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Saturday, March 7, 2009

Goldman is Dirty, But We All Knew That

Errr... it turns out Goldman Sachs (GS) is dirty. We all knew that, but seeing it printed in the Wall Street Journal (WSJ) brings it all to the light of day. As word spread, Goldman finally broke down.

Yves over at Naked Capitalism covers the recent revelations in Quelle Surpise! Who Gained From the AIG Rescues? Goldman (and Deutsche) Tops the List (and Willer Buiter is REALLY Angry!)

Related Posts:
Exxon and Goldman: Taking the Market Lower
Exxon, Goldman: They Will take the Market Down
Goldman Sachs: This Pig Too Will Fall

Friday, March 6, 2009

Goldman Sachs: Breakdown?

Goldman Sachs (GS) finally losing that key level of $80. Failure to regain that area by the close will result in a break DOWN and OUT!

Exxon Mobile: Exhausted, Time to Cover

Covering Exxon Mobile (XOM) this morning. Targets achieved. Lets not get too greedy.

The play going forward is to pound XOM short on strength... so patience.

651k Jobs Lost, Unemployment Rate 8.1%

“There is not a single sign that points to a bottom yet. It is the worst recession in the postwar era.” -Ellen Zentner

The numbers sucked. As expected. 651k jobs were lost. The revisions were especially bad. The prior month was revised down to a 655k jobs from a loss of 598k. This pushed the unemployment rate up to 8.1% from an expected 7.9%.

Since the world didn't end, it looks like a short covering bounce will be attempted right off the open...

The question is, will it stick?

Employers in U.S. Cut 651,000 Jobs; Unemployment Rose to 8.1%: “The U.S. unemployment rate surged in February to the highest level in more than 25 years and the economy lost more than 600,000 jobs for a third consecutive month, pointing to further reductions in spending.

Payrolls fell by 651,000 and revisions for the prior two months lopped off an additional 161,000 jobs, the Labor Department said today in Washington. The jobless rate surged to 8.1 percent, more than forecast and the highest since December 1983.

Tumbling demand globally is prompting companies from General Motors Corp. to Sears Holdings Corp. to step up firings, perpetuating a vicious circle of job losses and spending cuts. The Obama administration has set aside immediate concerns about a budget gap and pushed through a $787 billion stimulus plan aimed at creating or saving 3.5 million jobs.”

Thursday, March 5, 2009

Basis Traders Rooting for Bankruptcies

“Say you’ve lent $100 million to a company and you had bought $100 million in credit-default swaps. In that circumstance, the creditor really doesn’t care whether or not the company goes under.” -Henry Hu

Basis traders have been successfully arbitraging bonds and credit defaults swaps. The downside is that the ideal outcome for a basis trader is actual bankruptcy. This is pitting shareholders, bondholders... errr... EVERY OTHER STAKEHOLDER against these basis traders. Interestingly enough, it seems the basis traders have the upper hand in the battle because they can sit and wait, while the other stakeholders cannot.

Talk about epic battle to the death.

General Electric (GE) for example is clearly caught in the crosshairs of this trade and is just one of many wounded enterprises currently being sniped... (More here.)

NOTE: Before you all rage at the injustice make damn sure you note that these traders did NOT put these companies into their respective situations. The companies did that all by themselves through their reckless behavior. Economic turbo Darwinism ain't pretty, but it is absolutely necessary.

Darth Wall Street Thwarting Debtors With Credit Swaps (Update2) : "Amusement-park operator Six Flags Inc. and automaker Ford Motor Co. may be pushed toward bankruptcy by bondholders trying to profit from credit-default swaps that protect against losses on their high-yield debt.

By employing a so-called negative-basis trade, investors could buy Six Flags bonds at 20.5 cents on the dollar and credit- default swaps at 71 cents. If the New York-based chain defaults, the creditors would receive the face value of the debt, minus costs. In a Feb. 27 note, Citigroup Inc.’s high-yield strategists put that profit at 6 percentage points, or $600,000 on a $10 million purchase.

Investors who bet on the collapse of a company are pitting themselves against traditional debt holders at a time when Moody’s Investors Service projects defaults will more than triple this year to the worst level since the Great Depression. The clash may stall restructuring efforts to prevent bankruptcies, as basis traders may be less inclined to participate in distressed debt exchanges, said Matthew Eagan, an investment manager at Boston-based Loomis Sayles & Co., with $7 billion in high-yield assets.

“Before, you really had to worry mostly about where you were in the” company’s capital structure, he said. “Now, you have to consider the possibility that you might have this large holder of CDS incentivized to see it go into bankruptcy. It’s something that’s going to come up more and more.”

The Market Rallied, But NOT the Banks

The banks did not rally with the rest of the market. That has to a be red flag. Until the financials can mount a rally, any 'bounces' in the broader market will be short lived...

Markets Are Now Ominously Oversold

Well, it had to happen sometime... that one green day.

As I've mentioned repeatedly equities are Extremely Oversold and only getting more so. I also warned that the really scary rinses tend to happen from deeply oversold levels. The market has been methodically grinding lower, hitting one new low after another. In fact, it's almost Boring! Without panic, you can't trust the low to be a bottom. To date, there has been No Panic Yet, No Capitulation Yet.

With only 1.4% of all stocks above their 200 day simple moving average, everything is still in probable 'crash' territory.

Friday will be the big day. Non-farm payrolls is likely to be the catalyst for a cathartic and necessary final panic liquidation down...

Wednesday, March 4, 2009

Boring! No Panic

What? No panic? Bring it! (Without panic you can't trust the low to be a bottom.)

Cobra's Market View: Still No Panic

General Electric: Just Like a Retard Bank

General Electric (GE) is behaving just like a bank... you know, the ones that went into a death spiral? Well, GE is leveraged at 52 to 1, a much higher level than even some of the most retarded banks! Don't believe it? Check it out: Bank Leverage Ratios... GE Boomin'

GE Capital CDS moves to upfront basis-Phoenix Partners: "Sellers of credit insurance on General Electric Co's (GE.N: Quote, Profile, Research) finance arm were asking to be paid on an upfront basis on Monday, a sign of greater perceived risk after a rating agency threatened to cut its "triple-A" rating.

Five-year credit default swaps on General Electric Capital Corp were quoted around 8.5 percent upfront, meaning it would cost $850,000 in an upfront payment, plus $500,000 in annual payments to insure $10 million of GE Capital debt, according to data from Phoenix Partners Group. On Friday, it cost $710,000 a year to insure $10 million of debt.

Moody's Investors Service on Friday said it may still cut GE's "triple-A" rating after the conglomerate said it plans to reduce its dividend by 68 percent, saving about $9 billion a year."

Exxon and Goldman: Taking the Market Lower

“If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG,” -Federal Reserve Chairman: Benjamin Shalom Bernanke

Exxon, Goldman: They Will Take the Market Down: Yup. As expected. They did. The S&P 500 (SPX) is sniffing around below 700 now...

XOM broke down. Clearly. But is rapidly approaching support. Keep those trailing stops tight and cover on the first sign of strength.

GS, notched a lower high and is hanging around support around $80... The rumor is that Goldman Sachs is on the other (winning) side of some of AIG's trades in the CDS (Credit Default Swap) world. (The clowns at AIG were borderline retarded. Some might even end up going to jail.. Eventually.) While this is nothing new, the concern now is that Goldman might not be able to collect on everything because Fed Chairman Ben Bernanke is has now publicly expressed his outrage...

Goldilocks is going down... keep a loose stop on these rat bastards... you want to be there for the final reckoning.

Bernanke Says Insurer AIG Operated Like a Hedge Fund (Update3): "Federal Reserve Chairman Ben S. Bernanke said American International Group Inc. operated like a hedge fund and having to rescue the insurer made him “more angry” than any other episode during the financial crisis.

“If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG,” Bernanke told lawmakers today. “AIG exploited a huge gap in the regulatory system, there was no oversight of the financial- products division, this was a hedge fund basically that was attached to a large and stable insurance company.”

Bernanke’s comments foreshadow tougher oversight of systemically important financial firms, and come as President Barack Obama seeks legislative proposals within weeks for a regulatory overhaul. The U.S. government has had to deepen its commitment to prevent AIG’s collapse three times since September as the company accumulated the worst losses of any U.S. company.

The company “made huge numbers of irresponsible bets, took huge losses, there was no regulatory oversight because there was a gap in the system,” Bernanke said. At the same time, officials “had no choice but to try and stabilize the system” by aiding the firm.

AIG is getting as much as $30 billion in new government capital and relaxed terms on its bailout announced yesterday.

In another sign of tighter regulation to come, Bernanke said supervisors should have authority to bar new financial products that may be destabilizing to markets.

Bernanke made the AIG comments in response to a question from Senator Ron Wyden, an Oregon Democrat, at a Senate Budget Committee hearing today in Washington."

Tuesday, March 3, 2009

Short Gold and Silver: It Will Only Get More Interesting

The Short Gold and Silver trade has this ninja almost giddy with excitement.

Gold (GLD), THE SAFE HAVEN, is actually declining significantly even as the broader equity markets unceremoniously knock out new low after new low. The Gold Bugs are clearly all in and exhausted. When the S&P 500 (SPX) cracked 700 near the close on Monday, GLD was able to manage a amazing 15 minutes of strength (three consecutive white candles on the 5 minute intraday chart).

Silver (SLV) doesn't have quite the same appeal as a save haven, and in percentage terms it has faired significantly worse.

Now if Gold and Silver cannot catch a bid as the broader markets grind slowly into the abyss... what do you suppose will happen when equities finally put in that counter trend bounce? Can you say BEAR RAID?

Short: Gold and Silver, Just Getting Started. Fun times...

Oh and I can't wait for the full consequences of deflation to reveal themselves for all the world to see... and the bid just disappears out from under Gold and Silver.

Deflation first. Inflation second... much much later. It's all part of The Master Plan.

Commercial Real Estate: Broke Down

Commercial Real Estate: Could Break Down Here. It did.

Now there is nothing left to do but wait for the capitulation rinse...

No Panic Yet, No Capitulation Yet

Equities, despite being Extremely Oversold continue to grind lower. The decline has been orderly so far, and although the VIX has started to sneak higher, panic isn't yet palpable.

To get to that tradable bottom, there must be panic. There must be capitulation...

Monday, March 2, 2009

Switzerland First, Britain Not Far Behind: Niall Ferguson

"Switzerland is first in line… and Britain is not far behind." -Niall Ferguson

Niall Ferguson, respected economic historian, warns of other European countries facing an Iceland style bankruptcy.

Read the full article: Bankrupt Britain.

Related Posts:
Switzerland: Another Iceland?
UK Similar to Iceland: Has Ambrose Evans Pritchard Seriously Alarmed
UK: Banks Were Just Three Hours From Collapse
UK and Iceland: Not So Different
Iceland: What Happens After Imploding?
Iceland Melts, 77% Single Day Drop

There Will Be Blood: Niall Ferguson

[ HT Jesse's Cafe Americain: Economist Niall Ferguson on the Financial Crisis: "There Will Be Blood" ]

I've been warning of violence on a grand scale as the global economy continues to deteriorate.

In Hyperinflation First, Then Global War I first presented the theory that global economic instability will lead to the sudden unraveling of even advanced ethnic assimilation and that internal ethnic unrest is likely to rapidly escalate into full-scale external conflict between nation states. In Global Violence, Gold: But Not Yet I got more specific. Then in Global Protests, Riots, Violence as Economies Unravel I explained some of the more ominous signs in Western and Eastern Europe.

I based my expectations of global violence on the theories and writings of Niall Ferguson. On February 23rd, 2009 Niall Ferguson spoke up.

'There Will Be Blood':

"Harvard economic historian Niall Ferguson predicts prolonged financial hardship, even civil war, before the ‘Great Recession' ends

Harvard author and financial crisis guru Niall Ferguson has landed with a thud in Ottawa, spreading messages that could make even the most confident policy makers squirm.

The global crisis is far from over, has only just begun, and Canada is no exception, Mr. Ferguson said in an interview before delivering a presentation to public-policy think tank, Canada 2020.

Policy makers and forecasters who see a recovery next year are probably lying to boost public confidence, he said. And the crisis will eventually provoke political conflict, albeit not on the scale of a world war, but violent all the same."

The full article is definitely worth the read.

Everybody Blames 'Capitalism' for the Mess. Don't.

I would like to address a comment from the post Obama is No Match for Economic Reality: "You guys, the capitalists, messed up completely, so far beyond anyone's wildest imagination..."

Careful. You can't call the system we had leading up to this mess 'capitalist'. You can't call the housing bubble, and the mess on Wall St. the product of 'capitalism'.

You could call it Crony Capitalism or Corporatism or Finance Capitalism, BUT you cannot call it 'ideal' Laisse-Faire Capitalism.

The only reason any of this was even possible was precisely because the markets were not allowed to do their job... that is to say they were not 'free'.

Alan Greenspan changed the world when he first threw the might of the Federal Reserve into the breach during the 1987 stock market crash. Market participants saw this and adjusted their behavior accordingly. That is to say, they lost respect for risk and increased their exposure to it via increased leverage because they could count on The Greenspan Put.

The governments of the world started this mess through with their various economic policies. If the Chinese corporatist model had not artificially kept the Yuan exchange rate down to increase exports, a surplus of trillions of US trade dollars would not have flowed into everything from US Treasuries to US mortgages driving yields down to absurd levels. Without this artificially cheap credit, their would have been no 'reaching for yield' by investors such as pension funds. Without their demand for higher yields, mortgage securitization would never have exploded. Without the hunger on Wall St. for more mortgages to package, there would not have been a move into toxic mortgages such as subprime. Without access to cheap credit strawberry pickers would never have bid a $300k house up to $750k, leading to a massive real estate bubble. Without the bubble, there would have been no bust.

Fannie Mae, Freddie Mac are not the product of free market capitalism but of government social policy. Fannie was founded in 1938 during the Great Depression. In 1999, Fannie Mae came under pressure from the Clinton administration to expand mortgage loans to low and moderate income borrowers. As Larry Kudlow would say, the "mustard seeds" for a real estate ponzi scheme of truly epic proportions were planted. The end result of course could be nothing other than mustard gas.

GM would have smartened up back when it still could if the government hadn't bailed out Chrysler back in 1979. Instead, GM grew complacent, safe in the knowledge that it could never die because the government surely wouldn't allow it. Now GM cannot compete. Bailout or now bailout. Consequently, Detroit is dead and a median home price of $7 500 proves it. (Yes, seven thousand five hundred dollars.)

Government! Government! Government! Constant intervention has resulted constant booms and busts of ever increasing magnitude.

Economists Blame Flawed Theories and Models

In Policy Based on Failed Economic Theory: Just Stupid, I wrote:

"I can't stress how important it is to understand that economists are relying on hugely flawed theories and models when looking at the economy. Economic policy is being made off the neo-classical theory of economics.


Of course this cannot work and it never has. Neo-classical economic theory is fatally flawed from its very first basic premises. They are:

1) People have rational preferences among outcomes that can be identified and associated with a value.
2) Individuals maximize utility and firms maximize profits.
3) People act independently on the basis of full and relevant information."

I proceeded to absolutely tear into each one of these basic premises. This resulted in heated debates in the comment section.

Luckily, those in the world who can better express my mono-syllabic rage have come together to write a paper tackling these very issues.

The paper, The Financial Crisis and the Systemic Failure of Academic Economics is the outcome of one week of intense discussions within the working group on 'Modeling of Financial Markets' at the 98th Dahlem Workshop (December 14th - 19th 2008).

Abstract: The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold. In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public. This state of affairs makes clear the need for a major reorientation of focus in the research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models.

Section 3 of the paper: Unrealistic Model Assumptions and Unrealistic Outcomes:

[ snip ]

"Many economic models are built upon the twin assumptions of ‘rational expectations’ and a representative agent. ‘Rational expectations’ forces individuals’ expectations into harmony with the structure of the economist’s own model. This concept can be thought of as merely a way to close a model. A behavioral interpretation of rational expectations would imply that individuals and the economist have a complete understanding of the economic mechanisms governing the world. In this sense, rational expectations models do not formalize expectations as such: they are not written down as a component of the model according to some empirical observation of the expectation formation of human actors. Thus, even when applied economics research or psychology provide insights about how individuals actually form expectations, these insights cannot be used within RE models. Leaving no place for imperfect knowledge and adaptive adjustments, rational expectations models are typically found to have dynamics that are not smooth enough to fit economic data well.

Technically, rational expectations models are often framed as dynamic programming problems in macroeconomics. But, dynamic programming models have serious limitations. Specifically, to make them analytically tractable, researchers assume representative agents and rational expectations, which assume away any heterogeneity among economic actors. Such models presume that there is a single model of the economy, which is odd given that even economists are divided in their views about the correct model of the economy. While other currents of research do exist, economic policy advice, particularly in financial economics, has far too often been based (consciously or not) on a set of axioms and hypotheses derived ultimately from a highly limited dynamic control model, using the Robinson approach with ‘rational’ expectations.

The major problem is that despite its many refinements, this is not at all an approach based on, and confirmed by, empirical research. In fact, it stands in stark contrast to a broad set of regularities in human behavior discovered both in psychology and what is called behavioral and experimental economics. The corner stones of many models in finance and macroeconomics are rather maintained despite all the contradictory evidence discovered in empirical research. Much of this literature shows that human subjects act in a way that bears no resemblance to the rational expectations paradigm and also have problems discovering ‘rational expectations equilibria’ in repeated experimental settings. Rather, agents display various forms of ‘bounded rationality’ using heuristic decision rules and displaying inertia in their reaction to new information. They have also been shown in financial markets to be strongly influenced by emotional and hormonal reactions (see Lo et al., 2005, and Coates and Herbert, 2008) Economic modeling has to take such findings seriously.

What we are arguing is that as a modeling requirement, internal consistency must be complemented with external consistency: Economic modeling has to be compatible with insights from other branches of science on human behavior. It is highly problematic to insist on a specific view of humans in economic settings that is irreconcilable with evidence."

[ snip ]

Related, Interesting Books:
Beyond Greed and Fear: Finance and the Pschology of Investing
Predictably Irrational : The Hidden Forces That Shape our Decisions
The Drunkard's Walk: How Randomness Rules our Lives
Outliers: The Story of Success

Sunday, March 1, 2009

Obama is No Match for Economic Reality

[ HT Financial Armageddon ]

When the economically and financially illiterate make the rules, chaos and destruction are the consequence. No other outcome is possible.

A friend of mine asked me recently if I expected the S&P 500 to hit 1 000 again relatively 'soon'. I had to tell him it was IMPOSSIBLE... in real terms... and that in even in nominal terms it would take at least 10 years. (Real versus nominal value)

Even Obama is no match for the cruelty of reality.

Children Preparing Themselves for the Apocalypse

[ HT The Doomsday Report ]


See, video games are NOT a waste of time. They are practice.

Are Violent Video Games Adequately Preparing Children For The Apocalypse?