NEWS #80

From March 27, 2008 to June 16, 2008

June 16, 2008

Here is a link to 'What's Next For the Credit Crisis? Part 2', by Bennett Sedacca of MinyanVille.Com. I quote it below.

"There are a few other reasons I believe tech would lead another leg down in stocks, namely that the short interest in the largest companies in the NASDAQ 100 are at very low levels, which would suggest a dearth of buyers, should a down move develop. Further, insiders are selling in droves and valuations are hardly inspiring. Mutual fund cash as a percentage of assets remains at very low levels (as it has since 2000) and the best potential outcome for the stock market would be persistent sector rotation as opposed to broad market strength. More likely I expect large net redemptions from mutual fund investors that need to get cash from somewhere as they have exhausted all other avenues for liquidity. Consumers have already tapped home equity extraction and credit card advances, which in turn could lead towards a self-fulfilling prophecy of lower equity prices that lead to more redemptions, and so on."

June 12, 2008

The Red and White D sent me this link to 'Trading Secrets & Tactics of George Soros'by Yaser Anwar, CSC of Equity Investment Ideas. I quote it below.

"Having taken heavy positions in the Japanese stock market, Soros had to decide what to do-stay in, get out. His tennis partner noticed that sweat had formed on Soros's forehead that had not been there during the match. Then and there Soros decided to sell. There was no hesitation, no feeling that he needed to consult anyone else before taking such a large step. It had taken him a fraction of a second to decide. That was all."

June 11, 2008

A regular reader wrote recently. I include my reply to him here.

Good to hear from you. You ask some very complex questions. I have been tap dancing just to keep out ahead of these markets. The indicators are general and speak for general trends. They don't and won't help much for individual picks.

But, knowing that all three indicators (above on this page) were pointed up, I also realized that they could also indicate a topping market. Along with Jay Steele's warning about a general bear trend here, a prediction he is still standing by, I had to ask myself what does a trader do in this kind of market?

You complimented me on my moves into SKF and USO. Well, those were and are defensive moves. I figured that those two would do well even if the general trend headed south, and might do well because the general trend had headed south.

I let my system pick my stocks to watch for set ups for long positions. But not every stock in my top ten will have a good chart with a good entry position. And sometimes a bet on the downside is better than any long. I began the year saying that I would be in and out of SKF all year, and that is the way it has worked so far. I just sold SKF today at $132.00, that being the point at which I could take reasonable profits, and the point which it was very likely to hit a couple of times as it tops out.

One thing I will also point out. I have a lot of tech stocks in my system. Very few have made it into the top ten in the past 4 months. What does not appear can tell you as much about market conditions as what does appear.

The solar stocks still remain strong in my system because they are also energy related stocks. Shipping stocks have come back strong of late. Interesting, no?

June 8, 2008

Sometimes you just have to go with your gut. I have been reseaching ETFs lately, particularly those focused on oil. Early in the week I caught Easy Money on CNBC and all five talking heads agreed that oil had had it. Well, I placed a bet on oil the next morning, and I have been rewarded. Whenever 'everyone' in the markets knows a thing to be true, it isn't.

I have also been working over my system and the results can be seen in some new stocks in my top ten, including two oil stocks. Sorry, it looks like one of them, GMXR, may be topping out. Here is the list of the new ones:

ARD, GMXR, GRMN, ATW, OXPS,

June 5, 2008

This just came in from Richard Kolon.

"Hi Bender,

The Federal Reserve is continuing its mission to bail out irresponsible banks who tried to deceive the world into accepting derivatives that other banks don't want to accept as collateral.

http://www.federalreserve.gov/newsevents/press/ monetary/20080529a.htm

That's another $75 billion dollars 3 times during June. Before May the Fed was just "loaning" $50 billion every other week.

http://www.federalreserve.gov/newsevents/press/ monetary/20080502a.htm

Back in March it was just $30 billion a shot.

http://www.federalreserve.gov/newsevents/press/ monetary/20080229a.htm

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.

Now here is an excerpt from the Fed Vice Chairman Donald L Kohn:

http://calculatedrisk.blogspot. com/2008/06/feds-kohn-expect-more-bank-loan-losses.html

And from this complete version of his testimony:

'In view of this uncertain outlook, additional capital injections and the consideration of dividend cuts are still warranted for some of these companies and we have strongly encouraged supervised bank holding companies to enhance their capital positions.'

(See http://www.federalreserve.gov/newsevents/testimony/kohn20080605a.htm)

Now how are they going to do that? That can't sell the crap they have, except to the Fed. But they could try to issue more equity to those who will fall for the line that 'the economy has weakened, but there is no official recession yet.'

That's because the Fed is printing up a half trillion or so dollars so far this year. (caveat: I did not calculate the exact figure.) The economy would have crashed without it.

If things were getting better, banks would not need more money than before. Things are getting worse.

Hypothethical TV announcer: 'Well the stock market has been hanging in there, saying things are not as bad as the doomsayers believe'.

The stock market is going to try to sucker you into buying bank stocks secondaries, so you can bail out these banks, and the Fed in turn, currently holding the bank crap. Your hard earned money is going to support keeping these con artists alive.

And how does the system structure all these retirement plans for you, where you have your money? You can buy mutual funds of stocks, bonds with devalued dollars, and money market funds that buy up bank securities, such as mortgage backed securities. Do you still feel comfortable, Bunky?

And they are going to try to tell you that gold is just an archaic relic. It's the second biggest con job in the world. (The biggest is Federal Reserve notes, rather than the old Silver Certificates.)

Rich"

Yea verily Rich, you don't have a FED bailing with a bigger bucket unless the boat has a bigger leak than it had a while ago. Yes Rich, it is getting worse. This bad news about the banks is going to keep coming in for at least another nine months, perhaps for twice that long. It will take that long for all 'crap' to reveal itself.

June 2, 2008

Here are some interesting links:

'Whom To Believe: Recession by the Numbers, or by the Pain?', by Kevin Depew of Minyanville.Com.

'Lion or lamb?', by Mark Hulbert on MarketWatch.Com.

Meanwhile Jay Steele's comments are sounding very bullish.

I am still in defensive stocks, but am looking at some of Richard Kolon's wind power stocks. I particularly like ZOLT.

I notice with great interest the colapse in my number one stock's price. This down move may yeild a great buying opportunity.

May 26, 2008

Here is a quote from the May 26 edition of Time Magazine, page 38:

"If you feel as if you've been going backward, you haven't been imagining it. According to the U.S. Census Bureau, the median American family made $58,407 in 2006. That's $991 less, when you adjust for inflation, than the median in 2000, and indications are that things haven't gotten any better in 2007 or this year.

Recessions - like the one in 2001 and the one we might be in now - always reduce incomes. The problem since 2000 is that even when the economy was growing, the fruits of that growth landed almost exclusively in the pockets of the wealthiest Americans. According to economists Thomas Piketty and Emanuel Saez, 75% of all income gains from 2002 to '06 went to the top 1% - households making more than $382,600 a year."

This is precisely what I was saying years ago. And my critics were saying: 'but the AVERAGE income is rising.' Well yes. But the guy statistically smack in the middle is making less now than he was eight years ago. The average includes that top one percent that is gobbling up the wage increases. A rising tide lifts all boats? No, actually, it doesn't.

Recently Red and White D made the observation that when he began in his line of work, a kid fresh out of college could go to a big city and start in that line and make $7,500 a year. Of course a candy bar was still $.10 and a gallon of gas was $.35. And houses, oh my, they were very reasonably priced. Now, decades later, prices are ten times what they were then. And the kid fresh out of college, he's making ten times as much right? ... Well, no, he's making 4 to 5 times as much.

My friends, inflation is worse than the FED will ever admit. It has been lieing to us and to itself for so long, like the old Soviet Politburo, it wouldn't recognize a real number if that number bit it in its collective ass. We are seeing, simultaneously, deflation of houses...houses whose prices were grossly inflated, and a fall in the value of the dollar, even as the FED tries to reflate the economy. But the FED is operating at a disadvantage. Because it has been believing its own lies, it can not see the whole of the economic picture. The FED never saw the inflation that ballooned those house prices in the first place. It has blinders on.

If you are the FED and you are telling the world that inflation is only two percent, and you really believe - like Dorothy in The Wizard of Oz - that what you are saying is true, then house prices could not possibly have swelled the way they actually did -- or -- since you can not explain the rising prices of peoples' main asset, you simply exclude houses from your inflation numbers. That exclusion bit is a damned useful tool if you want to keep your rose colored glasses and ruby slippers on.

So I ask, with its blinders, its rose colored glasses on, just how well does the FED see what is happening now?

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

What I would like to have, and will never get, is a GDP corrected for true inflation. Now there would be a valuable number! Maybe one way to do it would be to exclude everything from the normal GDP calculation that is excluded by the FED from its inflation calculations.

For when you refuse to see inflation, you also refuse to see what is really happening all through the economy and your measurements of everyting, including GDP, are all fouled up. That is what has been happening year after year.

Let us, for arguement's sake, say that in year X and the following year Y the U.S. produced exactly the same amount of goods and services in exactly all areas of the economy. But, let us say that prices in year Y were 6 percent higher than in year X. The FED would say that the GDP grew by 6 percent - and using the exclusion tool - also tell us that inflation was only 2 percent. So, when the FED tells us about growth in the GDP, is there more than mush coming out of its mouth? Do we care? Or do we prefer to listen to the Wizard and believe?

May 20, 2008

I was having coffee this morning with Red and White D. He mentioned that at today's prices, it takes nearly a half million dollars just to fill up a 747. Of course, the airlines don't pay that. They locked in lower prices years back and that is what we are flying on right now.

But what happens when those contracts run out? How many of us will be flying when ticket prices double or tripple?

How will much higher fuel costs impact us? Red and White D thinks we are headed for a great watershed in our thinking about fossil fuels. He thinks people will be unable to drive a hundred miles to work as they have been doing for decades. He believes that people will be attracted to life in small towns where you can drive to work, pick up the kids from school, and shop for groceries, all on less than half a gallon of gas.

If that is where we are heading, the logical place to put some long term investments would be in railroads and into shipping.

Jay Steele is looking for a top to be put in here soon. He has been very accurate lately in calling the general moves in the markets. Accordingly, I have taken positions in defensive stocks, ones that should do well if the major averages head south.

May 18, 2008

Here is a link to 'Volker, The Ghost of Crisis Past', by Kevin Depew of Minyanville.Com. I quote it below.

"The end result will be a vast wave of government regulations and monetary stop-gap measures that rather than "dealing with the economy" will instead ensure that the effects of the credit bust are more widely distributed among the citizens.

...'Looking back to the 60s in the US, we used about almost 15% of our income for food,' Bond noted. 'Over the course of the last 40 years that has dropped down to about 8%. That number is going to start moving back up.'

...U.S. home foreclosure filings in April increased compared to March and were 65% higher than a year earlier, RealtyTrac said yesterday. Home foreclosure filings in April were 243,353, an increase of 4% from March, RealtyTrac reported."

May 15, 2008

Not all is gloomy out there. Here is a quote from Jay Steele's latest comments on his site.

"The fact is, corporate profits are outperforming all expectations. With three quarters of the S&P 500 companies reporting, profits outside the banking system have increased 10 percent over a year ago. First-quarter GDP growth came in at 0.6 percent. It wasn't the widely predicted decline, and economists expect that number to be revised up. GDP growth for the fourth quarter of 2007 was also up slightly, while the prior two quarters averaged over 4 percent growth."

May 13, 2008

Here is a link to 'How Did We Get Into This Mess? Part 2', by Bennet Sedacca of Minyanville.Com. I quote it below.

"This is the credit market’s way of telling us that the alchemy of Collateralized Debt Obligations that were full of sub-prime loans are not performing and that the real estate market, the credit market and the economy are in deep trouble.

...What could be a trigger for the next leg down? Insurance companies have 'downgrade language' in their investment policies. This means that if they buy a security when it's 'AAA' rated and then becomes "BBB" rated, they're forced to sell—no questions asked. If some of these assets are of the Level 2 and Level 3 variety, others that own the same assets and have them 'marked to myth' will be forced to mark them down to the traded price as well, potentially impairing their balance sheets even further. This could force yet another round of capital raising. You can see how this could become an accelerating process. So while most feel the watershed event has occurred with the Bear Stearns near collapse, I think it's just the beginning of a series of similar, unpleasant events."

Here is a link sent by Red and White D to 'The global slump of 2008-09 has begun as poison spreads', by Ambrose Evans-Pritchard of The Telegraph. I quote it below.

"'Nowhere and nothing will be immune. We are on the cusp of an equity meltdown that will slash and shred portfolios,' said Albert Edward, SG's global strategist.

'We see a global recession unfolding. Liquidity will drain away and crush the twin emerging market and commodity bubbles. The recent hope that 'the worst might be over' is truly staggering. Profits are disintegrating,' he said.

Today's "bear rally" may live on into June. Don't count on it. Global bourses are no longer rising hand-in-hand with oil in exuberant celebration of liquidity relief (US, UK, and Canadian rate cuts).

Crude ceased to be a friend of equities when it reached around $110 a barrel. At last week's close of $126, it became an outright threat. The Bush rescue package - $800 in rebate cheques per household - has been rendered null and void by the latest spike. The average US home is now spending over 8pc of income on energy or fuel.

OPEC is playing with fire by refusing to pump more oil to offset rebel attacks in Nigeria. The cartel's output drop of 350,000 barrels a day in April is a hostile act at this point.

But there again, why should Middle Eastern states help America as long as the White House keeps filling the US petroleum reserve to prepare for war with Iran? Bush is playing with fire, too.'

May 11, 2008

May 7, 2008

Some readers write in and ask why I don't follow this guru or that one. Here is why. Here is how the Bender Paper Portfolio has been doing. Early in its life I used it to experiment with different trading styles. It is now a mirror image of my personal trades.

And yes, I lost money in 2003 and in 2006. But I do very well in the average year, better than any guru I have ever heard about. Yes, my trading style has changed as I have tried to perfect it....and yes simplify it so that I have to spend less time on it each week. But my new style, as 2007 demonstrates above, works well.

May 5, 2008

Here are two notes from Red and White D.

"I read the Minyanville link in your last post with interest and it brings to mind thoughts about how banks deal with lost capital.....

All banks, big or small no matter where they are, operate under some regulation requiring a reserve ratio of captal to demand depoists and another ratio of capital to loans.

The last eight months of write offs have wiped enormous sums of money off the equity of bank's balance sheets. These losses must be replaced in order for banks to continue in business. The banking business is busy refinancing itself.... even as we speak. The Brits are in a gigantic dither over this presently because several of their publicly traded banks are diluting their shares with big stock issues to raise capital. Its a big deal over there (they call it a "rights issue") and has been for some time. The old stockholders are raising hell about it. No doubt something similar is happening here today but no one is paying much attention.

Truth is that raising capital is the only soloution. The banks lost their asses speculating on home mortgages and now they must replace their losses. Seems pretty simple to my pretty simple mind.

Is dilution done? Not likely. Maybe in a year. Maybe two.

By the way, I keep thinking about your suggestion to buy GLD. A truly great idea if the fed doesn't suddenly decide to start defending the dollar. I can only assume you have consulted your crystal tomatoe and have very high confidence that such a thing won't happen.

I agree it is unlikely considering our debt situation in the USA. But, then again, I read the other day the treasury is issuing 1 year T bills again after a 14 year hiatus in order to fund government expenditures. Are higher interest rates really out of the question?"

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

"I've always found it interesting how governments can't grasp the fact that tax policy has it's limits....once taxes reach a certian level entities and people vote with their feet and move. For instance Halliburton's big wheels all moved to Dubai to avoid the tax man. Here we have the brits fussing over companies moving to Ireland.

http://business.timesonline.co.uk/tol/business/columnists/article3867240.ece"

May 3, 2008

Here is a link to a good read: 'Is Dilution Done?', by Minyan Peter at Minyanville.com.

April 29, 2008

Here is a note from Richard Kolon that I thought I would share with the rest of my readers.

"Bender,

I was lucky to find a chart maker link for the LIBOR rate. Here is a specific one I generated, but you can customize the chart for length of loans, timeframe, grids, and even recession periods.

http://www.economagic.com/em-cgi/charter .exe/libor/day-us3m+1990+2008+0+1+1+290+545++0

The LIBOR is apparently used as a base rate on which many loans are keyed to. It is an overnight rate banks charge each other for loans, akin to federal funds. It is an average of rates charged the prior night reported by banks to other banks, after tossing out the highest and lowest ones (to prevent manipulation of the average.)

If history is a guide, steep drops in the LIBOR tend to signal recession periods coming. Such a drop has happened since late 2007.

But now there is some skepticism that the LIBOR rate is being manipulated thru the reporting of lower rates by banks who don't want to admit how desparate they are for cash. See the article below.

http://www.theaustralian.news.com.au/story/0,,23551198-36375,00.html?from=public_rss

So the chart of rates that appear above may be based on data that underreports the true rate, if these accusations are true.

'In a recent research report on potential problems with Libor, Scott Peng, an interest rate strategist at Citigroup in New York, says that "the long-term psychological and economic impacts this could have on the financial market are incalculable'.

Peng estimates that if banks provided accurate data about their borrowing costs, three-month Libor would be higher by as much as 0.3 percentage points.

Are the banks fudging these reported rates lower to decrease the costs of future borrowings? To not reprice existing fixed rate loan assets lower? LIBOR rates are 'also used to set the terms of more than $US500 trillion in "derivatives" contracts such as interest rate swaps, which companies all over the world use to protect themselves against sudden shifts in the difference between long-term and short-term interest rates.' Are they trying to not pay off on such derivatives?

Peng 'notes that the Federal Reserve recently auctioned off $US50 billion in one-month loans to banks for an average annualised interest rate of 2.82 per cent - 0.1 percentage points higher than the comparable Libor rate.

Because banks put up securities as collateral for the Fed loans, they should get them for a lower rate than Libor, which is riskier because it involves no collateral.'

Of course those Fed loans involve accepting questionable assets as collateral. Perhaps the Fed considers them as a necessary nuisance to appear as if the Fed is just not giving away money.

Maybe it's just a case of Scammed if you do, and Scammed if you don't.

Rich"

April 20, 2008

April 16, 2008

Here is a link sent by Ben Smith to 'Signs Of The Times', by Bob Hoye of 321Gold.com. This is a great read.

Remember my friends, inflation is the enemy. The FED is making more of it as you read this. It is going to destroy long term savings including the buying power of the dollars you receive to retire on.

What are you going to do about it?

April 13, 2008

Red and White D sends along this link to ' It’s a Crisis, and Ideas Are Scarce', by Floyd Norris of the New York Times.

In a not unrelated move, the Orange Section sends along these comments:

"On Fictional Ratings, this has more to do with how credit analysis works than anything else. I wouldn't blame S&P or Moody's. I would blame Greenspan. The rating agencies look at debt and ask the age old questions of 'can it be paid back?' if not, 'how much of a loss can be recouped?' or in banking terms, ability to pay / what is the collateral worth? The touch part is that up until 2007 home prices were being appraised as still rising or being flat. Neither S&P or Moody's would be willing to stake the reputation of their ratings service on a prediction that home prices would fall.

Now obviously housing was an asset bubble. You and I have been saying that for something like 5 years, if not longer. The question is this: Who is responsible for deflating the bubble? The Answer is the Fed. Who else is going to do it? Say for example that JPM stops issuing asset backed securities, stating that the housing market is too risky. What happens to them? They lose earnings and the other banks scoop up their market share. Their managers would have been fired for decreasing share holder value.

Such is the economy we live in.

This is just the latest indictment against the Federal Reserve Bank in my opinion.

In 1998 they could have let things ride and allowed the bubble to burst. They cut rates and spent tax payer money to bail out LTCM

In 2001 they cut rates after the September 11th attacks in order to sooth the economy. (I support this policy, it was patriotic)

In 2002 in the wake of account scandals they could have let things ride. They cut rates.

Since 2002, PIMCO has stated that the Refinanced Mortgage was by itself keeping us out of a depression. They have also called our economy as being in a state of unstable equilibrium with inflationary and deflationary pressures push threatening to wreak havoc.

Now in 2008 Housing has given out. Again they have cut rates. This time the rate cut isn't working. This time the issue is lending practices and credit standards. We have reached a point where they are going to need something new to keep paying forward the credit excesses of the 90s and now 2000s. Or they could let it bust and we could eventually come out and have period of real growth once again.

Or the government can spend more of our money by telling the risk takers they don't have to pay the piper."

I got home early on Friday and caught Larry Kudlow. Yuk! The idiot was calling for strengthening the dollar and cutting taxes in the same breath. Well Larry, if you want to strengthen the dollar you have to fight inflation, which means you have to cut Government spending as the fed actually tightens. We could do this, and it will make the Recession we are in deeper and longer. But we can not cut taxes, keep over-spending, and have the Fed easing. That is more of the same that we have seen for the last seven years. This is an administration hell bent on breaking Reagan's record of trippling the national debt in eight years.

We really don't need 'more dollars out there'. There are plenty of them out there now. We need fiscal controls, which we are not going to get.

April 8, 2008

Now that fiction has entered the scene, it is perhaps time for all of us Benders to cash in on a trend.

I first learned that things may be rotten in the bond field during Watergate. Most people forget that the only lawyering that John Mitchell (the only Attorney General ever to go to prison for deed committed while in office) had ever done was in the field of bonds. His entire legal career, before taking the post of highest law enforcer in the country, had been to write the language for municipal bonds.

Now we all know that the Tripple A ratings that the bonds linked to sub prime loans came from Standard and Poor and Moodys. We also know now that those ratings were pure fiction. I don't see either firm suffering much from having written that fiction; though like most of you I used to think that bond ratings were, and should have been more nonfictional than fiction. It never occurred to most of us that fiction was even warranted in the case of rating bonds.

But now that it is plain that fiction is acceptable, even desireable in rating bonds, I think the door is wide open to some of us writers who have considerably more imagination than these two 'venerable' old firms.

Therefore I propose the founding of the Bender Flimflam Itsascam Bond Rating Corporation. I don't know how or why Tripple A should demark the best, or most desireable bonds. Hell, I think if a company wants more than three A's, and it can afford our rating service, it should be able to buy more than three. It should be a matter of how many A's can you really afford, shouldn't it? If you want to give me enough money for me to retire on comfortably, I'll give you an even dozen A's. That's free enterprise at work is it not?

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

Here is an interesting link sent by the Red and White D.

'Another winter of discontent', by Larry Elliott of The Guardian.

April 4, 2008

"I weep for you," the Walrus said:
"I deeply sympathize."
With sobs and tears he sorted out
Those of the largest size,
Holding his pocket-handkerchief
Before his streaming eyes.

"O Oysters," said the Carpenter,
"You've had a pleasant run!
Shall we be trotting home again?'
But answer came there none--
And this was scarcely odd, because
They'd eaten every one.

.............The Walrus and the Carpenter, Lewis Caroll

This link pretty much tells what has been happening to the economy: 'Huge Job Losses Set Off Recession Alarms', by Jeannine Aversa, AP Economics Writer.

The Red and White D sends this link: 'Bank chief blames rumours and market fixers for Bear's collapse', by Andrew Clark of the Guardian.

My response to the Bear Stearns management, employees and stock holders would be this:

I wish my chest had a window in it, so you could see how my heart bleeds for you.

These poor devils are crying about how speculators did them in, not wanting you to remember that speculating is exactly how they made their living. Here is an outrageous quote from the article.

"'How did we get to a point where the failure of one firm can bring us to the edge of collapse for the whole of our financial markets?' Bunning (Republican Senator from Kentucky) asked. 'How did you let the entire financial system become so fragile that it could not tolerate one failure?'"

This question, were it purely innocent, would be a good one. But in this context it's like Snidely Whiplash, asking how it all has come to this, after he has tied fair Nell to the tracks.

Deregulation, don't you remember its sweet promise?
Savings and Loans will become banks
And lend on shopping malls and oil wells
Tell me again dear Walrus
How did that work out?

After deregulating savings and loans
Let's do the same to banks and brokers, said the Carpenter
Banks will do brokering and brokers will be banks
We'll let diversification and consolidation
Run its ugly course
Till all our yesterdays have but lighted
Fools the way to dusty death
(Sorry, Billy Spearshaker)

We have allowed, even promoted,
Diversification and consolidation
To run the fat oysters to exhaustion
And yes, Bunning, they are very weak indeed
Just as you, and your fellow
Deregulators would have them

If you want strong banks,
Let there be more of them, not fewer
If one of twenty fail, the rest will survive
If one of five fail, the rest of us will suffer
Bigness, in an of itself, is not strength

If you want strong banks,
Let them not be brokers

When was it ever in the best interests
Of the rest of us for there just to be
Five big banks in the country?
And then four, and then three, and then two?

And when there are only the Walrus and the Carpenter
Left standing on the beach
Where will the rest of us be?

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

Comment on my comments of April 2:

If I am right, and real assets, like wheat and gold, and oil, will stay high in value and even go up; while paper assets like dollars will go down...and if the inflation already built into houses will cause them to also go down in value....

What does that imply? That your house has become, through rampant inflation, a paper asset. Now there is a comforting thought, isn't it?

And what does all this imply about the future value of bonds? If I am right, folks are going to start selling bonds like they are tissue loaded with buggers. Interest rates on bonds are going to climb steeply.

If you are going to walk along the beach in the future, take a club with you, and watch for the Walrus and the Carpenter. Perhaps the best we can hope is that they will drown in paper.

April 2, 2008

Here is a terrific article about the banking problem: 'Time to Pay the Piper', by Mr. Practical at Minyanville.com.

Why is the banking crisis important? Most future growth has to come from, or at least through, the banks, particularly the big ones. But for the past four months they have not been lending, not even, and especially to, each other. The system is frozen. No lending now, no growth a year from now; that's just about how it works.

As Bill Gross at PIMCO describes it, the big banks have been playing a kind of card game, whose goal is to not get caught with the 'bad' card at the end of the hand. His example is Old Maid. My own would have been the game of Hearts, where all the hearts count against you and the Queen of Spades counts as much against you as all the hearts put together. Gross's implication is that other asset classes may become 'poisoned' by this prosses. The contagion may spread beyond mortgages and related bonds and risk devices to whole new areas.

So you say so what? Parts of the economy are doing fine and those companies may not need to go to the frozen banks for cash for expansion. You would be right. But let's see how that would work. Let's say that Microsoft wants to finance an expansion. It does not need to go to a bank for that. It has lots of assets in semi-liquid form. Ah, but there is the rub. To 'cash' in those assets (investments) Microsoft would have to sell them, and in these markets that would drive the price of those assets even further down than they already are.

In this example paper assets are being traded for real things like buildings and equipment. In that trade the value of the paper goes down and the value of the real things goes up. The fact is Microsoft is not going to be doing that expansion, knowing what it knows about what is going on in the banking world.

But that is the trend we will see anyway. Most real things will go up, or stay high in value. The big exception will be housing. The inflation has to come out of housing, so deflation will continue in housing. Deflation is also what we will see in paper assets, especially the dollar.

Here is a link from Ben Smith: 'Tales From the Crypt', by Bob Hoye of SafeHaven.com.

And here is a link from Red and White D: 'PennyMac to invest in shaky mortgage', from CNN.com.

March 27, 2008

Here is note from the Orange Section.

"Bender,

I read the comments you posted by Rich. I encourage you both to read PIMCO this month. Gross has a fantastic article about the credit situation and McCaulley has a great article about FED monetary policy and what it must do to not repeat the mistakes of the Japanese FED in the early 90s.

To summarize Gross, Sub Primes were merely the first asset class to turn up sour. The big question is not how bad will sub primes get, the big question is which asset class will be the next to go belly up. He likens it to the card game old made.

As far bank rates going up, this is probably part of the tightening of credit standards. However I agree with Rich, being more restrictive in to whom you give credit is mutually exclusive from what you charge a worthy borrower. Charging above market rate is most likely the banks trying anything they can (and bankers are a very unimaginative bunch) to generate cash flow in order to pad their capital base."

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