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Saturday, February 2, 2008

Life After Things Go Parabolic, This Bounce Too Will End

In my October 10th post When The Momos Go Parabolic I argued that the end of the Bull was in sight because a few select momentum names were accelerating upwards. This meant that the broader indices were posting gains on fewer and fewer participants. Market breadth was weakening. The four ‘momo’ horsemen were of course, GOOG, RIMM, BIDU and AAPL. The charts above are of the carnage that followed. Some of these names are now approaching levels where a counter trend rally becomes more and more probable.

I said ‘COUNTER TREND RALLY’. They will bounce. Nothing more. The bounce will be quick and significant. This will alleviate some serious short term oversold pressure and will occur as shorts cover and some longs look for bargains.

The entire global economy is on the verge of sliding into a recession and the US is leading the way. Non-farm payrolls came in negative yesterday. The BLS (Births/Death Model) was changed and that resulted in some significant revisions, but that does not change the fact that job creation can only decelerate right now.

U.S. Economy: Payrolls Fall for First Time Since 2003 (Update3): “The U.S. unexpectedly lost jobs for the first time in more than four years, increasing the odds the economy will fall into a recession and making it likely the Federal Reserve will cut interest rates another half point next month.

Payrolls fell by 17,000 in January after an 82,000 gain in December that was larger than initially reported, the Labor Department said today in Washington. None of the 80 economists surveyed by Bloomberg News predicted a decline.

Employment is one of the indicators, along with wages, production and sales, that help determine the start of economic contractions. The decline poses a further threat to consumer spending, which accounts for 70 percent of the economy, after households were already hurt by falling home and stock values.”

In my November 10th post When The Momos Lead The Way Down, I wrote the following: “The damage is swift and savage. Intraday the Nasdaq 100 was down over 4% and all the big momo names were down close to or in excess of 10%. When the big momo names lead the way down the Bull is probably dead for good.”

In my November 19th post Dow Theory Hints of Bear Market, I wrote: “Dow Theory is flashing some serious warning signs here. In Dow Theory, the Dow Transportation average must confirm the highs or lows in the Dow Industrial average. This is now occurring. In fact, the Dow Transportation average is currently leading the charge lower and has now broken through the August panic lows.”

It is often difficult to put all the different pieces of information together, but that is the nature of trading. If you haven’t seen these already, sit down before you take a close look: Really Scary Fed Charts, Why Bernanke Will Furiously Cut.

So, now the market is bouncing… and bounce it must. The bounce too was predictable. both from a fundamental and technical perspective. Fundamentally, you had to assume that the powers that be would do SOMETHING. ANYTHING. They can’t tolerate ‘lock limit down’ on the futures after a big slide the week before. They can’t have such terrible economic news go unanswered. It is political suicide. Especially in an election year. So you had to assume they’d start acting. And so there was the stimulus package, the emergency cut and the planned cut. Still pending are the monoline bailouts. THAT will mark the end of the counter trend rally.

From a technical perspective, indices the world over were ‘rinsed’. Stops were blown out and capitulation took place. You can see that from the charts. Look for massive red candles on massive volume. Prices hit deeply oversold levels around long run support. I argued the point in my January 23rd post Charts for the Big Bounce. Things got off to a good start (Securing the Bounce: Microsoft Beats, More Fuel For the Bounce: Microsoft, Ambac) and then things became critical very quickly (Monday: Bounce or Die, Bearish Engulfing). If the S&P can clear 1400, look for a move to the 1430 area. This will likely mark the end of the bounce. Then markets will turn and head once more for the depths of hell.

Other Related Posts:
Fact Sheet: The Bush Stimulus Package
Ambac, Monoline Insurers: The End Game

Friday, February 1, 2008

Microsoft Buys Yahoo, Banks Bail Out Their Hedges

Microsoft Offers to Buy Yahoo for $44.6 Billion (Update1): “Microsoft Corp., the world's biggest software maker, made an unsolicited offer to buy Yahoo! Inc. for about $44.6 billion, or $31 a share.

The offer is 62 percent more than Yahoo's closing stock price yesterday, according to a Microsoft statement distributed by PR Newswire. Yahoo shareholders can choose cash or stock, Microsoft said.”

That was the big news this morning. Futures shot up, hitting resistance of 1390 on the S&P… where prices got slammed down hard into the close yesterday.

Hidden amongst all the excitement and noise of that deal, CNBC quietly mentioned that eight big banks have formed a consortium to bail out the monoline insurers. They are launching a ‘recovery bid’. (That’s all I know.)

The bank names being tossed around are:

PNP Paribas

Understand this: Every effort, both private and government, will be made to save the monoline insurers. Ultimately, they will be rescued. Somehow. The news will be instantly viewed as massively Bullish and risky assets will rally hard the world over. Wait for the rally to exhaust itself. It may take a while. Weeks. Maybe a month. Be patient. Then get short in a big way.

A bailout will not change the trends currently in place. A consumer lead recession will not be averted. This is just a big counter trend rally.

EDIT: (02/02/08) More details on the proposed bailout. 8 Banks Discuss Aid For Bond Insurers.

Subprime, CDO Bank Losses May Exceed $265 Billion (Update5): “Losses from securities linked to subprime mortgages may exceed $265 billion as regional U.S. banks, credit unions and overseas financial institutions write down the value of their holdings, according to Standard & Poor's.

S&P cut or put on review yesterday the ratings on $534 billion of bonds and collateralized debt obligations, many of which were rated as high as AAA. The action was the broadest by the New York-based firm in response to rising delinquencies among borrowers with poor credit. Moody's Investors Service and Fitch Ratings today said that they're also toughening assessments of the securities as home prices fall and the economy weakens.

While banks and securities firms such as Citigroup Inc. and Merrill Lynch & Co. accounted for most of the $90 billion in writedowns to date, S&P said the next wave may descend on regional U.S. banks, Asian banks and some large European banks. The ratings actions may create a “ripple impact” that further reduces debt prices, S&P said.”

$534 billion of bonds yesterday had their ratings cut. A rescue package for the monolines does not change that.

“Almost half the subprime bonds rated by S&P in 2006 and early 2007 were cut or placed on review, also potentially forcing credit unions and government-sponsored enterprises such as Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks to write down their holdings, S&P said. The securities represent $270.1 billion of subprime mortgage bonds and $263.9 billion of CDOs. About 35 percent of all CDOs comprised of asset-backed securities were put under review, S&P said.”

Subprime Bank Losses Reach $146 Billion as Europe Joins: Table: “The following table shows the $146 billion in asset writedowns and credit losses since the beginning of 2007, including reserves set aside for bad loans, at more than 25 of the world's largest banks and securities firms.

The charges stem from the collapse of the U.S. subprime mortgage market. The figures, from company statements and filings, incorporate some credit losses or writedowns of other mortgage assets that aren't subprime.

All figures are in billions of U.S. dollars, converted at today's exchange rate if reported in another currency. They are net of financial hedges the firms used to mitigate their losses.”

Hey, if you have to bail out the guys you used to hedge, is it really a hedge? Haha.

Thursday, January 31, 2008

Fed Cuts and Rates Rise: Bond Vigilantes

Ben 'Helicopter' Bernanke cut and he cut hard... the Bond Vigilantes came and and raised rates on everything along the curve.

The curve steepened as intended, and this will eventually help the banks. However, if yields continue to rise are simply ignore further cuts, then the strapped consumers won't see the benefits of a lower Fed funds rate. Looks like mortgage rates won't be coming down as intended...

U.S. Initial Jobless Claims Rose to 375,000 Last Week (Update1) : "The number of Americans filing first-time claims for unemployment benefits rose more than forecast last week to a 27-month high, evidence of a weakening job market.

Initial jobless claims increased by 69,000 to 375,000 in the week ended Jan. 26, the Labor Department said today in Washington. The increase in claims was the biggest since just after Hurricane Katrina in September 2005. A separate report from Labor showed employment costs rose 0.8 percent in the fourth quarter of 2007, the same as in the prior three months."

That was a little bit of a surprise as well. S&P went from 1344 to 1331 on the news this morning. Looks like the begining of an ugly day.

"Last week's figures were distorted by difficulties adjusting for the Martin Luther King holiday, when state unemployment offices were closed, a Labor Department spokesman said. Total benefit rolls have been moving steadily higher since September, signaling a slowing job market and raising the odds the economy may be on the verge of a recession, economists say."

Looks like traders are taking the 'seasonality' arguement at face value.

Wednesday, January 30, 2008

Really Scary Fed Charts, Why Bernanke Will Furiously Cut

$ Now $
$ Hear This: $
$ Money is debt. $
$ No debt, no money. $
$ Less debt, less money. $
$ Less money, less inflation. $
$ Even less money, is deflation. $
$ Because $
$ "Inflation is always and everywhere $
$ A monetary phenomenon." $

(Money Tree from Sudden Debt)

Fed May Cut Rate Below Inflation, Risking Bubbles (Update3): “The Federal Reserve may push interest rates below the pace of inflation this year to avert the first simultaneous decline in U.S. household wealth and income since 1974.

The threat of cascading stock and home values and a weakening labor market will spur the Fed to cut its benchmark rate by half a percentage point tomorrow, traders and economists forecast. That would bring the rate to 3 percent, approaching one measure of price increases monitored by the Fed.

“The Fed is going to have to keep slashing rates, probably below inflation,” said Robert Shiller, the Yale University economist who co-founded an index of house prices. “We are starting to see a change in consumer psychology.”

So-called negative real interest rates represent an emergency strategy by Chairman Ben S. Bernanke and are fraught with risks. The central bank would be skewing incentives toward spending, away from saving, typically leading to asset booms and busts that have to be dealt with later.

Negative real rates are “a substantial danger zone to be in,” said Marvin Goodfriend, a former senior policy adviser at the Richmond Fed bank. “The Fed's mistakes have been erring too much on the side of ease, creating circumstances where you had either excessive inflation, or a situation where there is an excessive boom that goes on too long.””

They really don’t have any other kind of strategy.
This time I believe it will be different. The average American consumer has hit that ‘debt saturation’ point. Lower rates will not act as an incentive to increase spending simply because people can’t and increasingly because they don’t want to. There has been a rapid change in consumer psychology. Perhaps it has started to dawn on those legions of Baby Boomers that they may just have fucked themselves out of retirement.

It happened in Japan. They had savings to fall back on… and look what happened there.

Fed May Cut Rate to 3%, Hold Out Chance of More Cuts (Update1): “The Federal Reserve may lower interest rates for the second time in nine days and indicate a readiness to go further if the economy deteriorates.

The Federal Open Market Committee, ending a two-day meeting today, will probably follow the Jan. 22 emergency reduction with a half-point cut in its benchmark rate, according to 48 of 85 economists surveyed by Bloomberg News. Such a move would bring the rate to 3 percent.

Officials may cite “appreciable” risks to growth, a word used for the first time last week, avoiding what analysts said were the mistakes of 2007's statements. Through December, the FOMC referred to ``inflation risks,'' confusing some investors about its intentions. To avoid the impression of a blank check, Chairman Ben S. Bernanke will also seek language that notes the cumulative cuts since September, Fed watchers said.

“The statement will have a soft bias,'' said Brian Sack, a former research manager at the Fed's monetary affairs division, and now senior economist in Washington at Macroeconomic Advisers LLC. ``It certainly won't promise additional rate cuts, but it will talk enough about downside growth risks to leave that option open.”

The Fed's announcement is scheduled for about 2:15 p.m. in Washington. While most economists predict a half-point move, 21 in Bloomberg's survey forecast a quarter-point cut, one called for 0.75 percentage point and 15 saw no change.

Traders estimated a 70 percent chance of a half-point move and 30 percent odds on a quarter-point, based on futures prices on the Chicago Board of Trade. Treasuries rose on speculation of another rate cut with notes falling for the first time in three days.”

See the attached charts from the Federal Reserve Bank of St. Lious. You don’t need to be much of an expert really to see that something terrible is amiss. (I am NOT an expert on the banking industry, banking reserve requirements or the Federal Reserve banking system.) I can definitely see that in order to maintain banking reserve requirements a record amount of money is being borrowed from the TAF (Term Auction Facility). I can also see that the sudden increase in debt destruction is affecting the monetary base.

In the land of economics, debt and money are “fungible”. That simply means they are interchangeable and for all intents and purposes the same. Debt is money and money is debt. The sudden rapid destruction of debt (every write down you hear coming out of the financial sector) has the effect of destroying money. If debt is destroyed fast enough, and it will be, then you get a rather sudden contraction in money supply. This is known as DEFLATION… and it ALWAYS happens when a debt bubble bursts. ALWAYS.

It happened in the early 1930’s after the roaring 20’s sent consumer and corporate debt levels to record levels measured as a percentage of GDP. It has happened after every economic cycle since with the exception that the Central Banks of the world have always been able to inflate fast enough to offset the deleterious effects of credit destruction. Not this time. This time all major collateral has been leveraged and major forms of debt securitized. There are no other major assets left to employ as collateral. This time, there is no way to inflate fast enough.

… and so Bernanke, an expert on the Great Depression, will cut and will cut furiously.

A speech by Bernanke in May 31, 2003: Some Thought on Monetary Policy in Japan: “Rather, I think the BOJ should consider a policy of reflation before re-stabilizing at a low inflation rate primarily because of the economic benefits of such a policy. One benefit of reflation would be to ease some of the intense pressure on debtors and on the financial system more generally. Since the early 1990s, borrowers in Japan have repeatedly found themselves squeezed by disinflation or deflation, which has required them to pay their debts in yen of greater value than they had expected. Borrower distress has affected the functioning of the whole economy, for example by weakening the banking system and depressing investment spending. Of course, declining asset values and the structural problems of Japanese firms have contributed greatly to debtors' problems as well, but reflation would, nevertheless, provide some relief. A period of reflation would also likely provide a boost to profits and help to break the deflationary psychology among the public, which would be positive factors for asset prices as well. Reflation--that is, a period of inflation above the long-run preferred rate in order to restore the earlier price level--proved highly beneficial following the deflations of the 1930s in both Japan and the United States. Finance Minister Korekiyo Takahashi brilliantly rescued Japan from the Great Depression through reflationary policies in the early 1930s, while President Franklin D. Roosevelt's reflationary monetary and banking policies did the same for the United States in 1933 and subsequent years. In both cases, the turnaround was amazingly rapid. In the United States, for example, prices fell at a 10.3 percent rate in 1932 but rose 0.8 percent in 1933 and more briskly thereafter. Moreover, during the year that followed Roosevelt's inauguration in March 1933, the U.S. stock market rallied by 77 percent.”

Other great Blog posts on the topic:
Bank Reserves Go Negative
Money Does Not Grow On Trees

Tuesday, January 29, 2008

Bank of America, Countrywide and What If?

Bank of America Affirms Plan to Acquire Countrywide (Update1): “Bank of America Corp. affirmed plans to buy Countrywide Financial Corp., the mortgage lender that lost $422 million in the fourth quarter, and said it doesn't need to raise more capital after last week's preferred share offering collected almost $13 billion.

“Everything is a `go' to complete this transaction,” Bank of America Chief Executive Officer Kenneth Lewis said at an investor conference today, referring to Countrywide. The Calabasas, California-based mortgage company rose as much as 8.6 percent today in New York Stock Exchange composite trading.”

They always say things are on track, until they announce they actually aren’t.
Since there is no real way to determine the odds of this deal going through you can’t get in front of it. Instead, the safer and simpler thing to do is to prepare yourself for either outcome.

Here on our trading floor we play the “WHAT IF GAME”.
Basically our traders will run what if scenarios past each other and we all start arguing about what would happen. Which products would do what?

What if the deal doesn’t go through?
What happens to BAC, CFC and equities in general?
What happens to fixed income? The short end of the curve? The shape of the curve?
What would happen to FX?

What happens if the deal does go through?

The second phase of the 'what if game' is to build some models and run some numbers.

That way, the INSTANT the news hits the wires we’re out executing our positions…

LBO's Fail, While the Bounce Continues

Alliance Data Takeover May Collapse; Shares Fall (Update8): “Blackstone Group LP's $6.6 billion leveraged buyout of credit-card payments processor Alliance Data Systems Corp. may collapse because bank regulators have placed “unacceptable” requirements on the acquisition.

Alliance Data plunged 35 percent in New York trading today after Blackstone said conditions requested by the U.S. Office of the Comptroller of the Currency would impose “unlimited and indefinite” liability on the firm. It will try to keep the deal alive, the New York-based company said in an e-mailed statement.

Dallas-based Alliance Data owns World Financial Network National Bank, a credit-card issuer that, like all national banks, is regulated by the OCC. Neither Blackstone, manager of the world's largest LBO fund, nor Alliance Data said the purchase is threatened by financing problems or a slowdown in business, two issues that have scuttled other deals.”

When an LBO deal dies, the carnage is instant and massive. In these markets the risk reward probably isn’t there for you to be long anything involved in an LBO. If the LBO closes, you don’t really get much of a boost. If on the other hand the LBO fails… well, take a look at the charts: ADS, SLM and URI.

Countrywide Financial Posts Loss on Overdue Mortgages (Update2): “Countrywide Financial Corp., the mortgage lender that Bank of America Corp. plans to buy, lost $422 million in the fourth quarter, failing on its promise to return to profitability. The shares rose 6.1 percent.”

During the last conference call, Angelo Mozilo grandly promised that Crappyslide would return to profitability this quarter. If you believed that shiny orange little bastard, then I can almost guarantee that you will blow your trading account fairly quickly.

“The net loss equaled 79 cents a share, compared with a profit of $621.6 million, or $1.01 a share, in the year-earlier period, the Calabasas, California-based company said in a statement today. The loss was more than twice the 28 cents predicted in a Bloomberg survey of analysts.

Chief Executive Officer Angelo Mozilo agreed Jan. 11 to sell the company he co-founded in 1969 for about $4 billion in stock to Bank of America, the nation's second-biggest bank. He vowed in October to restore profit before year-end after Countrywide, the biggest U.S. mortgage lender, posted a $1.2 billion third-quarter loss, the first in 25 years. Investors have speculated Bank of America may try to lower its bid.

“Bank of America is going to keep its options open because they are in the catbird's seat,” said Sean Egan, managing director of Egan-Jones Ratings Co., the credit-rating firm. The bank's chief executive officer, Kenneth Lewis, “is going to be very careful about throwing the full creditworthiness of Bank of America behind Countrywide.””

I’m not saying that the acquisition of Crappyslide is in trouble, BUT keep a close watch on Bank of America (BAC). They should have been privy to these numbers, BUT should they get squeamish… well, just see the charts of ADS, SLM and URI. (Just think, those companies weren’t even on the verge of bankruptcy.)

U.S. Durable-Goods Orders in December Increase 5.2% (Update3): “Orders for U.S. durable goods rose more than forecast in December, indicating business investment is holding up even as other parts of the economy weaken.

The 5.2 percent increase in appetite for computers, aircraft and other items made to last several years was the biggest since July, the Commerce Department said today in Washington. The 0.5 percent gain in November was also greater than previously reported. Excluding transportation, demand rose 2.6 percent.”

Some bounce material. This should get them bottom callers out. Let it bounce and patiently wait for the re-short…

Bond Insurer Bailout Plan May Be `Too Late,' CreditSights Says: “New York Insurance Superintendent Eric Dinallo's attempt to bail out bond insurers is “coming too late in the game” to stave off ratings downgrades, CreditSights Inc. analysts said in a report.

Dinallo wants to bolster bond insurers' capital with a $15 billion guarantee fund supported by contributions from banks and securities firms, according to the New York-based bond-research firm. Setting up the fund and gaining the backing of the banks is likely to be overtaken by events, CreditSights said today.

“Given the number of competing interests and levels of commitment of participants involved, we think it is unlikely that an agreement sponsored by Dinallo could be hammered out within the appropriate timeframe,” Rob Haines, Craig Guttenplan and Joe Di Carlo wrote. “In the offchance that any deal could be solidified, the rating agencies are likely to have already taken action.””

Just don’t get all caught up in this bounce. None of the major problems have been or will be solved by anything less than a recession. The last few Bulltards will climb out of their holes on this bounce and start the usual cheerleading. Ignore it. This economy has had its Minsky Moment. It can’t be undone.

Monday, January 28, 2008

The Dollar Smile Theory

Morgan Stanley: Economic Re-Coupling Will Boost the Dollar Smile in 2008: “The dollar’s general weakness so far in 2008 gives little support to the 'Dollar Smile' theory. But according to Stephen Jen, Luca Bindelli and Charles St-Arnaud in the Global Economic Forum, Morgan Stanley believes that the Dollar Smile will eventually work, admittedly with a delay.

As opinions among investors change - particularly those on the U.S.'s slowdown being felt primarily in the U.S., and also the low yield premium on USD assets - Morgan Stanley foresees the following effects on the dollar:

"... [a] rally this year against the EUR and the GBP. In turn, the JPY and CHF could rally against the strengthening dollar, for as long as the U.S. is in a recession, which we believe will likely persist through 1H08. One by one, various parts of the rest of the world will start to show signs of a slowdown/deceleration. Even though we are of the view that this ‘economic re-coupling’ will be tentative and partial, financial coupling will likely push investors back into ‘fear mode’ and bond rather than equity flows will, perversely, support the dollar – consistent with our ‘Dollar Smile’ framework.”

All of this is of course based on the assumption that the world’s economies never really de-coupled in the first place… I’ve posted about de-coupling on December 12, 2007: The Global Decoupling Theory is Garbage. On December 17th, 2007 I presented additional data and charts in Asia Tanks.

MacroMan tackles the Dollar Smile theory in his January 7th, 2008 post: Will A US Recession Strengthen The Dollar:

“One possible explanation is an emerging school of thought that a US recession/quasi-recession is actually good for the dollar. According to the proponents of this theory, weak/negative US growth is both damaging to the rest of the world and a catalyst to encourage US investors to bring money back home. The upshot is that there is less demand for foreign assets/currencies and more demand for US assets/currency; hence, the dollar rallies.”

I don't need to tell you what this would mean for commodities and the commodity Bull eh?

Gold, oil? Can you say, "Body Slam?"

Sunday, January 27, 2008

Monday: Bounce or Die, Bearish Engulfing

Monday is a critical day. Its bounce or die time.
Let me emphasize that again: Bounce or die.

Friday left the major equity indices looking vulnerable with a Large Black candle and Bearish Engulfing candle patterns. The indices look vulnerable on all time frames, from weekly and daily to the five day, five minute charts. Basically its bounce, then die… or simply die. The Bull is long dead and the secular Bear is here. The only question that remains is how far and how fast does the Bear maul this market?

New Homes Sales out on Monady at 10:00 AM just might be the catalyst either way...

Never forget, the best case scenario is still bounce THEN die.