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Friday, May 2, 2008

Can't Resist Apple: Way Too Ripe, Way Too Juicy.

I couldn't resist... Apple (AAPL) looks way too ripe and juicy for a nice fat short.

I like the $180 level as my short entry. I'd add more around $190 and then again $195... should it come to that. Stop out would be new highs. This rally from the lows of $115 to $180 has been fast and furious. I'm calling this 50%+ rally as 'too far too fast'. A correction to $170, $160 areas are easily possible. I can even envision a drop to $150 in the near term.

Puts are the safest and easiest way to get short AAPL... especially now that volatility has come in.

Related Posts:
When The Momos Go Parabolic

Finally, Dollar Smile Theory In Play?

It’s been a long time coming, but we finally have a countertrend dollar rally underway. It would appear that we are now entering the early phase of the Dollar Smile Theory.

“In anticipation of the world finally starting to catch on that this mess isn’t just a U.S. problem, I’ve spent the week selling the EUR:USD cross and selling the CAD against the JPY.” –TheFinancialNinja, 04/03/08

I sold EUR:USD all the way up to $1.60… and then damn near got stopped out. I’m not gonna lie, I really didn’t want to see anything much above $1.60. I have since taken out 25% of my position around $1.55. I intend to drop another 25% of my position fairly soon depending on how the markets react to this -20k non-farm print. So far so good.

I will add again to my position on bounces into the $1.57 - $1.58 area.

This move in the USD appears to be fairly robust and sustainable for weeks or months. I say appears to be, because the entire world was dollar short and long any and every other currency, especially the Euro. Commodities are behaving as they should. Oil has come off hard and quickly, confirming the dollar strength.

"The US dollar has perked up some on continued weak economic developments out of Europe. Consequently some of the fast money pulled out of commodities such as Gold and Oil.

The $120 area would appear to be 'arbitrary' resistance do to its status as a 'round number'. This makes for an interesting short opportunity around these levels.

Commodity price strength will ANNIHILATE the already MORTALLY wounded U.S. economy..." -TheFinancialNinja, 04/25/08

Since then crude was aggressively rejected just shy of $120 and is now sitting near support.

Related Posts:
The Dollar Smile Theory, Overbought Euro
The Dollar Smile Theory
Commodities Unravel, Confidence Collapses

Maybe not yet, but soon it will be that time again...

The Yen (XJY) has come off and consolidated as the Carry Trade Unwind has run its course. As risky assets the world over rallied, the hedgies have even re-entered their Yen carry trades. Keep an eye on the Yen for the first signs of any stress returning to the system. The Yen would probably be a good leading indicator as it has been throughout the entire credit crisis.

Related Posts:
The Yen As A Leading Indicator
Watch The Yen, Carry Trade Unwind

Fed Raises Cash-Loan Auctions by 50% to $75 Billion (Update1): “The Federal Reserve expanded its cash- loan auctions for banks by 50 percent to $75 billion each after higher borrowing costs blunted the impact of the four-month-old program.

The Fed also increased its currency-swap arrangement with the European Central Bank by two-thirds to $50 billion and doubled the amount with the Swiss National Bank to $12 billion, extending their terms through January. In a third move, the Fed will accept other AAA/Aaa-rated asset-backed securities as collateral for Treasury loans through another program.

Fed Chairman Ben S. Bernanke created the TAF and two other programs to reverse a decline in liquidity that began last year with the collapse in the market for subprime mortgages. Today's move may reduce loan payments for some companies and homeowners with variable-rate mortgages.

The actions were taken “in view of the persistent liquidity pressures in some term funding markets,” the Fed said in a statement.

The Term Auction Facility, which provides 28-day loans to commercial banks, will sell $75 billion per biweekly auction, starting with a sale on May 5, the Fed said in a statement. The decision will increase the amount outstanding under the auctions to $150 billion from $100 billion.

It's the third increase since the program started in December at $40 billion per month.”

Raising the auction amounts by 50% at a time is nothing at all to worry about?
Hmmmmmmmmmm. Everything is fine though eh? Just get long. To the moon Alice!

“The expanded collateral under the Term Securities Lending Facility will take effect with the sale to be announced May 7 and settle on May 9, the Fed said. The Fed announced the program in March, auctioning as much as $200 billion in Treasuries. In several of the sales, the Fed has failed to attract enough bids to cover the securities at auction.

The Fed already accepts residential and commercial mortgage- backed securities and agency collateralized mortgage obligations through the TSLF.”

Dropping the quality of collateral is also a good thing right? Could it be that there isn’t enough ‘good’ collateral to go around? Nah… That would be crazy talk. Its not like commercial mortgage backed securities could possibly go the way of residential backed securities right?

Bank of America (BAC) appears to have begun with the back pedaling…

Bank of America May Not Guarantee Countrywide's Debt (Update1): “Bank of America Corp., the second- biggest U.S. bank, said it may not guarantee $38.1 billion of Countrywide Financial Corp.'s debt after taking over the mortgage lender, fueling speculation that Countrywide's bondholders face renewed risk of default.

“There is no assurance that any such debt would be redeemed, assumed or guaranteed,” the Charlotte, North Carolina-based bank said in an April 30 regulatory filing, adding that no decision has been reached. Investors have grown more optimistic the bank would back Countrywide debt, and Standard & Poor's said this week it may raise Countrywide's rating to match Bank of America's.”

BAC has started to realize that their acquisition of Countrywide (CFC) was early and on far too generous terms.

“Bank of America agreed to buy Countrywide, the largest U.S. mortgage lender, for about $4 billion amid speculation that the worst housing market since the Great Depression would bankrupt Countrywide. Bondholders have been counting on the merger to put Bank of America's AA credit rating behind Calabasas, California- based Countrywide's $97.2 billion of debt.”

If BAC doesn’t back the debt, then the some $38 billion is at risk.

“Investors have been asking Bank of America about plans to back Countrywide's debt since January, when the issue was raised in a conference call to discuss the merger. The bank has demurred ever since. Bank of America spokesman Scott Silvestri declined to comment further beyond the filing.”

It is becoming more and more likely that BAC will attempt to find a creative way out of the entire situation.

“The purchase of Countrywide is scheduled to close in the third quarter. Investors have speculated Bank of America may seek a lower price or cancel the deal because U.S. home prices and sales have deteriorated.

“This confirms how tenuous this transaction is,” said Christopher Whalen, managing director at Institutional Risk Analytics, a banking research firm in Torrance, California.

Whalen expects Bank of America to absorb the best assets, including Countrywide Bank, while the debt remains with a new company created by the merger, Red Oak Merger Corp. Red Oak may then file for bankruptcy, shielding Bank of America from liability, Whalen said.”

In all honesty, it is not in the interest of BAC to back the CFC debt. If it can at all be done, BAC will pillage CFC for its best assets and dump the rest. Unsuspecting bagholders beware…

“Countrywide’s finances have worsened since the merger announcement because of falling house prices in California, which accounts for about 40 percent of its lending. The company reported a first-quarter loss of $893 million as late payments and foreclosures soared. Lewis has reiterated Bank of America's commitment to the deal, citing long-term benefits of becoming the largest U.S. mortgage lender.”

Related Posts:
Bank of America, Countrywide and What If?
Quiet, Sneaky Little Downgrades: CFC, MBI

Thursday, May 1, 2008

Financial Ninja Favs: April

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

1) Really Scary Fed Charts: MARCH
2) Really Scary Fed Charts: APRIL
3) The Race to the Bottom Accelerates
4) World Recession and the Perfect Short Squeeze
5) Bull Markets and Busted Banks

I can’t help but notice that 4 of the top 5 posts are related to the Fed and various Fed actions. It would appear that the current desperate measures enacted by the Fed to save the financial system from collapse are hitting a nerve. A new month also brings new scary Fed charts straight from the Federal Reserve Bank of St. Louis.

The economic data continued to deteriorate over the last month while equities rallied. The Fed rate decision yesterday was widely expected. Equities tried to rally. The S&P500 tried to stay above that 1400 area and the DOW tried to stay above 13000. After a brief struggle, equities ended the day down, losing these key levels.

In anticipation of just this kind of tired last gasp, I commenced building my short positions early in the week. I’m calling a top here and putting my money where my mouth is. The month of May will belong to the Bears.

April was another record month for The Financial Ninja with 35 000 unique visitors and 80 000 page views. That translates into over 1000 unique visitors a day and 2000 pages views a day.

Not bad considering I envisioned that my financial ranting and raging would interest about 5 people.

Thank you all for your time and interest.

Wednesday, April 30, 2008

Slowly Building Shorts

The Bulltards tagged 1400. The falling 200 day EMA is nearby, ready to provide resistance. The SPX is now overbought on the daily timeframe (Slow STO). Volume has shriveled up, not exactly inspiring much confidence in the the rally to date. A drop to Support around 1370 is highly probable. The 1320 - 1330 area would be the next area of interest.

Volatility (VIX) has fallen to what amounts to COMPLACENCY levels in this credit crisis environment. Although technical analysis isn’t nearly as relevant on the VIX, this 20 area does appear to be an area of support.

Fannie Mae (FNM) has bounced from $18 to $35. Since then FNM has made a series of lower highs, $35, $32, $30, on declining volume. I have been shorting above $30 and have been taking some profits around $25. (I'm using puts to limit my downside risk.) I have my full position again and am looking for a break below $25 this time around. March New Home sales and Case Schiller Home Prices all showed an ACCELERATION of real estate mess.

Same goes for Freddie Mac (FRE). FRE bounced from $16 to about $34. Since then FRE has made a series of lower highs on declining volume. I have been shorting above $27 area using puts. I am now fully short again and looking for a break below the $22 area.

FNM and FRE are pretty much doomed. While they may eventually be bailed out or nationalized, the common shareholder will get ANNIHILATED.

FNM and FRE make me angry:
Sarcastic Rant on Fannie and Freddie.
Fannie Mae, Freddie Mac: The Dumbest Idea Ever
Fannie Mae: Another Shoe Drops

Goldman Sachs (GS) is happily expanding its Level 3 assets...

Yesterday I began legging into my short position. Using puts, I intend to build a short position over the course of the week. I expect the declining 200 day EMA and the $190 area to provide resistance. GS is sufficiently overbought (Slow STO) to warrant some profit taking into the $170 - $175 area in the short term.

I did the same for Lehman Brothers (LEH). I expect the $50 area and the 50 day EMA to provide resistance. LEH is no longer oversold and the same problems, namely expanding Level 3 assets, remain. I expect an initial move into the $38 - $40 area.

I did the same with Merril Lynch (MER) and Morgan Stanely (MS) for the same reasons.

That puts me short GS, LEH, MER and MS after a nice run into a credit crunch that has not abated at all. I like it. I like it a lot. These names are exposed to a ridiculous amount of risk that they cannot get off their bloated balance sheets, while SIMULTANEOUSLY facing a worsening business environment as deals dry up for them.

Citigroup (C) raised $3 billion yesterday. Common shareholders continue to get diluted. This should come as no surprise to anybody. I recently wrote that things would get worse at ShittyGroup before they could get better in: Citigroup Earnings, Downgrades and LIBOR

Late last week I began nibbling at various short positions. I should be happily short by the end of the week or early next week just in time for the next leg down.

Read these recent headlines. You don’t even have to read the articles to get in the right ‘mood’. This stuff isn’t just a temporary blip. This is real and the long run consequences aren’t going to be pretty.

Bernanke May Have to Do More to Ease Jump in Bank Funding Costs
CDOs Face Downgrades as Losses Prompt Fitch Overhaul (Update1)
More Subprime, Alt-A Mortgages May Head `Underwater' (Update1)
Rate Cut Would `Do More Damage Than Good,' Gross Says (Update2)
Deutsche Bank Says It Had First Loss in Five Years (Update3)
Countrywide Reports $893 Million Loss From Bad Loans (Update3)
GMAC Posts $589 Million Loss on Home Lending Woes (Update1)
S&P/Case-Shiller U.S. Home-Price Index Fell 12.7% (Update2)
KB Home's Broad Says Home Prices May Drop Another 20% (Update2)
Fed's Eurodollar Rates Suggests Dollar Libor May Stabilize
U.S. Home Vacancies Rise to Record on Foreclosures (Update3)
Wolfensohn `Pessimistic' as Financial Losses Rise (Update1)
Goldman, Morgan Hit Level 3 Jackpot.
Taleb Outsells Greenspan as Black Swan Gives Worst Turbulence

Getting long risky assets, such as equities, now and betting on a ‘second half recovery’ before the recession has really even started is border line retarded.

Tuesday, April 29, 2008

Stimulus Package: Does It Even Work?

The government mailed out the long awaited rebates. The current debate is about how big of an impact these rebates will have on the economy and when. The clear assumption is that the stimulus package is GUARANTEED to work and it is only a question of degree.

What we need is to take a look at similar countries in similar situations to see how things turned out in practice, rather than in theory.

If only we could turn to a country that had both a MASSIVE real estate bubble and credit bubble simultaneously…

If only we could turn to a country that had similar demographics, namely a large portion of the workforce nearing retirement…

If only we could turn to a country whose monetary authorities responded with massive rate cuts, liquidity injections, tax cuts and stimulus packages…

Oh wait, I got one. Can you say JAPAN?

An Overview of Japan's Economy 1985–2000

After the September 1985 Plaza Accord, the yen's appreciation hit the export sector hard, reducing economic growth from 4.4 percent in 1985 to 2.9 percent in 1986 (EIU 2001).1 The government attempted to offset the stronger yen by drastically easing monetary policy between January 1986 and February 1987. During this period, the Bank of Japan (BOJ) cut the discount rate in half from 5 percent to 2.5 percent. Following the economic stimulus, asset prices in the real estate and stock markets inflated, creating one of the biggest financial bubbles in history. The government responded by tightening monetary policy, raising rates five times, to 6 percent in 1989 and 1990. After these increases, the market collapsed.

The Nikkei stock market index fell more than 60 percent—from a high of 40,000 at the end of 1989 to under 15,000 by 1992. It rose somewhat during the mid-1990s on hopes that the economy would soon recover, but as the economic outlook continued to worsen, share prices again fell. The Nikkei fell below 12,000 by March 2001. Real estate prices also plummeted during the recession—by 80 percent from 1991 to 1998 (Herbener 1999).

Real GDP during the 1990s stagnated, rising only from 428,826 billion yen in 1990 to 469,480 billion yen by the end of 2000.2 Growth has been negative since 1998. The unemployment rate rose from 2.1 percent in 1991 to 4.7 percent at the end of 2000. Although the unemployment rate may seem low by international standards, the rise to 4.7 percent is significant in Japan, given the cultural and historical precedent of lifetime employment and given that it was never above 2.8 percent in the 1980s. The official unemployment rate is also biased downward because the Japanese government offers "employment adjustment subsidies" to companies that maintain employees as "window sitters" (Herbener 1999).

The Response 1992-1995

Between 1992 and 1995, Japan tried six spending programs totaling 65.5 trillion yen and cut income tax rates during 1994. In January 1998, Japan temporarily cut taxes again by 2 trillion yen. Then, in April of that year, the government unveiled a fiscal stimulus package worth more than 16.7 trillion yen, almost half of which was for public works. Again, in November 1998, another fiscal stimulus package worth 23.9 trillion yen was announced. A year later (November 1999), yet another fiscal stimulus package of 18 trillion yen was tried. Finally, in October 2000, Japan announced yet another fiscal stimulus package of 11 trillion yen. Overall during the 1990s, Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen, and each failed to cure the recession. What the spending programs have done, however, is put Japan's government in poor fiscal shape. The "on-budget" government spending has caused public debt to exceed 100 percent of GDP (highest in the G7), and even more debt is apparent when the "off-budget" sector is included.

The Keynesian policy solution when the economy is in a liquidity trap is to have the government lend directly to businesses instead of creating liquidity in the banking system. Japan has the Fiscal Investment and Loan Programme (FILP), an off-budget branch of the Japanese government worth about 70 percent of the spending in the general-account budget. FILP gets most of its money from the post office savings accounts. Once they collect the money, the funds are allocated to borrowers through the Ministry of Finance Trust Fund Bureau and the bureau's various agencies. Much of this money is not allocated to the most efficient projects.

Politicians in the Liberal Democratic Party (LDP) run most of these government agencies. The Economist Intelligence Unit profile states that "FILP money is channeled toward traditional supporters of the LDP, such as those in the construction industry, and without proper consideration of the costs and benefits of specific projects" (EIU 2001, p. 30). Although this Keynesian approach of government direct-lending does avoid the reluctance of banks to lend, it does not aid economy recovery. Funds are not allocated according to market-based consumer preferences, but to the most politically connected businessmen. This leads to a higher cost of borrowing for those seeking private funds, further distorting the economy. Also, because the loans are often highly risky, Japan's fiscal condition deteriorates further. Once FILP and other "off-budget" debts are included, Japan's debt is estimated to exceed 200 percent of GDP (EIU 2001).

Read the full article here: Explaining Japan’s Recession

In the end it all didn’t work. The agony was prolonged and is now referred to as the Lost Decade in Japan.

Sparked by low interest rates, Japans average home value more than doubled from the early 1980's to 1990 (sound familiar?). Now, over 16 years after prices peaked, home values are still declining and are nearing the average price of 1980.

The situation in Japan then and America now are eerily similar. I would argue that America is actually worse off. The ABSOLUTE lack of personal savings is really going to hurt the team here.

I’m with Mish on this one: Stimulus Checks Already Spent

Related Posts:
Fact Sheet: The Bush Stimulus Package

Monday, April 28, 2008

Bull Markets and Busted Banks

Equities continue to find a bid pre-market with the S&P 500 over 1400.

Naturally, there is talk in the air of a new Bull market. If it weren’t so sad, it would be funny. A new Bull market would require a GROWING economy. A growing economy requires an expansion of credit and borrowing. This is NOT happening and worse CANNOT. The banks are maxed out and are desperately scrambling to find more capital just to keep from having to aggressively shed their balance sheets.

U.S. Banks' Earnings May Fall 26% in 2008, Morgan Stanley Says: “U.S. banks' earnings may fall 26 percent this year and a further 15 percent in 2009, as credit continues to deteriorate and trim profit, according to analysts at Morgan Stanley.

Bank earnings will decline by $17 billion this year and a further $13 billion in 2009, driven by higher borrowing expenses and bad loans, analysts including New York-based Betsy L. Graseck wrote in a note to investors today. Lenders will probably cut dividends and raise capital to offset the losses, she said.

Banks are scaling back loans and raising cash amid a credit-market slump triggered by the collapse of the U.S. subprime mortgage market. The world's biggest financial firms have posted more than $300 billion in writedowns and credit losses in the past year and announced plans to raise more than $210 billion selling stakes.

Earnings may fall further if the U.S. Federal Reserve doesn't cut interest rates, Graseck wrote.”

“We are only in the 3rd inning of the credit cycle and expect it will be worse than 1990-91. Credit deterioration will accelerate and banks will raise more dilutive equity and cut dividends.” –Betsy L. Graseck

I’ve been posting some pretty scary charts on the health of the banking system. All the data was directly sourced from the Federal Reserve Bank of St. Louis. Until recently, I haven’t come across anybody else that has taken a keen interest in the matter. Finally somebody has picked up on it. Check out this great post over at the Market Ticker: The Lies And Obfuscation We Tolerate – Why?
Our banking systems "Non-borrowed Reserves" are deeply negative, implying that the banking system in the United States has no reserves at all, essentially gaining all their operating funds from The Fed after having burned through all their ACTUAL reserves!

That graph, by the way, although the latest available from The Fed directly, is out of date - the current number is $90 billion, or more than twice the total amount of required reserves in the banking system.

Banks are supposed to hold reserves in actual money against deposits, you see. That's because there is a chance you might show up and want the money you let them borrow, like your direct-deposited paycheck, and they have to be able to pay you in that event.

The amount required, in aggregate, is $40 billion as of the present time. The total shown "in reserve" is claimed to be $42 billion, again, as of the 23rd of April.

However, the "non-borrowed" amount, that is, the amount of reserves that are represented by actual deposits from customers, is negative $90 billion dollars.

In other words United States banks, instead of having $40 billion worth of deposits from people like you and me on reserve (not loaned out) instead have burned through all of that, then borrowed $90 billion more, in order to meet their reserve "requirements."

$130 billion dollars, in the hole, all-in.

And what did they post as collateral? To a large degree, dodgy mortgage-backed securities and even, in some cases, perhaps CDOs!

That's fantastic isn't it?

Is this talked about on Bubble TV? Oh hell no. Its just a good time to buy financial stocks, never mind the fact that our banks appear to be in as fine a financial condition from this report as is a subprime borrower in California who was handed an eviction notice as his house was foreclosed upon this morning!

When did this foolishness start?

At the same time the "Term Auction Facility" did.

Now you know why the "TAF" was "needed", eh? Gotta pay that light bill, plus those bonuses and dividends, since we lost all of our customer's deposited money gambling on bum mortgages written against a $500,000 house that we gave to a hairdresser making $8/hour at SuperCuts.

Never mind the other borrowings from The Fed to prop up the system. Oh no, let's not talk about the other $30 billion or so through primary (discount window) and PDCF credit. Naw, nothing to see here with the banks $130 billion in the hole .vs. what are supposed to be reserved deposits from customers, move right on along.

Are there any reserves at all?
Well, from that table it certainly appears not, eh? Negative $130 billion in aggregate (from "required" level) eh?
Can you really believe in a new Bull market while the banks are busted?