Disaster

I couldnt' find a picture of Bernanke in this kind of position... YET.

On Vacation

I will be on a one week cruise.

Please stop selling in the meantime so I don't miss the ultimate crash. Pause. Just pause. (Dear Trading Gods, please don't let me miss anything really really cool... I don't want to be THAT guy... trading from the cruise ship in my Hawaiian shirt, raging at my laptop... spilling my beer all over the place.)

Or better yet, bounce equities for me so I can re-short when I get back from my vacation.

Oil and Gas: Will they Break Down?

Natural Gas (NATGAS) gapped below the rising 10 day EMA (blue line) that has provided reliable support during this up trend. Prices fell immediately to support at the 50 day EMA (red line).

Even as prices moved to new highs, MACD we losing momentum and did not confirm. Expect this move to turn into a very significant correction. A bounce back to just below $13.00 to fill the gap is possible.

Even as oil ($WTIC) prices moved to new highs, MACD we losing momentum and did not confirm. Expect this move to turn into a very significant correction. Oil ($WTIC) is at support at the 10 day EMA (blue line) where the Bulls have been able to marshal their forces for moves higher in the past. Failure here would result in a violation of up trend (black line) started in 2008 since the break OUT and UP from $100.

As equities peaked ($SPX, grey area) and money began pouring OUT of equities... it needed to find a new home. So, despite deteriorating economic fundamentals, this 'hot money' flowed into commodities. The faster equities fell, the faster commodities rose. Now this party too shall end.

Former Federal Reserve Presidents Says Fannie Mae and Freddie Mac are Insolvent

Former St. Louis Federal Reserve President William Poole says Fannie Mae (FNM) and Freddie Mac (FRE) are insolvent.

Nice. Nuff said.

Fannie, Freddie `Insolvent' After Losses, Poole Says (Update1): “Borrowing at Fannie Mae, the U.S. government-sponsored mortgage company, has never been so expensive and it may not get better any time soon.

Fannie Mae paid a record yield relative to Treasuries on the sale of $3 billion in two-year notes yesterday amid concern the biggest provider of financing for U.S. home loans won't have enough capital to weather the worst housing slump since the Great Depression. The company's credit-default swaps show traders are treating the AAA rated debt as if it were five steps lower. Fannie Mae shares tumbled 13 percent yesterday in New York to the lowest level in almost 14 years.

Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae's assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said.”

Poole only said what traders already knew: Fannie Mae, Freddie Mac: Downgraded by Traders.

It may not yet be too late. Using Fannie Mae and Freddie Mac as Disaster Insurance might still be feasible on bounces (Update1).

FNM and FRE Make Me Angry:
Fannie Mae and UBS Miss, Bankruptcy Filings Up Big Time
Sarcastic Rant on Fannie and Freddie.
Fannie Mae, Freddie Mac: The Dumbest Idea Ever
Fannie Mae: Another Shoe Drops

Calculated Risk:
Fannie Mae Tightens Guidelines Again
WSJ Repots: Fannie Mae Eliminate “declining market” Rules
Fannie Mae’s 120% Refinances
Fannie Mae on 2/28 Delinquencies
Fannie Mae’s Credit Loss Ratio: Fuzzy Math or Fuzzy Reporter?
On Freddie Mac Accounting Change
Freddie Mac Conference Call
Freddie Mac on Walking Away
Freddie Mac: Project MI Lifeline?
More on Freddie Mac Housing Forecast

Mish’s:
Fannie Mae Cumulative Defaults (and other disasters)
New Rules At Fannie Mae Combat Appraisal Fraud
Delinquency Footnote #12
Misinformation From Fannie and Freddie On Walking Away

Excellent Sources of Real Estate Data:
Calculated Risk
Countrywide Foreclosure Blog
Paper Economy
UK Bubble

FNM and FRE Make Me Angry:
Fannie Mae and UBS Miss, Bankruptcy Filings Up Big Time
Sarcastic Rant on Fannie and Freddie.
Fannie Mae, Freddie Mac: The Dumbest Idea Ever
Fannie Mae: Another Shoe Drops

Time to be Short Commodities

In Commodities Seeing Demand Destruction, Canada Rolls Over I went over some short commodity ETFs.

Since then DUG broke OUT and UP from $26.50 to $31.00, or 17%.
Since then SMN broke OUT and UP from $27.50 to $34.00, or 24%.

Both still have room to run before hitting any significant resistance.

I didn’t get ‘full size off’ in KOL before it collapsed and will be adding on any bounces as mentioned in Coal Gets Smashed.

Other short commodity ETFs that I’m looking at or have positions in:

HED.TO (Horizons BetaPro S&P/TSX Capped Energy Bear Plus ETF)
HOD.TO (Horizons BetaPro Crude Oil Bear Plus ETF)
HXD.TO (Horizons BetaPro S&P/TSX 60 Bear Plus)

For a complete list of Horizons BetaPro ETFs click here.

I think it's time to be short commodities now as this is the last bastion of the cheap credit bubble Bulls...

Fannie Mae, Freddie Mac: Downgraded by Traders

Fannie, Freddie Downgraded by Derivatives Traders (Update1): “Fannie Mae and Freddie Mac, ranked Aaa by the world's largest credit-rating companies, are being treated by derivatives traders as if they are rated five levels lower.”

Wait. Where have I seen this before?

Aaaah, right! MBIA (MBA) and Ambac (ABK) were “treated by derivatives traders as if they were rated five levels lower” long before the clowns over at the ratings agencies even began to think about maybe, possibly putting these names on some kind of ‘negative watch’ list.

“Credit-default swaps tied to $1.45 trillion of debt sold by the two biggest U.S. mortgage finance companies are trading at levels that imply the bonds should be rated A2 by Moody's Investors Service, according to data compiled by the firm's credit strategy group. The price of contracts used to speculate on the creditworthiness of Fannie Mae and Freddie Mac and to protect against a default doubled in the past two months.

Traders are overlooking the government's implied guarantee of the debt as credit losses grow and concern rises that the companies don't have enough capital to weather the biggest housing slump since the Great Depression.”

Hmmmmm. Let’s do some quick, back of the envelope math. 1% of $1.45 trillion is $145 billion. Suppose then that Fannie Mae (FNM) and Freddie Mac (FRE) end up with losses of 1% on their portfolios. FNM has a market cap of 17.19 billion, $133.05 billion in cash and $761.05 billion in debt. FRE has a market cap of $8.70 billion, cash of $132.24 billion and $759.77 billion in debt. It would appear to me that these entities could not weather a $145 billion hit should it occur over a short period of time.

Recent estimates, which I covered in IndyMac: Failure by Friday? Fannie, Freddie: We Need Capital, are that they have to raise a combined $75 billion as FAS 140 forces off-balance sheet entities back onto the books.

It is likely that FNM and FRE would eventually get exempt from implementing this new accounting rule, but even having to raise the much smaller $75 billion would be damn near impossible in these market conditions.

Now imagine trying to raise about $145 billion with your credit rating under assault.

Imagine also that their portfolios start to show losses greater than 1%...

I’m betting against the Bulltards on this one and going with the derivatives traders…

Oh and this isn’t going to help at all:

Pending U.S. Home Resales Decline More Than Forecast (Update2): “Contracts to buy previously owned U.S. homes declined more than forecast in May, a sign prices that have been sliding for more than two years have yet to touch bottom.

The index of pending home resales fell 4.7 percent following a revised 7.1 percent gain in April that was greater than previously reported, the National Association of Realtors said today in Washington.

The prospect of further price declines may be discouraging offers, while rising mortgage rates and tougher lending standards make it harder to qualify for loans. Record delinquencies on home loans have led to concerns that Fannie Mae and Freddie Mac, the two biggest U.S. mortgage finance companies, may need to increase their capital by $75 billion.”

How to Spot the Next Tradable Rally

I’m a Bear… but not a Perma-Bear. Someday I will become a Bull again. But above all else, I am a Trader. Consequently, while being a Bear, I still look for and trade rallies from the long side.

The forces are gathering for a just such a tradable rally. On signs of strength I will start to ease out of my shorts and start easing into some small long positions.

Patience around these levels is absolutely paramount. One more cathartic rinse downwards to trigger stops and to clear out the last weak longs is still possible. Only a close above 1260, quickly followed by a clsoe above 1270 on the S&P 500 can unleash a short covering squeeze.

Below are just some of the indicators that I’m currently watching:

When the percent of stocks above their 50 day simple moving average rises above 80%, a tradable top in the S&P 500 (SPX, grey) quickly follows.

When the percent of stocks above their 50 day simple moving average falls below 20%, a tradable bottom in the S&P 500 quickly follows. This is a reliable signal as long as equities are in an uptrend, as defined by the index being above it’s 200 day simple moving average.

When the percent of stocks above their 50 day simple moving average falls below 10%, a tradable bottom in the S&P 500 quickly follows. This is a reliable signal as long as volatility as measured by the VIX (bottom, grey) has spiked to 30.

Buy signals that result in the greatest return are those accompanied by at least a 100% increase in the VIX from its previous level.

When the percent of stocks above their 200 day simple moving average rises above 80%, a tradable top in the S&P 500 (SPX, grey) quickly follows. This one works particularly well when there is a divergence. For example, if the S&P 500 continues to rise, but the percent of stocks above their 200 day simple moving average starts to drop, exit long positions or go short on the first sign of weakness in equities.

When the percent of stocks above their 200 day simple moving average falls below 20% or 10%, a tradable bottom in the S&P 500 quickly follows. This is a reliable signal as long as volatility as measured by the VIX (bottom, grey) has spiked to 30.

Obviously relying on a number of very different indicators will increase the quality of your signals. Use one or two in isolation at your own risk.

IndyMac: Failure by Friday? Fannie, Freddie: We Need Capital!

IndyMac Cuts Half its Staff as Mortgage Losses Mount (Update1): " IndyMac Bancorp Inc., battered by the mortgage crisis, will cut more than half its workforce and said it's been unable to raise new capital as losses mount.

IndyMac will slash its workforce by 53 percent to 3,400 employees and curtail lending, the Pasadena, California-based company said on its Web site. Regulators have advised IndyMac that it's no longer ``well capitalized'' and the bank said that it will report a wider loss in the second quarter than in the previous period.

"We don't expect to be able to raise capital until there is more stability and less uncertainty in the housing and mortgage markets,'' Chief Executive Officer Michael Perry said in the statement.

IndyMac, which was the second-biggest independent U.S. mortgage lender last year behind Countrywide Financial Corp., has lost almost $900 million in the prior three quarters amid tumbling home prices and record foreclosures. The company is focusing on mortgages that can be sold to government-sponsored Fannie Mae and Freddie Mac."

What's the over-under on 'Failure by Friday'?

I really enjoy that last line: "The company is focusing on mortgages that can be sold to government-sponsored Fannie Mae and Freddie Mac."

Fannie Mae (FNM)... where did I hear that name today? Oh yeah... that's right!

Freddie Mac, Fannie Mae Plunge on Capital Concerns (Update4): "Freddie Mac and Fannie Mae fell to the lowest in 13 years in New York Stock Exchange composite trading as concerns grew the two largest U.S. mortgage-finance companies may need to raise more capital to overcome writedowns and satisfy new accounting rules.

Freddie Mac fell 18 percent and Fannie Mae dropped 16 percent after Lehman Brothers Holdings Inc. analysts said in a report today that an accounting change may force them to raise a combined $75 billion. Speculation that the companies may take further writedowns also weighed on the stock, said John Tierney, a credit strategist at Deutsche Bank AG in New York."

At one point FNM was down almost 30% intraday.

So let me get this straight, the big plan over at IndyMac (IMB) is to emphasize loans that Fannie and Freddie are able to buy? So the big master plan is to accelerate the concentration of all mortgage risk in two already stressed institutions?

"Freddie Mac fell $2.59 to $11.91 after earlier dropping as low as $10.28. Fannie Mae declined $3.04 to $15.74 and earlier fell to $14.65.

The new FAS 140 rule that seeks to stop companies keeping assets in off-balance sheet entities may force Fannie Mae and Freddie Mac to bring mortgages back onto their books, requiring them to put up capital, Lehman analysts led by Bruce Harting wrote in a note to clients today.

Fannie Mae would need to add $46 billion of capital and Freddie Mac would need about $29 billion, the Lehman analysts wrote.

The companies will probably get an exemption from the rule because it would be "very difficult" for them to raise that amount of capital, the analysts said."

Difficult? Try impossible. Either way, common shareholders of FNM and FRE are dead. Raising the capital would result in a massive dilution. Not raising capital will result in the eventual failure and nationalization.

I'll say it again, MBIA and Ambac are Dead, Fannie Mae and Freddie Mac are Next. I described how Using Fannie Mae and Freddie Mac as Disaster Insurance (Update1) was cheap and easy. Because of Fannie and Freddie, The Bank and Mortgage Index: Nothing But Trouble.

This is how I feel about Fannie Mae (FNM) and Freddie Mac (FRE):
Sarcastic Rant on Fannie and Freddie
Fannie Mae, Freddie Mac: The Dumbest Idea Ever .

Analysts Expect a 50% Profit Increase in Fourth Quarter

I’m not making this up…

Deutsche, UBS Fight History Forecasting Best S&P 500 Since 1982: “Deutsche Bank AG, Lehman Brothers Holdings Inc. and UBS AG say the Standard & Poor's 500 Index will gain the most in 26 years during this year's second half. That isn't going to happen, if history is any guide.

The S&P 500 will rise 18 percent by January, according to the consensus projection of 10 U.S. strategists surveyed by Bloomberg. The forecasts are based partly on estimates that profits will jump 50 percent in the fourth quarter after falling for the past year.”

What? Jump 50%? On what? It is far more likely that profits will COLLAPSE in the fourth quarter as real estate prices continue to slide and consumer credit is aggressively reduced.

“Even if that happens, it may not be enough. In 2001, the last time profits fell as much, they then had to climb for three straight quarters before stocks rebounded. Analysts' earnings estimates for this year still represent a decline from 2006 levels, making the strategists' optimism harder to justify, investors say.”

Most analysts still have a ridiculous year end target for the S&P 500.

“Based on the index's closing price of 1,280 on June 30, the average strategist forecast of 1,515 by year-end calls for the biggest rally of any second half for the S&P 500 since Ronald Reagan was in the White House in 1982.”

From Calculated Risk:

Bridgewater Study: Banking Losses to Hit $1.6 Trillion: “From SonntagZietung: Brisante Studie: Die Bankenkrise wird noch viel schlimmer (hat tip Dwight)

Paul Kedrosky at Infectious Greed has a translation: The expected losses from the financial crisis will reach $1600 billion. To-date financial institutions have so far announced only $400 billion. The pessimistic forecast comes from a confidential study by Bridgewater Associates...

It's hard to comment without seeing the study, but I'm sure this includes all losses including corporate debt, CRE and C&D debt, consumer debt, credit cards, etc. in addition to losses on mortgages.”

$400 billion in losses have been booked. With losses of $1.6 trillion now being predicted, corporate profits can’t possible improve by the fourth quarter.

Analysts expect the S&P 500 to close at 1 515 by year end. Considering 1 576 was the all time record high during the greatest real estate and credit bubble in history, I'm going to call BULLSHIT on that and trade accordingly.

You don’t even want to know my year end target.

Related Posts that should make it clear that the S&P 500 won’t see 1500 for years to come:

German Output Unexpectedly Falls the Most in 9 Years (Update1): “German industrial production fell the most in more than 9 years in May, further evidence that Europe's largest economy is losing momentum.”

U.K. Factory Production Weakens to Eight-Month Low (Update2): “U.K. manufacturing unexpectedly contracted in May to the weakest in eight months, choked by record commodity prices and slowing economic growth.”

Bank of Japan Says Economy Worsened in 8 of 9 Regions (Update2): “The Bank of Japan said the economy has worsened in eight of the country's nine regions since April as costlier energy and raw materials slowed the expansion.”

European Investor Confidence Drops to 3-Year Low, Sentix Says: “European investor confidence slumped by a record amount to the lowest in more than three years in July on concern that record oil prices and a stronger euro will dent economic growth and hurt companies' earnings.”