Coal Gets Smashed

Short post. No time for anything fancy before Non-farm Payrolls…

Coal stocks as represented by the Market Vectors Coal ETF (KOL) got smashed yesterday. When an index drops 10% in a single day off record all time highs on record volume, you can assume a major top has been put in.

It all happened so fast I couldn’t get into the rest of my short position and will have to add on a bounce back just short of $57.00 area. A clean move above $61.00 would make me nervous and would be a clear sign of danger. While I would trade some of the position, the main profit objective is in the $44 - $46 area.

FinancialNinja Favs: June

In case you missed them, here are YOUR favorite Financial Ninja posts for the month of June:

1) Three Hindenburg Omens Since June
2) Lehman Put Open Interest: Just Like Bear Stearns
3) MBIA and Ambac are Dead, Fannie and Freddie Mac are Next
4) Public and Private Debt vs GDP: The Illusion of Prosperity
5) Lehman: Death Spiral?

The appearance of a Hindenburg Omen cluster as the S&P 500 put in an impressive Bear Market rally has been a hot topic this month. I’ve followed up on the original post Three Hindenburg Omens Since June with two more; Hindenburg Omens: I am Bear, Hear Me Roar and Hindenburg Omens + Oversold = Crash?.

Before Lehman Brothers (LEH) went into this most recent dive, I posted Lehman Put Open Interest: Just Like Bear Stearns. This post attracted a lot of interest and even made it into the Wall Street Journal: Following the Bear’s Tracks.

I’ve been saying that MBIA (MBA) and Ambac (ABK) are dead since the first tremors of the credit crunch. I’ve also be said the same about Fannie Mae (FNM) and Freddie Mac (FRE). The monolines have quietly faded from the headlines now… left to die on their own. The next big thing will be the GSE’s. I argued that Using Fannie Mae and Freddie Mac as Disaster (Update1) would be cheap and easy. I say it again: MBIA and Ambac are Dead, Fannie and Freddie Mac are Next.

Public and Private Debt vs GDP: The Illusion of Prosperity sparked a lively debate in the comments section. While I used the data and charts from the Federal Reserve Bank of St. Louis, others have done some more detailed research. For example, Hellasious over at Sudden Debt has explored the debt and GDP relationship more closely in Real GDP – Part V: Goose Eggs.

A new month brings a new quarter. I’m expecting Oversold Bounce Time after One More Rinse… but it is from the deepest oversold conditions that markets have crashed as I’ve addressed in Hindenburg Omens + Oversold = Crash?

Yes, things really are worse than you’ve been told…

Regional Banks: Dead Men Walking

(WSJ) Small Banks ‘Reckoning Day’ Is Coming: “Wall Street is bracing for regional and small banks to fess up to large losses from their mounting volume of soured construction loans made primarily to home builders.

According to the Federal Deposit Insurance Corp., $45.4 billion of the $631.8 billion in construction loans outstanding at the end of the first quarter were delinquent. When banks announce second-quarter results in coming weeks, they are expected to report sharp increases in loans that builders can't repay. Banks are also facing intensifying pressure from federal and state regulators to deal with the problem loans on their books.”

Put another way, 7.18% of all construction loans are CURRENTLY delinquent. These delinquency rates have nowhere to go but up as the economy slides into a recession. With residential and commercial real estate inventories to sales ratios climbing, new construction can’t compete with existing.

“That will put additional pressure on an already stressed financial system. Banks have begun to dump bad construction and land loans at discounts, curtail new lending and halt construction projects that are under way to preserve capital. Some analysts even see a wave of bank failures as a possibility.”

Bank failures a POSSIBILITY? Try a CERTAINTY.

“Nearly one in three of the banks analyzed -- or 2,182 -- had construction-loan portfolios that exceeded 100% of their total risk-based capital, a red flag to regulators, although it doesn't mean the bank is in danger of failing. Risk-based capital is a cushion that banks can dig into to cover losses.

Even more alarming, 73 of those banks had construction-loan delinquency rates of more than 25%. Executives at all of the banks that responded to questions acknowledged the problems but expressed confidence they had the capital to weather the storm.”

The weakest will fail quickly. Everybody else will languish for years. Zombification of the banking system will be the order of the day.

“Over the next few quarters, banks are expected to begin recording much larger losses. In 2007 and the first quarter of this year, U.S. banks wrote down just 0.7% of their residential construction and land assets as bad debt, according to Zelman & Associates, a research firm. Over the next five years that figure could rise to 10% and 26%, which would amount to about $65 billion to $165 billion, Zelman projects.”

The KBW Regional Banking Index (KRX) is a great way to play this out on the short side. Patience. Wait for those outsized Bear Market short covering rallies that always go further than you think possible.

Bounces just beyond the declining 50 day EMA (red line) have presented excellent short opportunities. Currently the decline is a little stretched, with prices having fallen so far and so quickly as to leave the declining 200 day EMA in the dust.

More on the KRX ETF here.

Lehman: Death Spiral?

Lehman Hits Lowest Level Since 2000 Amid Buzz: “Lehman Brothers Holdings Inc. shares tumbled on Monday to their lowest level since 2000 on yet another swirl of speculation that the Wall Street firm is in trouble, including possibly having to sell itself for a bargain-basement price.

Rumors of a ‘take under’ sent Lehman (LEH) spiraling down 10% in late afternoon trade yesterday.

“It didn't help Lehman that Monday was the last day of the quarter, when fund managers typically dump their losing stocks so they don't have to disclose those egg-on-your-face positions to investors. Stocks sold for that reason often get a bounce at the start of the next quarter.”

While that may be the case, I’d argue that is far more likely that investors are just now getting really uncomfortable with the LEH’s balance sheet.

Lehman swears it doesn’t need any more funds. Banks, Lehman: Busy Lying and Raising Funds

Lehman also swears it’s been shrinking it’s balance sheet and reducing leverage. Much like Goldman Sachs, nothing but lies: Think About: Goldman Sachs Level 3

In reality, Lehman is stuck with a huge amount of toxic garbage on it’s balance sheet. To avoid the consequences, Lehman has been playing account games, moving these assets into first the Level 2 and then the Level 3 asset buckets: Bulltrap: ABCP and Level 3 Asset Bombs

Investors have caught on Lehman is now unlikely to survive. Investors have placed their bets accordingly: Lehman Put Open Interest: Just Like Bear Stearns

All support has now been broken with a close below $20. LEH is now in free fall. Customers and clients are probably getting really nervous about now… once the first few pull their funds the flood gates will open and LEH will cease to exist.

Hindenburg Omens + Oversold = Crash?

“One thing is certain. Israel will not stand by idly while Iran builds a nuclear bomb. If necessary, we will use force.” -Ben-Israel

More threats of war Iran, another profit warning over at UBS, rumors of a Lehman 'take-under' and worries that Merril has to sell their Blackrock or Bloomberg stakes to raise desperate capital have all pushed the futures down below support pre-market.

This could be Oversold Bounce Time After One More Rinse… or it could be crash time instead. Stock market crashes, that is to say the largest down day in a series of down days, tend to occur from deeply oversold territory.

Hindenburg Omens have faithfully foreshadowed all major equity index declines… and we’ve been bombarded with Hindenburg Omens recently.

Hindenburg Omens + Oversold = Crash?

Hindenburg Omen Posts:
Hindenburg Omens: I Am Bear, Hear Me Roar
Three Hindenburg Omens Since June
5th Hindenburg Omen This Cluster
Hindenburg Omen Chart

If you’re thinking WTF is a Hindenburg Omen? Click here.

Israel Prepared to Strike at Iran, Lawmaker Tells Der Spiegel: “Israel is prepared to strike militarily if diplomacy doesn't stop Iran from developing nuclear weapons, Isaac Ben-Israel, a former Air Force general and ally of Prime Minister Ehud Olmert, told Der Spiegel.

Ben-Israel, a member of parliament from Olmert's Kadima Party, said the Air Force conducted exercises to simulate an attack on Iran because international sanctions haven't been effective, the German magazine said in its online edition.”

[EDIT: Israel May Attack Iran This Year, Pentagon Official Tells ABC ]

Commodities Seeing Demand Destruction, Canada Rolls Over

Even as oil continues its parabolic blow off, the commodity heavy Canadian market put in what appears to be a significant top. The MACD rolled over long before prices did. Now that prices are oversold, any strength can and should be used to build short positions.

Toro’s Running Of The Bulls caught this early in Canada Rolling Over.

With the world’s emerging economies now in full monetary tightening modes, with the ECB in full inflation fighting mode and with the US Fed in no position to loosen the spigot any further, expect a significant turning point in commodities.

Commodities Signal Bubble Bursting as First-Half Ends (Update2): “Commodities are heading for their best first half in 35 years. The next six months may not be as rewarding because record prices for oil, copper and a dozen other raw materials may crimp consumption and encourage growth in supply.

The 19 commodities in the Reuters/Jefferies CRB Index jumped 29 percent this year, the most since 1973 and more than any second-half gain in at least five decades, data compiled by Bloomberg show.

High costs are slowing the pace of demand for gasoline in the U.S., and gold purchases in India, the biggest buyer, plunged 50 percent from a year earlier. Producers are expanding supplies of wheat in the U.S. and steel in China.”

Demand destruction is accelerating, while supply growth has reached furious levels as large projects start to go online. Demand destruction in the US is clearly evident in $200 Oil: World Economy Would Collapse. But more importantly, the real demand destruction will come from when Oil Drops on Subsidy Cuts in China, India, Malaysia, Taiwan.

“Demand is slowing for copper after the metal jumped 28 percent this year and reached $4.2605 a pound May 5, the highest ever, partly because of temporary supply disruptions in Chile, Peru and Mexico. China said June 10 its copper imports fell 19 percent last month to the lowest since August. Buyers in China, the world's biggest metals importer, are “price sensitive,” according to Freeport-McMoRan Copper & Gold Inc., the world's second-largest producer.

Gold demand from jewelers, the biggest users, has stalled since September, London-based UBS AG analyst John Reade said May 29. After reaching a record $1,033.90 an ounce March 17, gold will average $850 this year and $750 next year, he said. The World Gold Council said May 20 that first-quarter demand fell to a five-year low.”

A slumping global economy will viciously slash ALL demand for ALL commodities as a period of unsustainable ‘super, hyper’ growth comes to a sudden end in ALL emerging economies from Brazil to China.

European Prices Rise More Than Forecast as Oil Surges (Update2): “Inflation in Europe accelerated more than economists forecast, eroding consumers' spending power and adding to pressure on the European Central Bank to increase borrowing costs even as economic growth cools.

The inflation rate in the euro area rose to 4 percent this month, the highest in more than 16 years, from 3.7 percent in May, the European Union statistics office in Luxembourg said today. Economists had forecast a 3.9 percent rate for June, according to the median of 38 estimates in a Bloomberg survey.”

Put it all together, and it is finally time to build larger short positions in commodities for the longer run through some inverse ETF’s.