More Madoff Victims: Kevin Bacon and Kyra Sedgwik

I know it sounds like a funny headline but I am not trying to be facetious here. It is a tragedy anytime someone loses most of their life savings to a lying con artist, and this situation with Bacon and Madoff is no exception.

We'd heard that along with Hollywood boldfacers Jeffrey Katzenberg and Steven Spielberg, Bacon and his wife, Kyra Sedgwick, lost money in Madoff's devastating $50 billion Ponzi scheme, and Bacon's rep, Allen Eichorn, confirmed it for us. "Unfortunately, your report is true," he wrote. He wouldn't elaborate on whether, as we'd heard, they'd lost everything except for their checking accounts and the land they own. "I can confirm that they had investments with Mr. Madoff — no further specifics or comment beyond that," he said, adding: "Please, let's not speculate or rely on hearsay."

But we can't help but speculate! Just think about it: Footloose money: gone. Wild Things residuals: gone. The Singles stash: obliterated. If there's anyone in Hollywood who didn't deserve this, it's Kevin Bacon and Kyra Sedgwick. Those two have worked. It sincerely pains us. At least they have The Closer to fall back on.

Trading idea for oil: a weird kinda pair trade

It's clear that OPEC, geo-political risk, loose Fed and a resulting sh*ty US dollar will not let oil stay below $40 a barrel for all of 2009. However, given the global recession underway, it is clear that WTIC will not exceed $60 a barrel in 2009 (fyi Brazil and OPEC say they need about $75 a barrel for additional investment/supply...good luck with that).

The point is that crude will rise in 2009 but not enough to help oil producers/drillers who's business models require much higher prices. So how will I play this anticipated situation of rising crude but suffering oil producers?

*I will buy and hold the DXO (The 2x long oil ETN) and swing trade the DUG (2x short oil ETF) *

At first glance this trade might look pointless since the two trades would just cancel eachother out, but here's why that won't happen:

1) The DXO is an ETN (exchange traded note), which does not suffer from the same daily resets and time decay issues as the options in the DUG and all the other Proshares leveraged ETF's. A simple look a the DXO and DUG charts shows that the DXO is safe to "buy and hold" if you expect crude to stabilize somewhere higher between $40 and $60 (ie there is no need to market time this ETN).

2) The DUG is a play on the oil producers/drillers and not directly on crude oil spot prices like the DXO. The DUG tracks the Dow Jone U.S. Oil and Gas Index so it is more correlated to the daily stock movements of Exxon, Chevron and Conoco Phillips (those three combined make up more than 45% of the NAV of the index). Granted those three producers are linked to oil prices, but recently there has been a notable divergence in price action between oil prices as seen in the graph below (note the USO is an index that tracks WTIC prices):

The chart shows that despite crude oil's crash, the producer stocks have held up relatively well (aside from COP). Nevertheless, EVEN IF CRUDE OIL RISES TO $45, $55 or even $60 a barrel, XOM and its peers cannot be viable investments (OPEC, Brazil, Russia, etc. have said that $70 is support for them).

So the way I will play the inevitable demise of oil producer stocks in 2009 is with the DUG and I will hedge myself with any rise in oil prices by going long the DXO. Please note that because of the time decay issues associated with the options in the DUG, I must swing trade the ETF and market time the SOB, but the DXO is a pure buy and hold. Now I haven't implemented the trade yet, but when I do I will certainly let you know.

Israel Palestine Conflict added to the "Wall of Worry"

The carnage in the Middle East is absolutely horrific. If this continues, the current conflict might begin to rival the Six Days War(let's pray it doesn't for both sides sake).


Nevertheless, this war is just another problem Obama will inherit from Bush (ironic considering Bush expected therewould be peace in the Middle East by 2005...whoops). Now, putting aside my political bias, as Obama's "to do list" grows by the hour it will become clear to Wall Street that Obama cannot save them from the graves they have dug themselves (economically, environmentally, socially, politically, etc.)

I am optimistic that Obama can restore global confidence over two terms, but certainly not in the next 12 months. I say 12 months because that is what Wall Street and Main Street is currently expecting (2nd half 09 recovery)...they assume the cavalry will show up just in time to save the day...big mistake!

Conclusion: Black Swan events like these will certainly accelerate an end to the "Obama honeymoon."

Late night thought...

The Fed's attempts to lower the cost of capital for American consumers and banks won't work in 2009. THE PROBLEM ISN'T that we can't get access to cheap credit. If you have a good credit history and solid personal balance sheet then you can get a sub 6% mortgage (super cheap). Of course, you're probably saying: "But given our cultural proclivity for debt most of us can't get this loan because most don't have solid personal balance sheets."- AH-HA! There's the rub my friends.

THE PROBLEM IS REALLY that we already have too much debt and CAN'T AFFORD to add any more, even if the Fed drives interest rates down to 0%. America has hit its debt ceiling and is now in the process of paying it off, not taking on more. Besides, who will borrow $300k to buy a house or borrow $20k for a business venture when more than 30% of Americans polled are worried about losing their jobs and the housing market it not stabilizing? Rather than encouraging Americans to "fatten" up and eat more from the debt trough, the government should use the money to provide debt/principal reductions and lowering interest payments on existing loans (not new ones).

So regarding credit in 2009, the Fed will find itself in the same position it has been in since 2007: Pushing on a string.


Time for some music. Have a good night.

Future credit cycle scenarios: Ayers Rock or Matterhorn?

Put simply, Bank of America is debating the depth — and structure — of the credit cycle. Specifically, whether we’ll see a ‘classical’ version of accelerating defaults followed by rapid improvement (the Matterhorn) or an Ayers Rock scenario, in which government intervention to stave off bankruptcy ends up prolonging the credit adjustment.

Despite its headline figure of 30% cumulative default rates across 09-11, the “Matterhorn” scenario should be hoped for as the economic implication of “Ayers Rock” increases cumulative defaults to 50%.

The historical perspective suggests that Matterhorns are much more likely than Ayers Rocks — but, then again, we’ve never seen government intervention on this scale before. We’d also note that a prime criticism of quantitative easing in Japan was that it ended up postponing the structural change that many argued was necessary for the country’s banking system. That the US is embarking on something similar could end up tilting the balance in favour of an Ayers Rock situation.

Given the government's efforts to prop up an overleveraged financial system (a system that will inevitably succumb to massive defaults and consumer retrenchment) I believe we are in store for an Ayers rock credit cycle. Thx Greenspan, Paulson, Bernanke, and Bush!!!

Hat tip to FT Alphaville for the find.

2009: The Fallout

2008 saw the collapse of Wall Street and Global Financial Markets at the hands of the deflating international real estate bubble (with the largest bubble obviously residing in the US). The failure of world renowned institutions like Bear Sterns, Lehman Brothers, Fannie Mae, Freddie Mac, and others destroyed all confidence in the financial credit and equity markets. Slow and ineffective action from governments and central banks precipitated the "crisis of confidence" amongst investors. The level of fear, anxiety, and volatility witnessed in 2008 reached comparable levels seen only during the 1930's with the Great Depression. After everything that has transpired in 2008, it is safe to assume that modern capital markets will NEVER be the same again (much needed rules and updated regulations will ensure that).


With that said, if 2008 was about Wall Street's crisis and subsequent collapse, then 2009 will be about the collapse of "Main Street" and the International Economy. The evaporation of trillions of dollars in imaginary wealth and credit lines will destroy any chance of economic growth in the next 12-18 months. Over the long run, governments and central banks will work around the clock to re-inflate the financial system by lowering the cost of capital for banks and consumers, but in 2009 the level of capital destruction from defaults and bankruptcies (individual, corporate, and governmental) will overwhelm policy makers. Furthermore, the psyche of credit markets, banks, and consumers heading into the new year is far too fragile and uncertain meaning an "L" shaped economic recovery (much like Japan's lost decade) is the best case scenario investors (not to mention human beings) can hope for in 2009.

In a few days, I will post some specific forecasts and predictions for 2009 regarding unemployment, real estate, credit writedowns, government intervention, alternative energy, and a few other subjects I deeply care about.

Children avert your eyes!

Roubini's 2009 forecast

How much has Harvard's endowment really lost?

And we thought Madoff was the only liar on Wall Street..puhlease ;-)

Harvard University's admission that it lost $8 billion from its $36 billion endowment fund, as staggering as it sounds, may grossly underestimate the true magnitude of the loss between from July 1 through Oct. 31 2008. According to a source close the Harvard Management Corporation (HMC), which runs the fund for Harvard, the loss is closer to $18 billion if the losses on the fund's illiquid investment are realistically appraised. (Harvard's PR team is very smooth for convincing us it was "only" $8 billion)

From 2000 to 2008, the notional value of Harvard's wealth quadrupled through a strategy that involved shifting the lion's share of Harvard's money from American stocks, bonds and cash to to highly esoteric investment...by the time the bubble burst in the fall of 2008, less than a fifth of Harvard's endowment fund was invested in exchange-listed stocks and bonds. (WHAT??? Less than 20% of porfolio was in stocks and bonds?)

Where was the rest of Harvard's money?

-Nearly 28% of Harvard Endowment fund was in what the fund manager's called "real assets," a category comprised of timber forest and arable land in remote areas, commercial real estate participators, and huge stockpiles of oil and other physical commodities (NOTICE HOW MUCH ALL THESE "REAL ASSETS" HAVE DECLINED IN VALUE).
-Another huge chunk of the endowment was in private equity placements and hedge funds (UH-OH!) which imposed restrictions on withdrawals.
-Another 11 percent of Harvard's money had been sunk in volatile emerging markets. Here the investments took a double hit: First, the local stock markets collapsed in most of these countries, with, for example, Russian stocks, losing 80%, of their value. Second, on top of these losses. the local currencies lost much of their value against the dollar, with the Brazilian Real, for example losing 40% of its value.

My knowledgeable source finds the claim by Harvard's money managers that the fund only lost 22 percent not only "purely pollyannaish" but self-serving (they got increased bonuses for 2008).

Harvard University, relies on the interest from its endowment fund for one-third its budget, needs to be more realistic. As its President, Drew Faust, noted in letter to the Harvard faculty, "We need to be prepared to absorb unprecedented endowment losses and plan for a period of greater financial constrain,"
(This "thrifty/conservative mindset" should be prevailing in America right now! But we are all too busy shopping.)

The collateral damage goes far beyond the ivy-covered walls of Harvard. Money managers at other non-profit institutions plunged their funds into the murky get-rich-fast universe of illiquid investments.

California Public Employees' Retirement System, heavily invested in the same sort of "real assets" as Harvard. Leveraging its own funds, It bought so much undeveloped real acreage, that by 2008 it became the largest private land owner in America. (FUBAR....this is retirement money...FUBAR!)

Then came the subprime debacle, and the real estate bubble imploded, leaving Calpers with unsalable land and, because of its borrowed funds, a 103% loss. Together with other losses in hedge fund and conventional investments, Calpers found that it had lost nearly 40% of the value of its entire pension fund.


Speechless

An Xmas postcard from a friend...

Thx Brian.

My gift to my readers (all 5 of you): scenes from the best Christmas Movie EVER!







I wish everyone Happy Holidays and a kickass New Year!!!

California is f*d....

Full disclosure: I work part time on campus at a CSU (Cal Poly San Luis Obispo), so I am a little anxious about all the budget cuts. I know it sounds stupid to fret over a part time job on campus, but life is expensive (this job helps with that); besides you never know what stupid politicians and state university boards will decide to do.

The point of these excerpts from an article I read, is to show how much municipal governments (like CA) are"in over their heads." If our states are already f'd, I don't want to see them in 8-12 months from now.

A loss of nearly 42,000 jobs last month pushed California's unemployment rate to 8.4%, a 14-year high and the third-highest jobless rate in the country.

California's November unemployment figure lagged behind only Michigan with its crippled automobile industry at 9.6% and Rhode Island at 9.3% after job cuts this year in retail, manufacturing and services.

Even once-strong hiring in healthcare and government is showing signs of weakening next year. A projected $41.2-billion state budget deficit could lead to involuntary furloughs and wholesale firings of workers at state and local government agencies, school districts, community colleges and public universities.

California's real unemployment picture is darker than the state's 8.4% unemployment rate indicates, economists caution. "People believe there are no jobs to be had, and they are simply dropping out of the labor force and don't get counted," said economist Sung Won Sohn of Cal State Channel Islands. California's real or "effective" unemployment rate is probably twice the official number, Sohn said, meaning "the pain in the marketplace is much greater than 8.4% would show."


The city of Vallejo, Calif., gained national attention earlier this year by filing for Chapter 9 bankruptcy protection. Now, two neighbors are fighting to avoid the same fate, as the state's economic crisis spreads.Isleton and Rio Vista, small towns roughly 50 miles northeast of San Francisco, say they have begun consulting with bankruptcy lawyers as they draw up plans to deal with their mounting budget crises. The towns' leaders say they hope to avoid bankruptcy, but concede the move may eventually be their only option.Vallejo instantly became the nightmare scenario for towns across the state facing a similar toxic mix of foreclosures, debts, pension obligations and the inability to raise money on bond markets.

I've been super busy with Xmas shopping. I've also been doing a lotta soul searching lately on account of this Global Economic Meltdown. This is largely on account of my impending graduation in 6 months (arguably the worst time ever to be entering the job market) so I need to lock up work ASAP. Hint, hint...my blogging responsibilities might have to take a back seat for the next few months. Doesn't mean I will stop blogging altogether, but I gotta prioritize.

Private Equity 101...

a very interesting Money Morning article about how Private Equity firms (aka Leveraged Buyout Firms) operate. The part about "covenant-lite" and "reverse convenants" is especially eye-opening since it means controlling PE firms don't have to answer to stakeholders or act in the company's best interest (two seemingly antiquated notions nowadays).

PE's current push into assisting (aka purchasing) distressed banks is also very disturbing since they would then be playing with our bank accounts/deposits and would also be backed by the bailout machine known as the U.S. government...moral hazard anyone?



The once booming business of private equity faces an uncertain future. What’s not uncertain, however, is that many private equity deals are imploding from the weight of leveraged debt and greed. Inevitable bankruptcies will result in higher unemployment and a deeper recession.

Private equity firms are the debutante sisters of hedge funds. They raise huge pools of capital from pension funds, endowment funds, sovereign wealth funds, institutional investors and wealthy entrepreneurs. But while hedge funds buy and sell the stocks of companies they hope to profit from, private equity shops buy whole companies.

The trick of the deal is to pay for the target by using as little equity capital as possible, and raising the remainder by actually having the target company borrow the required funds. (I assume the author is referring to the use of tax shields here to maximize overall firm CF's) Except for the private equity firm’s initial equity investment, the target company is essentially buying itself (More likely burdening itself with massive, crippling debt).

And if that isn’t enough of a trick, very often when the target is privatized, their new masters have the company borrow even more money so they can then pay themselves a dividend as a bonus for the good job they did in leveraging the company to the hilt so they can streamline it.

There are two elements that made massive borrowing possible.

The first was a ready supply of capital courtesy of the U.S. Federal Reserve’s easy money policy and low interest rates. The second was the ability of banks that lend money to acquired companies to pool those loans into securities called collateralized loan obligations, or CLOs, and sell them off to investors. Banks and investors refer to this asset class as “leveraged loans.”

Banks and non-bank lenders attach covenants to the loans they make. Typically, covenants dictate to borrowers what specific balance sheet requirements must be met and include debt-to-cash flow leverage ratios, limitations on the total amount of debt a company can carry, minimum equity provisions and other dictates that serve to secure collateral that is relied upon by lenders.
But, banks were so flush with money and so eager to lend that privately acquired companies, driven by their new private equity masters, proposed that the money they borrowed should not be encumbered by the protective covenants lenders are used to demanding. Hence the birth of “covenant-lite” loans.

Covenant-lite loans included insane “reverse covenants” that benefited the borrowers not the lenders. (unbe-f**king-lievable! How backwards is that?)

Among other things, some borrowers demanded and got rights to:
-Increase debt-to-EBITDA levels to 10:1.
-Freely substitute collateral.
-Issue unsecured debt equal to the total amount of existing debt (if they hedged or effected swaps.
-Employ PIK (payment-in-kind) options, where instead of paying interest in cash they could substitute more debt.
-Employ PIK toggles**, sometimes called “extendibles.”
**PIK toggles...like an option ARM mortgage, where borrowers can choose whether to pay the interest due, some part of it, or none of it, and roll unpaid interest into principal.

Eventually, investors simply stopped buying leveraged loans. And the net result is that banks may be sitting on over $150 billion of junk leveraged loans that they can’t place. They are taking hits to their balance sheets as they have to mark down these loans....they are terrified that the recession will drive more of these leveraged companies into bankruptcy.

Thomson Reuters recently reported that 40 private equity companies have sought bankruptcy this year. According to Standard & Poor’s, of 86 S&P rated companies that defaulted this year, 53 of them were private equity related transactions. Linens ‘n Things which was taken private by Apollo Group Inc. went bankrupt. Sharper Image, Wickes Furniture and catalogue company Lillian Vernon, were all taken private by Sun Capital Partners Inc., all of them are bankrupt. Mervyn’s which was taken private by Sun Capital and Cerberus Capital Management LP. is bankrupt.

Then, of course, there’s the pure genius of PE firms coming to the rescue of troubled banks. But, TPG Capital (formerly Texas Pacific Group) doesn’t look so genius with its $7 billion investment in Washington Mutual Inc. (OTC: WAMUQ) which was wiped out in a matter of five months. ($7 billion lost in 5 months...lmao...what a bunch of idiots).

There’s a lot of pressure on banks to raise capital and there’s a lot of pressure being exerted by the private equity guys to lean on the Fed and U.S. Treasury to bend the rules to let them play in that sandbox. (I AM NOT EASILY FRIGHTENED BUT THIS SCARES THE SH*T OUT OF ME!) Pushing hard from the private equity camp are Randall Quarles, Managing Director of Carlyle Group Ltd. and a former senior Treasury official and none other than the former Treasury Secretary himself, Chairman of Cerberus Capital Management, John Snow.

What the private equity guys want is the ability to buy into banks and control them. If they get their hands on the low cost deposit-based capital at commercial banks, they’ll be unstoppable. How about having the piggy-bank, backed by taxpayers to leverage at will?

Right now there’s a limitation imposed on investors in Federal Deposit Insurance Company insured commercial banks. Once an investment exceeds 9.9% there must be an agreement with regulators to not “control or influence” management. If an investment exceeds 24.9% the investing entity must register as a Bank Holding Company, and subject itself to all necessary transparencies called for by regulators and the Fed. Private equity guys do not want any part of either of those restrictions. They don’t want their business looked through nor do they want their capital encumbered. (Not surpised...only 28 days until Hank Paulson and Bush Co. are gone! They are the only ones who would be stupid enough to let this go PE "assistance" go through).

Some good news, but more bad news

Diane Garnick, investment strategist at Invesco says "I'm more bullish short-term — valuations have been knocked down."

The strategist also cited falling commodity prices, which reduces companies' input costs (and she's not worried about deflation), as well as mass layoffs, which can boost the bottom line. (yeah, but higher unemployment means fewer potential customers and lower future sales).

Having said that, Garnick is restrained in her enthusiasm for stocks in the short term because of still elevated levels of volatility (as measured by the VIX) and in the longer term because of what she calls "the next two crises":

1) Municipalities facing budget shortfalls because of reduced tax revenues.
2) Social Security funds being depleted even before Baby Boomers start to retire en masse.

Regarding volatility, Garnick notes that if the S&P is at 900 and the VIX at 50 (current levels are 899 and 54, respectively), the market is pricing in a two-thirds chance the index will trade between 770-1,029 over the next 30 days.

"Now is one of the most difficult times to make a commitment" to stocks, but "it's a good time for active managers who can handpick the winners and losers," she said. (I agree...you can't be a long term investor in this market when you have 10% intraday market swings. You have to take profits and cut losses when you can.)

Not very auspicious for Real Estate...

"Those who do not learn from history are doomed to repeat it."

The doomed:

VNO
BXP
KIM
PLD
DLR
GGP

Gary Schilling has been right and will be right in 2009.

The S&P 500 could fall to as low as 600 in 2009 and "alternative assets" like commodities and currencies will provide no shelter for investors, says Gary Shilling, president of A. Gary Shilling & Co.

Having been appropriately bearish heading into this year, Shilling sees "few good places to hide" in 2009. Currently, Shilling is long Treasuries and the dollar, but notes the bond market's rally is getting long in the tooth.

Other than defensive plays like utilities and consumer staples, Shilling is short stocks. His "S&P 600" prediction, a 33% drop from current levels, is based on a view that S&P earnings will be $40 per share next year (vs. the consensus of $83) and the index will trade with a P/E multiple of 15. (Here's the math: $40 EPS x 15 P/E = 600.)

Shilling is also commodities and remains bearish on emerging markets, most notably China. The theory China, most notably, could "decouple" from the U.S. doesn't hold up to scrutiny, Shilling says, as evinced by the slowdown of China's economy and the fact their middle class isn't large enough to sustain growth internally.

Against that backdrop, Shilling isn't only bearish on China as an investment, he sees the potential for major social upheaval in the world's most populous nation.

The "Pooring of America"

A graphical illustration of America's de-leveraging (I am talking about consumers not banks). You remember the American consumer....right?

Hat tip to Calculated Risk for this stunning visual.

Notice how slow debt is decreasing, whereas value is plummeting. Kinda reminds me of going to Vegas, it's really hard to earn/win your money but it's really easy to lose it. The problem here is that you can't walk away from the "debt table" like you can the blackjack table.

Stung by the loss of more than $2.8 trillion in their net wealth, the nation's households paid down their debts in the third quarter for the first time since at least 1952, the Federal Reserve reported Thursday.

As of Sept. 30, households' total outstanding debt shrank at an annualized rate of 0.8% from $13.94 trillion to $13.91 trillion, the Fed said in its quarterly flow of funds report. It's the first decline in household debt ever recorded in the report.
...
With the stock market plunging and home prices falling rapidly, American households lost a total of $2.81 trillion in wealth during the third quarter, the most ever. Wealth fell at an 18% annual rate during the quarter.

VIX says don't get too comfy with your longs here...

The dramatic sell off in the VIX these past few weeks suggests that a lot of complacency and comfort is returning to the market very quickly (consistent with Larry Kudlow - perma bull behavior). IMO this VIX selloff and subsequent stock rally is because all the big institutions have closed up shop for 2008.

We have key support and a rising 200 day MA that will likely act as support for "fear and uncertainty". I know it seems stupid to apply TA to the VIX, which is tracks emotion/sentiment, but it's important to juxtapose how much people's emotions/sentiments are changing relative to their feelings a few weeks/months back.

Macro-wise, things have not gotten better in this market, yet the graph says stocks are comfortable with that news. I willing to believe and "bet" my money that this market is wrong and is clinging to false hopes (like "Barack the builder" or "2nd half 09 recovery") and will be gravely disappointed. Remember this market is irrational, short-sided and will be proven wrong (yet again) by a massive VIX rally in early 2009 that will retest the 80 level at least.

Bush's Economic legacy in...

one chart:

And one quote:

Thanks to our policies, homeownership in America is at an all-time high. (Applause.) Tonight we set a new goal: seven million more affordable homes in the next 10 years so more American families will be able to open the door and say: Welcome to my home

"The road to hell is paved with good intentions."

No bond bubble here...

Do yourself a favor and start nibbling at TBT...buy in small increments only (say 1/5 of a position today).

POSITION: Sold some NOV and bought some TBT @ $37 today. Oil's bubble has popped, treasuries are the next big game kill.

Some items I came across...

Scouring the interwebs I found these VERY IMPORTANT pieces of data that should color your perceptions about this market because they have certainly not been "priced in" yet (Hat tip to 24/7 Wall Street):

On bank stocks and writedowns

Analyst Staite of Atlantic Equities downgraded Bank of America to "underweight" from "neutral" and Wells Fargo to "neutral" from "overweight." He believes that each firm will have to raise $10 billion to $15 billion. Having to come up with that kind of money could be remarkably expensive for current shareholders. Bank of America's market cap is $77 billion with a stock price of $17. Bringing in a huge sum of capital may have to be done below market and with warrant coverage. That would drive dilution of over 20% making BAC a $12 stock.

On Unemployment:

The Conference Board Employment Trends Index notes that the U.S. economy lost 1.9 million jobs, but more importantly the data suggests that job losses could pass 3 million jobs by mid-2009. And to add insult to injury, the report also notes that "the continued deterioration in the labor market will exert significant downward pressure on wages. But this data would also put unemployment well under the 8% hurdle (HENCE IT IS OPTIMISTIC IMO).

On "what inning we're in?"

Goldman Sachs (GS) said that the issues within the credit system were far from resolved. According to the AP, these analysts believe that "Now, about 18 months into the current crisis, the industry's reserves have doubled to 2 percent, and banks have taken half of the estimated $1.8 trillion in losses related to U.S. credit, the analysts said. This implies that we are now roughly half way through the credit crisis without including the impact of a new de-leveraged financial world. Goldman Sachs also expects government intervention and government "assistance" to continue into 2009.

What is interesting here, albeit something we have expected for some time, is that the crisis will migrate away from residential mortgages. Goldman Sachs believes that the next waves of trouble spots will come from consumer loans and corporate loans.

On a "Detroit Bailout" and it's affect on thos financial WMD's known as Credit Default Swaps.

Bailout or No bailout, the CDS's will likely be triggered. Banc of America Securities analyst Glen Taksler noted that the International Swaps and Derivatives Association, the trade group that acts as a standard-setter for credit-derivatives trading, says one trigger for a bankruptcy credit event is the appointment of an administrator, trustee or similar official to oversee all or most of an entity's assets

Between GM (GM) and Ford (F) there are almost $6 billion in net swaps outstanding.

Pfft! WHO CARES ABOUT ANOTHER $6 BILLION DOLLARS? PUHHHLEASE, NOT EVEN WORTH MY TIME.

On who gets hurt by new credit card regulation (of which I am IN favor of!)

Citigroup, Bank of America and JPMorgan Chase enjoyed almost 70 percent of the credit card market at the end of 2007, according to the Card Industry Directory.

Nobel Prize Winner Paul Krugman's fears may become a reality:

"A scenario I fear is that we'll see, for the whole world, an equivalent of Japan's lost decade, the 1990s -- that we'll see a world of zero interest rates,
deflation, no sign of recovery, and it will just go on for a very extended period."

UCLA Research backs Krugman's fears

The UCLA Anderson Forecast unit expects real GDP to shrink another 3.4 percent and 0.8percent in the first and second quarters of next year, respectively, as consumer and business spending weaken and as the foreign trade that had propped up growth much of this year sags.

"Because Europe and Japan are already in recession and China and India are suffering from a significant slowdown in growth, the export boom of the past few years will wane," the report said. "Make no mistake the global economy is in its first synchronized recession since the early 1990s."

By late 2009 the U.S. unemployment rate will hit 8.5 percent, as employers shed an additional two million jobs over the next year.

The Price is Right!!!

The only thing more amazing than the guy's guess, is Drew Carey's complete lack of emotion.



Before I graduate I totally plan on taking a trip down to SoCal to see a taping of the Price is Right! My only regret is that Bob Barker is no longer hosting....he was a chiller!!!

Current asset allocation...

FAZ (15% of portfolio)
SRS (15%)
APWR (20%)
GU (15%)
NOV (15%)
Cash (20%)

*Pretty neutral overall position, with slight long bias.

*I have a larger emphasis on China (via APWR and GU positions) because the FXI ETF (proxy indicator for China) is acting stronger technically than other indices like the SPY or IWM. Besides both stocks have very little debt, lots of cash, and very promising futures for the next 5 years.

*FYI, tomorrow we have some more jobs data. Also the VIX is nearing 45 (an important level of support - if emotions can be quantified with support/resistance line :-) This 45 support line makes me wary of getting too long this market. We also have some more bad news from the Big Three, as Chrysler just told all its employees not to come back to work until January 19th.

*Also GGP just announced that it received another debt extension until February 12th 2009....LMFAO!!! An extra 3 months doesn't change the reality that GGP owes $22 billion dollars in debt over the next 4 years. GGP needs a 3 year credit extension, not 3 months. WTF? Ultimately, this isn't a "game changer" I am still content with my SRS position.

P.S. I will never mention FXP ever again on this blog...it is now the ETF "that shall not be named."

Interesting late day selloff in GGP...

I bought some SRS @ $57 at the close after seeing this stock action in General Growth Properties (GGP)


GGP is the second largest mall REIT in the U.S. (owns more than 200 malls) and is on the verge of bankruptcy anyday. When that day comes it will rock the CRE market to its core and send SRS flying higher. I am sure Zuckerman over at Boston Properties (BXP) will sh*t a brick when he sees GGP go under...just another nail in the coffin for real estate and investor confidence.

Neutral + Heavy cash position didn't pay off today...

I lost a mere .25% today but I didn't get to participate in this rally. Boo hoo :-(

Frankly, I don't care because I knew coming in today that I had NO EDGE WHATSOEVER! Remember this game is rigged (very much like a casino) and I am not about to waste my money at a goddamn casino!

Disagree? Ok, let me ask you...Who the f**k knew that the market would shake off Goldman's terrible miss and bid it up 10 points today? Also, do you think this will be Goldman's only bad quarter? Given growing unemployment, lack of stabilization in credit, global growth slowdown, etc., aren't there more bad quarters to come from GS? Of course GS is VERY WELL connected to the government, so maybe they will survive...but once again, that's because the game is rigged.

Or what about the Fed meeting today. Everyone knew the Fed would do something "dramatic" with a massive cut so wasn't it already priced in? Apparently not. Of course, an important question is how is libor looking? Not good at all, last time I checked libor mattered a whole lot to the credit markets.

The biggest fear every investor on the sideline has is: "Oh no I missed the bottom."

I used to think that way all the time and that mindset will get you killed because picking a bottom is a fools game (albeit very enticing and lucrative).

Rather than looking in hindsight, you should care about the future events that will drive this market higher/lower. I have been and will continue to compile a list of events that I believe this market will "eventually" care about. I say eventually because I don't know when the "casino bosses and players" will wake up and decide that $2 trillion in credit card lines matter, or that 9% unemployment matters, or that the demise of the extravagant American way of life matters.

But I have gone out and educated myself on all these issues, and have made my decisions. Here they are: In the short term, I will continue to be mostly neutral, with an occasional long or short bias in my overall asset allocation. But my long term position is to short this motherf**king market down to the ground because I believe the FUTURE EVENTS that will arise will warrant it. There is no doubt that this type of transition will be difficult to pull off but I have enough confidence to say that "This was not the bottom" and that we shall see more pain ahead.

Cramer still thinks housing will bottom in 2009...sheesh

and he wants a house in the Hamptons.



Until we get millions of mortgage modifications, a stabilization in credit markets, and a stabilization in jobless claims, Cramer can go f**k himself and his dream of a Hampton's home.

Until those criterion are met, I will trust Credit Suisse's call on the deteriorating housing market (8.1 million foreclosures by 2013).

For this economy the plug gets pulled...

on Thursday

And as bad as it is, a revered, and feared, bank analyst, Oppenheimer’s Meredith Whitney, has now lobbed another bombshell: Credit card issuers will withdraw more than $2 trillion in available credit over the next 18 months.

Banks’ aversion to risk has obviously risen. So they’ve been closing accounts, raising rates and lowering limits. A reader sent us a letter from American Express announcing it was lowering his limit. Being late with a payment was not one of the reasons listed, but he was popped for using his card where other customers with poor payment histories shopped.

Thursday, the Federal
Reserve is expected to announce dramatic reforms in its credit card regulations. These are expected to prohibit increasing interest rates on existing balances, except in extreme cases.

(THIS MEANS BANKS WILL CHARGE HIGHER RATES UP FRONT - THUS REDUCING THE AVAILABILITY OF CREDIT...)

While reform is clearly warranted, the new regulations, according to the Fed, will result in credit card issuers reducing credit lines by $931 billion.

(HMMM...THE FED KNOWS IT'S ABOUT TO PULL $931 BILLION IN CREDIT OUT OF THE FINANCIAL SYSTEM. STRANGE CONSIDERING THEY ARE SIMULTANEOUSLY POURING IN THE $700 BILLION TARP FUNDS)

Whitney, who predicted the financial meltdown back in October 2007, doubles down on that number.

(I TRUST MEREDITH WHITNEY MORE THAN THE FED/TREASURY RIGHT NOW....SO $2 TRILLION DOLLARS IS THE CORRECT ESTIMATE ON CREDIT REDUCTION...NOT $931 BILLION)

That would be the modern-day equivalent of what most say caused the Great Depression.

Many economists believe the central bank’s restrictive monetary policy turned a market crash and recession into the Great Depression.

Fed Chairman Ben Bernanke has been pulling every lever in sight to avoid No. 2.

But until home prices stabilize, the market recovers and consumers start spending, recovery has as much chance as the yield on that T-bill auctioned last week.

Death by 1000 shoes.....R.I.P. AMERICA

"Credit Suisse's fixed-income research team forecast 8.1 million mortgages will be in foreclosure over the next four years representing 16% of all mortgages."

Given these numbers no wonder guys are throwing shoes at our motherf*ing "idiot in chief:"



P.S. We should also be throwing shoes at every banking, auto, retail, and construction CEO is this country. Better yet, we should be throwing pink slips at them right now [Bush gets his in January...not soon enough :-(

Frankly alot of my crazy/revolutionary friends would prefer throwing more lethal objects at all their sorry asses for the pain they've inflicted.

In case you didn't watch Pulp Fiction this weekend...

Another neutral day for the portfolio and surprisingly for the market...

There was soooo much bad news for the markets today (stalled bailout plans for Detroit and Maddow defrauding investors out of billions) but amazingly the bulls fought their way back.

Essentially anyone who claims the have an edge in this market is full of sh*t (or they have Hank Paulson on speed dail). This market is being driven by so many factors its hard to keep track of them all, hence you cannot possibly know what to expect.

One thing is for sure, the news coming out is getting worse (eg: CA is bankrupt, Ecuador is bankrupt, unemployment surging nationally, BOA job cuts, credit card lines getting pulled, China/India slowdown, etc.) which means the "Wall of Worry" will eventually grow too large for the bulls to climb.

Considering the bulls' burden of proof is growing by the hour, I continue to remain overall bearish (we will remain in this primary downtrend, although our rate of descent may slow now). However, short term I will start liquidating my current neutral 50% long/50% short strategy in order to raise more cash (around 40%). That way when we stop churning in this range, I can pounce on the next big move (either up or down) because then I will have an edge.

Neutral market position pays off.

This market continues to tease both the longs and shorts. IMO today's drop was because of the stalled GM/Ford bailouts (Congress will drag their feet, but they will ultimately pass the damn bill). All I know right now is that we have sliced through alot of support points on the XLF, SPY and IWM (the USO interestingly is still in tact but I am not optimistic).

I continue to remain market nuetral (50% long and 50% short)...fyi my portfolio was up .34% today so I feel good about my current allocation. Of course I will not become complacent...that got me into trouble last time.

Oil might be temporarily bottoming out here for the holidays...

The USO (Oil ETF) just broke through overhead resistance @ $37.50. If it can close above it then I would say the short term downtrend is now broken and that oil prices will stabilize for the next several trading sessions (likely the rest of the year). Of course if $37.50 is not broken, the downtrend remains intact.



By the way, hat tip to Brian Shannon over at AlphaTrends for his enlightening posts on key technical support/resistance levels. Listen to Brian talk for 2 minutes and you can tell that he has "ice in his veins" when he trades (a real objective student of the markets). He's a very cool customer, kinda like these guys:



Positions: Long NOV, ATW, FWLT

Goldman betting against States and Muni's...

Remember when Erin Burnett over at CNBC made the asinine suggestion that shorting financials (like Goldman, Citi, JP Morgan, etc.) was "Unpatriotic."

Well after reading what Goldman's been up to recently (advising its clients to buy CDS exposure against Municipalities...ie bet that states will go bankrupt) I wonder if Erin still stands by her very childish "unpatriotic" statement? Methinks not, but these CNBC personalities are truly shameless, that's why I came up with the logo:

I'll discuss this article and others in more detail, but I gotta go to sleep.

Memo to John Thain: Don't drop the soap!

Luckily Thain came to his senses, realized that he didn't "deserve" a $10 million bonus, and most importantly STFU! Now if I were him, I'd get on a plane right now and head to a non-extradition country because he can and SHOULD be investigated for lying to MER shareholders (remember that 20% dilution back in July after telling shareholders MER didn't need $$$...whoops). I sure as hell remember, CRAMER REMEMBERS, and I am sure the SEC remembers!

Trade Mark over @ Fund My Fund just crushed my infra dreams...

Here I was thinking FWLT/JEC/SGR/FLR/CBI/ABB would all triple in market cap in 2009 under an Obama Administration (he appears to be a big proponent of Keynesian economics). However, Trader Mark rudely pointed out that infra's future isn't as bright as my "Amateur" mind would believe. Nevertheless, I'll settle for a return to the old highs; looking at all the infra company charts, that would still be a 2x in one year ;-) Besides where else am I gonna park my long-bias money? Banks? Homebuilders? Retailers?

Hey Mark! Why you gotta focus on facts all the time??? Just drink some kool aid and take a nap

Asset allocation: neutral on this market

we appear range bound with a slight upside bias (on account of the Holiday season, and optimism surrounding the new Obama administration). So with that said I will continue to balance out my longs (NOV, GFA, APWR, GU, FWLT, ATW) with my shorts (SRS, FAZ, and of course that bitch of an ETF known as FXP). So I am basically 50/50

When I say "range bound" I mean the bracket support/resistance levels are between
$82 - $93 on the SPY.

I wanna to be greedy this x-mas with FXP...

I won't buy any more FXP until I see it hit sub $30. China will burn to the ground soon enough.

This is an Obama rally...last time I checked he ain't President for another 40 days. At least this market knows the cavalry is coming and that the Bush f&kups will be leaving office soon (but not fast enough to save this b.s. economy).

FINALS WEEK @ COLLEGE....

I've got exams on Monday and Tuesday.

so no blogging.

Bulls=Spartans / Bears=Persians

The outnumbered bulls are putting up a good fight


But they will meet their fate soon enough


In the VERY VERY LONG RUN the bulls will win this

No FXP x-mas present but it looks like this rally will BTFD...

Added 10% of portfolio to SRS on account of GGP's impending bankruptcy. That will rock the commerical REIT market and send SRS soaring into the holidays with a 2 handle.

Now 45% short, 25% cash and 30% long.

An early X-mas present would be....

FXP under $40.


If that happens I will put 50% of my portfolio into that ETF (currently 25%).

To those who ask "diversification?" I reply "Global Recession."

Asset allocation...

Now I am:

50% long

25% Short (FXP trades so poorly, but I will buy the next bucket at $45 - will then become a 35% position as cash gets drawn down)

25% Cash

The final support leg holding up this market is at around $80.25 on the SPY. Should we break it we will retest the lows.

Off to class. Very busy day ahead so no more posts today, but here's an interesting/enlightening read.

Will take it very slow with TBT because of this guy...

I mentioned earlier today that I am starting to nibble at TBT. Looking at these headlines, I will continue to be very cautious with building my position in this investment.

“This sets the stage for the Federal Reserve to be more formal in its adoption of quantitative easing,” said Vincent Reinhart, the Fed’s director of monetary affairs until last year and now a scholar at the American Enterprise Institute in Washington.

The Bank of Japan is the only major central bank in modern times to rely on quantitative easing -- the strategy of injecting more reserves into the banking system than needed to keep the target interest rate at zero.

Bank of Japan Governor Masaaki Shirakawa said in May that while the strategy “was very effective in stabilizing financial markets,” it had “limited impact” in remedying Japan’s economic stagnation because banks wouldn’t lend and companies wouldn’t borrow.

One option is for the Fed to buy “longer-term Treasury or agency securities on the open market in substantial quantities,” Bernanke said. “This approach might influence the yields on these securities, thus helping to spur aggregate demand.”

Looking at these headlines I am positive that Bernanke will bring 20-30 year bond yields down to 3.00% if not much lower. Hence I will likely add to TBT when it hits $35, $30 and $25. Of course, by the time TBT hits $25 Bernanke will likely be out as Fed Chairman. I mean why the f*ck would Obama keep this idiot around? Bernanke wrote a book about the Great Depression and yet he still couldn't see this sh*t coming even in 2007! Pathetic.

What inning is housing in? Looks like the 6th...

With all this talk about rising unemployment, Citi's bailout, Detroit's potential bailout, China's massive economic slowdown, Black Friday, and the dwindling credit card securitization market, it appears we have forgotten about THE root cause for our financial system meltdown: Housing.

Now I am not an economist and I can't run dozens of regression, time series and stochastic models. However, I can discern and listen to the really smart economists who want to enlighten and share their knowledge with the world (ie the economists that don't regularly go on CNBC/FOX ;-). My careful screening (or "leaching" if you want to be affectionate about it) has led me to some research courtesy of Calculated Risk that sheds light on where we stand in the current housing cycle. The report uses historical price to rent and price to income levels to identify exactly what inning we are in:

Looking at the price-to-rent ratio based on the Case-Shiller index, the adjustment in the price-to-rent ratio is probably 60% to 70% complete as of Q3 2008 on a national basis. This ratio will probably continue to decline with some combination of falling prices, and perhaps, rising rents. The ratio may overshoot too.

Here is Calculated Risk's price to income metric:

Using national median income and house prices provides a gross overview of price-to-income (it would be better to do this analysis on a local area). However this does shows that the price-to-income is still too high, and that this ratio needs to fall another 15% or so. The further decline in this ratio could be a combination of falling house prices and/or rising nominal incomes (Note: this uses nominal incomes, and even if real incomes are stagnant or declining, nominal incomes usually are rising).
Last quarter this index was over 1.25. Now it is close to 1.2. At this pace the index will hit 1.0 in Q3 2009. However, during a recession, nominal household median incomes are usually stagnate - so it might take even longer.

Here is additional housing deterioration information from Mish's Global Economic Trend Analysis (via Case Schiller data)
regarding where we stand and how much further is left to go:

The Case-Shiller numbers are for September 2008 which do not reflect any of the market meltdown. Price declines in excess of 10% are now occurring nearly everywhere, although the median dollar declines are only above $100,000 in those markets that experienced extreme price appreciation (CA, AZ, NV, FL). The trading in the futures markets continues to reflect nominal price declines for the next 2-3 years with prices plateauing afterwards (they only price out 60 months forward.

Great quote...

Journalist: "Given the amount of energy Americans consume per capita, how much it exceeds any other citizen in any other country in the world, do we need to correct our lifestyle?"

Ari Fleischer: "That's a big no. The president believes that's an American way of life."

I am sorry if I offended any one's political sensibilities just now.

TBT is getting crushed....

It's down almost 5 days in a row (even though we saw [emphasis on past tense] a huge rally this past week...strange, no?). I will initiate a larger position in TBT (5%) with the ultimate goal of reaching 20% by end of December - who the hell would be stupid enough to lend their money to the U.S. Government for 20 years at 3% (that's where I expect this bubble to top out at and pop). We are currently at 3.35'ish.

Current Asset Allocation....

45% long (half of this 45% are my long term value picks like GFA - so I will never go below 25% long in my portfolio)

20% short (Mainly FXP, which is acting like a total b*tch today...weak spike)

35% cash (we are stuck in a range on the SPY, IWM, and QQQQ's so I must wait for confirmation of the trend before I invest these funds), here's the game plan for my cash:

If we break $84.50 on the SPY ETF and hold below there for more than 30 minutes, I will move my cash into shorting this market (probably add more to FXP).

If you like the IWM more than the SPY than use $44 as your "Maginot" line of support for this market right now.