But whatever happened, the founding concept of savings and loans... "Thrift"... seems to have been jettisoned along with the old fashoned George Baileys of the world.

Ordinary people saved money. George took their money, collected it into pools large enough to do some good for some individuals, used reasonably good judgement in picking credit risks who could pay the lent money back with interest and lent it out at a profit. He took a small cut of the margin for his trouble and everyone came out to the better. Not every George Bailey was competent and not every George Bailey was honest but in large measure it was a system that local people whose money was at risk could keep an eye on and when disaster struck, it was a local disaster, not a global meltdown. And, someone... George... was responsible.

I admit, I am just a nostalgic old fart who grew up in a conservative little Oklahoma town and sorta saw the George Bailey thing in action as a kid. It worked pretty good there. George lived in the biggest house in town of course and had the only color TV in 1961. I used to sneak up and peek in his window on Sundays at 8 or so to see Bonanza in color. A peeking TV Tom.

After I read this article I linked to above, it dawned on me we have completely abandoned any semblence "thrift" or proper risk assessment in our finances, personal and public. Seems that today finance of all sort is just a giant global bazaar with hucksters of every kind, public and private, running around willy nilly peddling every kind of financial pot, pan or gadget to whoever is willing to sign the paper. And...when the poop hits the fan we all run to Big Mama whining and crying and wanting to hide under her big fiscal skirt till the wolf goes away. It's becoming a habit now. But, worst of all, no one is responsible. Where's George?

I've concluded that this financal system we have cooked up will ultimately collapse on itself someday. It's way too complicated and requires way too much technology to manage. Many if not most of the people whose money is at risk have no connection to the responsible people, the George Baileys are invisible, hidden away in some financial bunker somewhere watching MSNBC on HD TV (and I can't peek in his window and watch). We are just a computer glitch away from a financial train wreck... and George won't be anywhere to be found."

I quote the Clive Crook article below.

"Summers points to three main factors. First, the housing market continues to tank. There are signs (in derivatives markets) that house prices may eventually fall by a quarter from their peak -- about as big a drop as between 1925 and 1933, the only other housing-market crunch that comes close. So far, the market is not even halfway there."

'The housing market continues to tank.' That is understatement. What no one is talking about, and what no one has calculated is just how big the housing bubble was (and still is). My own unprofessional figures indicate that housing prices could fall MORE than a quarter because they were that far out of whack when the fall began. And yes, Virginia, we're not even halfway there. The real foreclores begin in 2008, and it's going to get really ugly. And no, Virginia, you can't be stupid with your money AND keep the house.

I went all into the market this week and I am already back out of one stock:FSLR. I made 15 percent in two trading days and sold out. Richard Ney always said: 'he who sells and runs away lives to buy another day.' I might get back into it if it offers a good entry point.

Now that the dark days of December are upon us I am reminded that by this time next year we will have elected a new president. My loyal readers already know how fond I am of balanced budgets and fiscal responsibility. But, besides pushing those ideas I would like to make a plea to all my readers.

Please, no matter what your persuasion, or the candidate's, please ignore the icing and pay closer attention to the cake. By that, I mean please try to put more weight upon the candidate's record of decision making than upon what he/she promises to do in the future. Anyone can promise anything. But what we need, in my humble opinion, is good judgement. The Presidency is unique in that the holder of that one office gets to make decisions that affect the rest of us for decades to come. Please work to elect those candidates who have demonstrated the best judgement.

Friends of mine, who lean heavily toward one party, are hoping that the other party nominates someone they think will be easy to beat in the general election. I think that is the wrong attitude altogether. What I would like to see is both parties to nominate those candidates who are capable of the soundest judgement. Then, no matter which one wins the office our country will be best served. Isn't that be the way it should work? Don't we really want the holder of the office to do a good job? How can that possibly happen if the nomination process produces third rate candidates? No, we need the best we can get. So choose and vote wisely. That's what we need the most of right now. Some wisdom.

November 29, 2007

Here is a link to 'As credit dries up in U.S., concerns mount about recession', by Peter S. Goodman of the International Herald Tribune. I quote it below.

"A survey of bank loan officers conducted by the Fed in October found that about one-fifth of lenders had over the three previous months tightened lending requirements for commercial and industrial loans for large and mid-sized businesses. A slightly smaller proportion had tightened lending to small companies.

...A year ago, when he needed new machinery, Doyle Hayes, president and chief executive of Pyper Products, an auto parts maker in Battle Creek, Michigan, went back to the local branch of Comerica bank, where he has been doing business for years. He borrowed $300,000. Last week, when Hayes needed $140,000 for a new robot, he did not even bother to inquire at the bank.

'We knew what the answer was going to be,' he said. 'When the auto industry goes down, anything that has four wheels becomes suspect.'"

And here is a link to 'Mama Bull and the Little Bears?', by Fil Zucchi on Minyanville.Com. His claim is that: "it is possible to have vicious bear markets in certain sectors, without having a generalized Bear Market."

This is an idea I too have been kicking around. There are a number of different ways to look at the market. One way is to think of it as a big tub full of green (for money) gelatin. As different players move the gelatin around between different investment devices and different continents, individual investment areas will experience low or high levels of the green stuff chasing after their wares. But the green stuff does not leave the tub, it just sloshes around inside, high in one place now, lower there later. But the point is that the players have to put that money to work SOMEWHERE. In the modern world it is sloshing around to more and more formerly remote areas, and it is moving back and forth at a higher and higher velocity.

November 28, 2007

There were some seriously gloomy articles on Tuesday. Here is a link to one, 'U.S. Consumers Lose Faith', by Andrew Farrell of Forbes.Com.

For my readers who follow gold, Minyanville.Com was all over Gold with this pair of stories:

'Special Update: Mr. T Gold Indicator Forms Rare Double Sell Signal', by Kevin Depew.

'What Say You, Gold Bugs?', by Fil Zucchi.

November 27, 2007

Jay Steele is saying that he is seeing signs of a temporary bottom here and a chance for a relief rally, before stocks head lower.

Kevin Depew of Minyanville.Com, is seeing much the same opportunity. I quote his article of November 26 below.

"One of our favorite indicators is the NYSE High-Low Index. We wrote about this indicator back on August 7 and again on August 27 as it reached the tremendously oversold level of 8%.

According to data from Investors Intelligence it is now at 10.7%, a very washed out level, and near where the August reversal occurred. Why is this important? This indicator does not reach such low levels very often. The move to 8% in August was the lowest level this indicator had reached since July, 2002.

Prior to 2002, the lowest level for the NYSE High-Low was September 1998, when it reached 6%.

A reversal up in this indicator, when it occurs, sets up a tradable rally for very short-term aggressive traders, but for those with longer-term timeframes it creates the opportunity to reposition portfolios, ejecting positions in weak relative strength sectors such as Financials, Real Estate and Insurance. The primary bullish percent indicators for equities remain negative for now."

I may trade this short rally. But remember folks, the general trend is still down.

After a lapse, we hear again from Florida. Here are some of his ideas.

"If my interpretation is correct we will have a series of 4 to 5 , 10-week cycles to the down side. These cycles are based on the 50 day moving average. There will be a probability of a weak up cycle some time early in Feb. but it would only be a relief rally.

As I have stated before, each stock has a pattern of it's own, just as every wave on the beach is influenced by the natural rhythm of time. Florida has had its share of real estate news and I can still see no resolution for years. Insurance, taxes and the hurricanes have taken their toll and until affordability returns... The storms of a month ago were a reminder of living to close to the water as a number of condo buildings will soon be history. Water levels are dangerously low, salt intrusion is imminent in many aquifers without needed rain. On the west coast sink holes will become a common event without rain. We are out of are rainy season and now rely on cold fronts bringing occasional storms as fronts collide.

The charts tell me the market is in serious trouble, and there will be many opportunities if you have the discipline to wait for a buy signal to trade for the relief rallies or you approach the short side. I do have some concern that this might have the potential to become very ugly as we approach mid '08. NO one can put any perspective on just what the total exposure and losses might be lurking on the off the balance sheet risk."

My own two cents would be to avoid financials (as I do as a rule) right now and for at least a half a year. Even the good ones will fall with the bad.

November 21, 2007

I am going to share what the Orange Section has been writing:

"I reread the articles you posted on November 16th. It is amazing how things are paralleling the Corporate Finance course I am taking right now. I also read Bill Gross' latest article at PIMCO. All 3 sources seem to be pointing towards many of the same conclusions: Tightening, Stricter Lending Requirements, Increased Difficulty for 1st time home buyers to get credit, Downward Trending Home Prices due to lack of demand, lower consumer spending due to tougher refinancing standards. All of this to me adds up to Deflation. The Fed will attempt to counter this spiral by cutting rates, albeit probably very carefully.

I know better than to bet against Santa Claus, we have seen that rally too many times to discount it. However, I think we are entering a short to intermediate term buying opportunity for Bonds. Deflation and Rate Cuts will cause price appreciation in debt instruments.

To me the real question is this: How much of this economy depends on appreciating home prices? There are many layers of complexity to answering that question and determining how it will all unwind. I think people forget that the Refi Mortgage more or less staved off a depression in 2001-2002 all by itself. 5 years later and now the question is what, if anything, might be able to take it's place."

"Robert Reich: We may yet avoid a recession -- Bernanke and company may make bigger cuts in interest rates. Congress may enact a payroll tax holiday on the first $15,000 of income, as I've urged. But look beyond the business cycle and the consequences may be larger.

For years now, America's middle class has lived beyond its paycheck. Middle-class lifestyles have flourished, even though median wages have barely budged. The reason is we've been able to borrow so, much so easily.

With housing prices rising, home-equity loans have financed renovations and home improvements. With credit cards raining down like manna from heaven, we've bought plasma TVs, new appliances, vacations. With dollars artificially high because foreigners have held them, even as the nation sank deeper into debt, we could summon cheap goods and services from the rest of the world.

But now the era of easy money is over. The housing bubble is bursting, and home equity is drying up. Credit card debt is next. Personal bankruptcies rose 48 percent in first half of 2007, likely even more in the second half -- which means a wave of credit-card defaults. If you think the trillion dollars in subprime mortgage debt carried by big banks is large, think of the record $915 billion Americans hold in credit card debt.

Meanwhile, as foreigners begin shifting out of dollars, we'll no longer have access to cheap foreign goods and services. For starters, you can forget that long-awaited European vacation. The splurge is over, folks.

As the days of easy money come to an end, what will America look like? Maybe we'll see a recession in the short term. But more importantly, over the long term, the American middle class will have a truer understanding of what it can and cannot afford, a truer sense of what's really happened to its paychecks, and a more realistic view of where -- and to whom -- the economic gains of the last dozen years have actually gone."

And here is a link to 'Author Debunks Financial Parlor Tricks', by Jack Hough of SmartMoney.Com. It's about time someone pointed this one out. Here is a quote.

"THE FOLLOWING IS a felony, unless you do it the right way, in which case it's called a mutual fund.

Call 800 people. Tell half the stock market will rise tomorrow. Tell the other half it will fall. Come tomorrow, you'll have given a great forecast to 400 people. Repeat the process for three more days. You'll have been right four times in a row with 50 people. Call these impressed folks and offer tomorrow's forecast — for a fee."

And here is a link to 'Nordstrom results help retailers roar', by William Spain of MarketWatch.Com. Please note that retailers on the high end and the very low end of the spectrum are doing fine. It is the ones in the middle that are hurting. The middle and lower middle shift down to the lowest retailers. The folks making better money keep on spending, and spending in their usual stores.

November 16, 2007

If you can hack it, click here and go to 'Inflation, What The Heck Is It?', by Mike Mish Shedlock, of Minyanville.Com. This is the best discussion of inflation I have read in a long time.

The implication is that government can set interest rates and expand money supply. But it can not force individuals and corporations to keep expanding credit, to keep on taking on more debt.

Please also read 'Risk Aversion leads To Risk Aversion', by Kevin Depew of Minyanville.Com. Note that the Wells Fargo CEO was already more risk averse last quarter. It has already begun. In my November 8 comments I wrote:

"The psychological impact of falling house prices can not be over- stated. If your bicycle falls in value you might think: cool, now it will cost less when I go to buy a new one. When your automobile falls in value you probably think: o.k. it was going to depreciate anyway. But when you have $50k equity in a $250k house, and the houses all around it start selling for $200k, you might just think that all your equity had just been wiped out. As a consumer, that has to affect your mood. You're not nearly as likely then to run out and buy a new car. Oh yeah, did you see where General Motors posted a company record $39 billion loss in the third quarter? And CISCO's comments today about a less bright future were due, like IBM before it, to a big drop in demand for technology coming from...drum roll please... the financial sector!"

To review:

Banks, retailers, auto makers, business dependent on housing construction, etc. are all pulling in their horns and will be curtailing expansion projects, squirreling away cash, building reserves, and shrinking credit.

RECESSION ... WE'RE IN IT RIGHT NOW.

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