Fraud is Rampant

Deals With Hedge FundsMay Be Helping MerrillDelay Mortgage Losses
By SUSAN PULLIAMNovember 2, 2007; Page A1

Merrill Lynch & Co., in a bid to slash its exposure to risky mortgage-backed securities, has engaged in deals with hedge funds that may have been designed to delay the day of reckoning on losses, people close to the situation said.The transactions are among the issues likely to be examined by the Securities and Exchange Commission. The SEC is looking into how the Wall Street firm has been valuing, or "marking," its mortgage securities and how it has disclosed its positions to investors, a person familiar with the probe said. Regulators are scrutinizing whether Merrill knew its mortgage-related problem was bigger than what it indicated to investors throughout the summer.SCRAMBLING BULL•
The Issue: Merrill Lynch & Co. has been off-loading some of its mortgage-related assets to hedge funds as part of an effort to cap its exposures.•
Backdrop: Merrill's mortgage assets fueled a $7.9 billion third-quarter write-down, leading to the forced retirement on Tuesday of Chief Executive Stan O'Neal.•
Regulatory Question: Did some of Merrill's recent mortgage asset sales effectively postpone the reckoning for some write-downs?In one deal, a hedge fund bought $1 billion in commercial paper issued by a Merrill-related entity containing mortgages, a person close to the situation said. In exchange, the hedge fund had the right to sell back the commercial paper to Merrill itself after one year for a guaranteed minimum return, this person said.While the Merrill-related entity's assets and liabilities weren't on Merrill's own balance sheet, Merrill might have been required to take a write-down if the entity was unable to sell the commercial paper to other investors and suffered losses, the person said. The deal delayed that risk for a year, the person said.In a statement, a Merrill Lynch spokeswoman said, "We don't comment on specific transactions and we are confident in the appropriateness of our marks."At issue with any hedge-fund deals is whether there was an attempt by Merrill to sweep problems under the rug through private transactions kept out of view from investors. Some previous scandals, such as the collapse of Enron Corp. and the troubles of Japan's financial system in the 1990s, involved efforts to hide problems through off-balance-sheet transactions.
Ground Zero
Merrill has become ground zero of mortgage problems in the U.S. Last week, the firm announced a $7.9 billion write-down fueled by mortgage-related problems -- one of the largest known Wall Street losses in history -- after projecting just a few weeks earlier that the write-down would be $4.5 billion. Merrill also took a $463 million write-down, net of fees, for deal-related lending commitments, bringing the firm's total third-quarter write-down to $8.4 billion.A few days after the announcement, it ousted Stan O'Neal, its chief executive. Some analysts and others say they expect Merrill to take additional write-downs of roughly $4 billion in the fourth quarter.The rapid widening of Merrill's losses has led investors to wonder whether other banks and brokerages have a good grasp of their exposure to bad debt. Bank shares fell sharply yesterday, contributing to a 2.6% fall in the Dow Jones Industrial Average. Merrill's shares fell $3.83, or 5.8%, to $62.19 in 4 p.m. trading on the New York Stock Exchange.Merrill's deals have attracted the interest of some mortgage investors and specialists.Making the Rounds"Merrill has been making the rounds asking hedge funds to engage in one-year off-balance-sheet credit facilities," Janet Tavakoli, who consults for investors about derivatives, told clients in a recent note. "One fund claimed that Merrill was offering a floor return (set buy-back price)," she said in the note, "so this risk would return to Merrill." Ms. Tavakoli said such transactions would explain how Merrill's mortgage-related exposure dropped in the third quarter.In recent weeks, Merrill has been scrambling to line up hedge funds to take as much as $5 billion in mortgage-related securities, people close to the situation said, part of what Merrill executives refer to as a "mitigation strategy." Under the strategy, which started earlier this year, Merrill has tried several means of lowering the risk of its exposure to mortgage-backed securities, these people say.In accounting for such transactions, "the general guiding principle is whether the benefits and risks of ownership were transferred," says Charles Niemeier, former chief accountant for the SEC's enforcement division and now a director of the Public Company Accounting Oversight Board. Legal questions can arise if the seller retains some exposure to the risk of the assets losing value, and if the deal is designed to disguise the picture of a business's financial health.FROM THE ARCHIVE• U.S. Investors Face an Age of Murky Pricing10/12/07Jay Gould, a securities lawyer at Pillsbury Winthrop Shaw Pittman LLP, says if a firm is unloading securities from its books "without a real commercial purpose other than to create a value for pricing purposes, that can be a problem."Other big securities firms with mortgage-related losses have arranged similar deals with hedge funds. As disclosed in a recent page-one article in The Wall Street Journal, Bear Stearns Cos. sold $1 billion of risky mortgage loans to a hedge fund under a one-year pact known as a "mandatory auction call." Bear Stearns agreed to participate in an auction for the loans that provided the hedge fund with a guaranteed minimum return.Three big U.S. banks are assembling a group of financial institutions to create an investment pool to buy some mortgage-related securities from "structured investment vehicles" that are being forced to sell. That effort, which is backed by the Treasury Department, has also led some investors to question whether the goal is to delay the point at which banks recognize losses on troubled assets. The banks say their aim is to forestall forced selling of the assets.In mid-July, before the credit crunch worsened, Merrill reported better-than-expected earnings with little impact from exposure to mortgage-backed securities. Asked about the firm's mortgage position on a call with analysts, Merrill Chief Financial Officer Jeff Edwards said: "Proactive aggressive risk management has put us in an exceptionally good position." Two weeks later, Mr. O'Neal personally sent an email to Merrill employees assuring them the firm had such risks well in hand.
Source of Problems
One source of problems was the First Franklin mortgage company, which Merrill bought in December 2006. First Franklin catered to subprime, or less credit-worthy, borrowers. Subprime loans have fallen sharply in value this year due to rising default rates.Another source was Merrill's underwriting of collateralized debt obligations, which are securities backed by pools of assets including mortgages. Merrill ranked No. 1 in the area from 2004 through 2006.By the end of June 2007, Merrill had CDO exposure of $32.1 billion and a subprime-mortgage exposure of $8.8 billion, totaling $40.9 billion. Much of the CDO exposure was in triple-A rated "super senior" slices. These were supposed to enjoy strong protection against defaults, but they began to decline steeply in price in late July.By the end of September, Merrill says it reduced such positions through sales, hedges and write-downs to $15.2 billion of CDOs and $5.7 billion of subprime mortgages, a total of $20.9 billion. The write-downs totaled $6.9 billion for CDOs and $1 billion for subprime mortgages.

Down 360 on the DOW

How'd that feel?

More to come I'm guessing. Technology stocks are not going to drag the entire market higher when the financials are collapsing. Retail isn't looking so hot either. Builders and anything in the housing ATM food chain continue to leak deep crimson pools.

Hey bulls. Google won't save you. Neither will the Fed.

If the market decides to really go down (and we're overdue) there will be nowhere to hide. At least not in the short run.

We need to clear the dead wood. It's abundant and it's very dry. All it takes is a spark.

Was today that spark? Not knowable right now. The way to look at it is that the bulls are very determined to buy every dip. It's worked for so long that it will take time for the reality of trend change to set in and alter behavior.

Huge drops like the one today in CROX will help to change psychology. There have been many others in last couple weeks.

Latest From Jim Rogers

Without question Jim Rogers is smarter than you or I.

Bloomberg

``I'm in the process of -- I hope in the next few months -- getting all of my assets out of U.S. dollars,'' said Rogers, 65, who correctly predicted the commodities rally in 1999. ``I'm that pessimistic about what's happening in the U.S.''

Dow Drops 366, Nasdaq Down 74

Wow! That was fun. What a bloodbath.

After learning my lesson earlier in the week via my YHOO raping I was "smart" enough to cover a huge WB short and a modest COF short ahead of earnings. Ofcourse, they both got annihilated today. And, as I suspected their earnings sucked. Just goes to show you can't win. Tough market.

Unfortunately I was modestly long this morning. Like the bulls I sat watching my trading account balance slowly disintegrate before my eyes. Down a quick 2%, erasing yesterday's gains.

What did I do? Started selling longs and initiating shorts. Then I took a nap. It's Friday after all. Woke up and the market was still down 200+ but my balance had recovered- down only 1%.

Finished the day down 300 bucks. Ha! I could have easily lost 20 times that. So on one hand I'm patting myself on the back. On the other, I feel like I missed an opportunity to scalp the bulls for big profits today. Damn. I hate the bulls and I'm glad to not count myself amongst them today. Must say, I'm very excited to see my shorts working again after the parabolic rebound of the last few weeks.

Oil Closed at $89.15 Today. Whew!

Nine handle here we come. I hear Pickens is calling for $100. Sure. Why not?

We'll notice this sooner or later. As consumers that is. The crack spread has collapsed lately and higher per barrel prices have yet to translate in to higher prices for refined product. That won't last. Look for gas prices to head higher.

Geopolitical plays a role here too. Turkey suggesting an incursion into Iraq. Bush talking about WW3 with Iran/Russia. Fun stuff.

Rookie Mistake and Lesson Learned

So Tuesday I noticed YHOO breaking down. Nice. Shorted 300 shares of that dog.

Now in years past, during earnings season (of which we are in the midst with most major companies reporting this week), I closely followed upcoming earnings report. See, as a trader, it makes sense to avoid positions in which earnings are imminent. You have no advantage since you generally have no idea what the company is going to say.

Lately though I have suffered from news overload. Just decided I don't care much what's in the news. It's all so depressing. Especially when you interpret every piece of news as an indication of impending doom, as I'm apt to do. Long story short, I've not even noted upcoming earnings reports. Just don't care.

Well after initiating the YHOO position, that afternoon they reported. The numbers reported were not as awful as expected. That's the game- expectations. Despite the fact they suck and earnings were totally unspectacular YHOO stock popped $2.50 afterhours. Instant $750 loss- now I care.

So traders, watch for earnings reports! Don't make the same rookie mistake I just did.

Sucks. As per my discipline I have exited some of my favorite positions this AM. COF reports tonight. Covered my short. WB reports tomorrow morning before the bell. Covered my short. Fortunately they were both down big this morning giving me a nice opportunity to exit.

Sure I think there is a good chance WB in particular will not have anything good to say. But banks are black boxes, thanks to mark-to-make-believe accounting and other trickery they could report anything. No advantage for me. No reason to accept the risk of a violent move in reaction to the report.

As for YHOO...I'm gone. My thesis, a technical breakdown imminent, was immediately proven wrong by the market. I'm gone. Discipline folks. Live to fight another day.

Social Security Benefits to Rise 2.3%, Linked to Infation?

This is another scam. And partial explanation of deliberately understated inflation statistics as reported by Uncle Sam. Social Security benefits are linked to inflation.

Now you can certainly argue that social security is a disaster. It is. And that we should just give people their money back and wrap the whole thing up. No young person who has thought about it, thinks there will be anything left for them in the way of "benefits". But there is no money there now either because Congress spent it already. Ha! Ugggh.

However, society does have some responsibility to those less fortunate. And the purposeful deception of our seniors is wrong. Where is the AARP on this?

Here's the link from Fixed News...Link. Where I lifted this brief explanation.

"The 2.3 percent increase in the cost-of-living adjustment that will go to 50 million Social Security recipients is the smallest in four years even though many prices are rising more quickly this year than last year.
Blame it on the vagaries of how the government computes the annual COLA. The price change is based on the amount the Consumer Price Index increases from July through September from one year to the next."

Ugly TIC

"The Treasury said net sales of US market assets – including bonds, notes and equities – were $69.3bn in August after a revised inflow of $19.5bn during July. The August outflow exceeded the previous record decline of $21.2bn in March 1990."

FT.com

Worth keeping an eye on the somewhat slimish possibility, or perhaps inevitability, of substantial capital flight in the process of devaluing our currency.

M-LEC = FRAUD

Here's the latest bailout attempt: ReadMoreHere.

"The proposal essentially transfers assets to a new entity, essentially a ``game of three-card Monte, where unrecognized losses keep getting shuffled around to hide them,'' said Joshua Rosner, a managing director at investment research firm Graham Fisher & Co. in New York. "

Get Involved

Express your displeasure to the powers that be. Demand that everyone play by the same rules. Demand that your currency be protected as a store of value.

This petition is a touch over the top. However, considering the circumstances, strong language is warranted.

SignPetitionHere

Seriously.

Be Aware

The summer stock market swoon was led by housing/financial stocks. I've been closely following these names for an indication of what to expect going forward. After a few false starts my bank shorts stuck at the end of last week. They look weak again today. Could the banks lead the market lower again? Possible. I'll be looking for the opportunity to get more aggressive in shorting bank stocks and select housing/finance names. Careful out there.

Marc Faber on CNBC

Highlight of my day: CNBC interview with Marc Faber.

Excerpt:

Mark Haines: So you think the US dollar is on par with the Zimbabwe dollar?

Marc Faber: It's not there yet. But...

FullInterview

Broken Record Plays On

The Federal Reserve continues to devalue the dollar. It cannot be stressed enough that you must have a plan to protect yourself from ongoing debasement. Unfortunately that is easier said than done. We all must use dollars as a medium of exchange however you must hedge against continued dollar weakness in the form of commodity exposure. Own gold, own oil, own agricultural commodities. It probably would also make sense to have some of your wealth in a foreign currency. This is serious business, folks.

The Fed is stuck between a rock and a hard place. On one hand inflation is completely out of control. On the other the economy is clearly slowing as consumers who have relied over the last five years on mortgage equity withdrawal begin to fill up their credit cards. Don't even try to tell me that inflation is "contained". That's horseshit! As a matter of fact I'd go so far as to say that government inflation statistics are an outright fraud. However, it's these same bogus inflation numbers that have allowed the Fed to ease despite the fact they should be trapped.

The American people are nearly oblivious to this fraud. Sad as it is, at this point we are going to get what we deserve. Deserve? Yes. Just look at our politics. For example, the Democrats are using a 12-year-old boy to convince the public that the S-Chip health program should be extended. Granted, the S-Chip program is to the benefit of our children but still. Worse than that is the fact that the Republicans are actually attacking said 12-year-old boy. He just came out of a comma for christ sakes! Disgusting.

I will concede that in the latest Republican debate Ron Paul actually spoke to my issue- the currency/inflation- eloquently. That man is on the ball and he makes a lot of sense. Problem is he's polling like 2%. He's considered a joke. A pariah in his party. The people laughing at and belittling him are the same ones who scoff at Peter Schiff. The same ones who don't take my vehement warnings seriously. That's just about everyone. Yep. We deserve what's coming. Sad.

Dollar Weakness Attracts Modest Attention

Bernanke is full of shit. NYTArticle:
Though Mr. Paulson has primary responsibility for American exchange rate policy, Federal Reserve officials have also made it clear that they are not worried about imminent inflationary dangers from a weaker dollar.
The Fed chairman, Ben Bernanke, recently told a Congressional hearing that the dollar’s value remains strong in other ways. “The value of the currency can also be expressed in terms of what it can buy in domestic goods — the domestic inflation rate,” Mr. Bernanke said in response to questions about the dollar from Representative Ron Paul, Republican of Texas and a long-shot candidate for the Republican presidential nomination. Noting that inflation remains low, Mr. Bernanke suggested that the dollar’s weakness was not a source of concern to the Fed.
Democratic lawmakers, who have been quick to attack the Bush administration about most other economic policies, have said almost nothing about the currency’s decline.
To at least some European officials, worried that the soaring value of the euro will hurt European exports, the American silence has been thunderous.

Fisher Points to the Elephant in the Room

Richard Fisher, president Federal Reserve Bank of Dallas, on inflation statistics: "Many of the arguments for excluding food and energy—in particular, the statistical arguments—are based on the notion that an exceptionally large price increase today will be offset, somewhere down the road, by an exceptionally large price decline. But suppose the increases in food and energy prices we've been seeing over the past few years represent longer-lived trends, rather than transitory blips. The arguments made for excluding food and energy prices would be on shaky ground. To put it more succinctly, we risk throwing out the signal along with the noise." ReadFullTextHere

Weekend Wrap-Up

This week the dollar got pounded. Long term rates remain higher than when Ben cut. Gold, oil and commodities in general are soaring. Housing remains in the toilet, yawn. The economy is slowing. These are the important things to watch going forward.

It seemed a foregone conclusion that the Fed would panic in the face of a slowing economy. However, the specific circumstances under which the Fed eased are very ominous. Oil is at an all-time high (in nominal terms). The dollar was sitting right at long term support following near perpetual weakness. Then they aggravated their gaffe by cutting more than expected. You hear Bernanke and these "governors" talking about managing "inflation expectations". They don't even manage inflation anymore but expectations? That should be easy since none of them see any inflation going forward. Absurd (bordering on criminal). Will they have the audacity to cut again?

The major stock indices have rebounded sharply. Momentum names remain strong. However, I suspect we will see continued weakness in the banks which is similar to what we saw trigger the last sell off. I remain skeptical but if banks go higher and the tape is making new highs I will remain cautiously long. Regardless, the play here is gold. Oil. Nothing fancy. Respect the market and don't let out too much rope.

Next week features an employment report Friday. It is fair to expect fireworks. This is truly a battle of the arrogant undefeated bulls and demoralized perpetually derided bears.

Ron Paul Gets It

A fellow Cassandra.
http://www.youtube.com/watch?v=AeHWW5gbc0w

Gartman on Bloomberg

Audio only. Nothing new here. Sell the dollar, buy gold.
ClickHere

'Sleepwalking Into Crisis'

Interview with former Shell chairman from The Independent. ClickHere
Here are some highlights:

He accused the industry of having its head "in the sand" about the depletion of supplies, and warned: "We may be sleepwalking into a problem which is actually going to be very serious and it may be too late to do anything about it by the time we are fully aware."

In an interview with The Independent on Sunday ahead of his address to the Association for the Study of Peak Oil in Ireland this week, Lord Oxburgh, one of the most respected names in the energy industry, said a rapid increase in the price of oil was inevitable as demand continued to outstrip supply. He said: "We can probably go on extracting oil from the ground for a very long time, but it is going to get very expensive indeed.

The latest figures from the US Energy Information Administration show that global liquid fuels production in August was almost a million barrels per day lower than the same period in 2006.

Marc Faber on Bloomberg

The always eloquent Marc Faber is much smarter than you and I. Here is his recent interview with Bloomberg. Enjoy.
ClickHere

This Trend is Accelerating

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/09/19/bcnsaudi119.xml

Welcome To The 1970s

As you're likely aware, today the Fed cut interest rates and it's discount rate both by 50 Bps. The dollar instantly tanked. Oil shot higher. Gold shot higher.

There was a few weeks where you almost had to give Ben Bernanke the benefit of the doubt. When he first cut the discount rate in response to the credit market turmoil it seemed like a reasonable move. Greenspan would have cut the Fed funds rate. Greenspan was a complete whore. So you figure Bernanke is attempting to act more responsibly. Then he says: "It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions." Those words actually came out of his lying mouth.

Well, today Bernanke proved that he is the Greenspan incarnate. Ofcourse we've known for a long time that the Fed would panic and slash rates in the face of a slowing economy. But the circumstances at this particular moment in time are especially insidious. Oil is at an all time high! All time high! The dollar is threatening a complete collapse having broken it's last support level. Well guess what, Bernanke just pushed the dollar over the cliff.

Let's put this in context. The Federal Reserve was founded with the primary objective of price stability. Control inflation. That is the mandate. Now we've devolved to the point where the Fed apparently doesn't give a damn about inflation.

You can bet that pushing the dollar over the cliff will have ramifications. To be felt by every single citizen of this country. There is no avoiding this now. You could probably paint the scenario...I guess, in which we impeach Bernanke and start jacking up rates in the face of a slowing economy. That's what it would take and the chances of that are virtually nil. That scenario wouldn't be pretty either but it's a whole lot better than what we're going to get.

Think $5/gal for gasoline. Think about your grocery bill doubling. Think about everything in Wal-Mart going up in price by 30%. That's all in our future. Kiss the middle class goodbye. They're history.

How did this happen? Bernanke wanted to bail out Wall Street. Pure and simple. Bernanke is a tool. A puppet. We just sacrificed the middle class of this country in an attempt to insure Wall Street players get their bonuses. Labor just got screwed again.

This rate cut will not even help the housing mess. Long term interest rates will be going higher not lower. Bernanke just made things worse for housing.

If I had the choice I would move my family out of this country right now. As it stands, that option is not on the table. It will be six years until it is. By then it will be too late and we'll be stuck here. That is my fear and such is my level of disgust that I am deadly serious. I would move-right now!

Folks, I suggest you take actions to protect yourself and your family. Get out of the dollar as much as possible.

Some Truth From The Nation

Someone is paying attention. I don't have any idea who this Greider guy is but he is spot on here (bold print is mine). In addition, there is a book review from Jim Grant in today's WSJ worth reading.

The Lies of Alan Greenspan
By: William Greider (TheNation)

Alan Greenspan has come back from the tomb of history to correct the record. He did not make any mistakes in his eighteen-year tenure as Federal Reserve chairman. He did not endorse the regressive Bush tax cuts of 2001 that pumped up the federal deficits and aggravated inequalities. He did not cause the housing bubble that is now in collapse. He did not ignore the stock market bubble that subsequently melted away and cost investors $6 trillion. He did not say the Iraq War is "largely about oil."
Check the record. These are all lies.
Greenspan's testimony endorsing the Bush tax cuts was extremely influential but now he wants to run away from it.
In the instance of Iraq, Greenspan is actually correcting his own memoir, The Age of Turbulence, which just came out. This weekend, newspapers reported provocative snippets from the book, including this: "I am saddened that it is politically inconvenient to acknowledge what every everyone knows: the Iraq war is largely about oil."
Wow, talk about your "inconvenient truth." Greenspan was blithely acknowledging what official Washington has always denied and the news media faithfully ignored. "Blood for oil." No, no, no, that's not what he meant, Greenspan corrected in a follow-up interview. [Bob Woodward in Monday's Washington Post] He was only saying that "taking out Saddam was essential" for "oil security" and the global economy.
Are you confused? Welcome to the world of slippery truth Greenspan has always lived in. He was the Maestro, as Bob Woodward's loving portrait dubbed him. Wall Street loved the Chairman best because the traders and bankers knew he was always on their side and would come to their rescue. The major news media treated him like an Old Testament prophet. Whatever the chairman said was carved on stone tablets, even when it didn't make any sense, as it often didn't.
Some of us who followed his tracks more closely, were not so kind. Harry Reid, now the Democratic Senate leader, said Greenspan was "one of the biggest political hacks in Washington." Amen. I called him "the one-eyed chairman" who could always spot reasons to stomp on the real economy of work and production, but was utterly blind to the destructive chaos in the financial system. No matter. The adoration of him was nearly universal.
Until now. The economic consequences of his rule are accumulating and even the dullest financial reporters are stumbling on crumbs of truth about Greenspan's legendary reign. It sowed profound and dangerous imbalances in the US economy. That's what happens when government power tips the balance in favor of capital over labor, favoring super-rich over middle class and poor, then holds it there for nearly a generation.
Things get out of whack and now the country is paying big time. A pity reporters and politicians didn't have the nerve to ask these questions when Greenspan was in power.
He retired only a year ago, but is already trying to revise the history. To explain away blunders that are now a financial crisis facing his successor. To rearrange the facts in exculpatory ways. To deny his right-wing ideological bias and his raw partisanship in behalf of the Bush Republicans.
The man is shrewd. He can see the conservative era he celebrated and helped to impose upon the American economy is in utter ruin. He is trying to get some distance from it before the blood splashes all over his reputation. Of course, he also came back to cash in--an $8 million advance for a book that is sure to be a huge bestseller. I don't want to be unkind, but Greenspan could have avoided all the embarrassing questions if his book was posthumous.
I haven't the read it yet. I have a hunch I am not going to like it.

Full Interview w/ Jim Rogers

http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vjUSJ.lwS8e0.asf

Apparently I'm Not The Only One Concerned

Think I'm full of hot air. Maybe you'll consider similar commentary from one of the greatest investors of all time. Jim Rogers echoes what I have been saying...


http://www.bloomberg.com/apps/news?pid=20601087&sid=aYBOOiT5mAO0&refer=home

Wake Up!

So, my friend sent me an e-mail this morning. One of those keep-out-the-immigrants-pass-it-along type e-mails. I couldn't contain myself. Instead of just ignoring it I blasted back that illegal immigration is almost entirely inconsequential in light of the larger issues we face. Seriously, watching the news, reading the papers and listening to the conversation of others it seems as if I might as well be living on another planet. In this country we have our collective head up our collective ass.

Britney Spears' lack of undergarments gets more airtime then the legitimate threats we face. For one, the global peak in oil production. Or the fact that our Federal Reserve is in the process of debasing our currency. Really hate to say it but we deserve what we are going to get. What are we going to get? Eventually, a wake-up call to the new reality. Just because we are collectively ignoring it doesn't mean everything is going to turn out just peachy.

Global terrorism? Who the hell cares. We lost 2,000 fellow Americans on 9/11. A tragic loss indeed but an American would have a better chance of winning the lottery then getting blown up by a terrorist in this country. Meanwhile, every single one of us is going to be affected when our dollar is virtually worthless.

Here is what to expect. Incredible price increases (measured in years not months) for all the things we need to sustain our current lifestyle. Oil, water, electricity, agricultural commodities just to name a few. Now is the time for us to wake up in order to have any chance of controlling our fate. I'm losing hope.

We'll eventually be confronted by this new reality. By then it will be too late. Future generations will wonder why it is that their parents and grandparents ignored these problems. They'll wonder how it is that we could have been so irresponsible and distracted by nonsense. We are going to hand down to our children a nation in shambles. As a new father, it all makes me so angry, that I just want to reach out and shake those around me. Wake Up! Before it's too late! I want to drive to Washington and burn down Bernanke's house for what I think he is about to do. I want to see Greenspan strung up in the town square.

Dollar Cracking

Dollar index below the incredibly important 80 level. And the Fed is going to cut into this? Ha. Bring it on. I'll continue to beef up my metals positions. I suggest you have at least some exposure to protect yourself from ongoing dollar weakness.

We're Not Done

US home sales decreased 12% from June to July! That's a big number.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ajD_j6XBeepg&refer=home

check, check and check

David Walker, comptroller general of the US, speaks the truth. I appreciate that increasingly rare attribute. From the FT:

Drawing parallels with the end of the Roman empire, Mr Walker warned there were “striking similarities” between America’s current situation and the factors that brought down Rome, including “declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government”.

Fast One

After being down 200 pts the Dow has rallied back to flat (now green). The bulls are attempting to again snatch victory from the jaws of defeat. "The Skeptic" still does not believe in fairy tales.

Of Fairy Tales and Weak Arguments

Global growth. Global growth. Global growth. If the moron pundits on CNBC say it enough maybe the bleeding will stop. Click your heels and hope Goldilocks can be revived. What a joke.

Look Out Below

Look here folks. You had better take precautions. Not even money market funds are safe according to today's WSJ. You see these slick wall street types on TV talking about the risk being spread out all over so no one is going to blow-up. Right. It just means this toxic waste is everywhere. It's in Germany where they are already bailing out a small bank and Paris where BNP Paribas dropped the bomb this morning that got us off on the wrong foot. I woke-up at 8ish and the futures were down more than I could ever remember seeing in a decade. Apparently the ECB had stepped in an attempt to stop the bleeding. According to the Financial Times:

"The European Central Bank might have called it “fine-tuning” but its decision to inject nearly €95bn into the eurozone banking system, the largest such intervention since the September 11 2001 attacks, is anything but. Does the ECB know something the rest of the world does not? After all, the Federal Reserve on Tuesday gave no inkling that a systemic threat might arise from the stream of banks and funds confessing to subprime-related problems."

So that toxic waste is in Europe and around the world. There's just so much of it. But don't forget here at home it's held by hedge funds, banks, insurance companies, builders, money market funds, pension funds and endowments. We are at the edge of the cliff. We are staring at the oncoming headlights. If we go over or stand flat-footed every single American will be affected. Period.

So you had better brace yourself as every asset class is being liquidated. We are still very close to the top and the hedgies are already blowing themselves up left and right. It's indicative of how much leverage has been employed.

Won't be long before cash (the dollar) isn't safe either despite the bounce today. If "The Skeptic" were to sell anything in the long-term account the proceeds would go into the GLD. Everything was sold today but gold has the best chance to protect you (after the ongoing liquidation). If you were smart you'd buy some farmland with water rights, bury some oil drums in the front yard and put some gold in a safe which you protect with a firearm. Good luck.

Disclosure: Long GLD

UPDATE: Countrywide just dropped the bomb. Look out.

Here's a Must Read

Great article. Absolute must read. Here's a latest from http://contraryinvestor.com/mo.htm

"The conceptual message seems pretty darn clear. When the rate of change in household debt growth decelerates meaningfully, the US has experienced recession. You don’t need us to tell you that this makes all the sense in the world. We’re a consumption based domestic economy that has been heavily debt financed. When the rate of change in debt slows, so does the economy. Simple enough? And what we see in the current period is a very sharp slowdown in household debt growth as of now. In our minds, this demands monitoring as we move forward."

Insert Expletive Here

This from the Daily Telegraph:

"The Chinese government has begun a concerted campaign of economic threats
against the United States, hinting that it may liquidate its vast holding of US
treasuries if Washington imposes trade sanctions to force a yuan
revaluation."

Wow. Read that one again.

Now:

"Two officials at leading Communist Party bodies have given interviews in
recent days warning - for the first time - that Beijing may use its $1.33
trillion (£658bn) of foreign reserves as a political weapon to counter pressure
from the US Congress. Shifts in Chinese policy are often announced through key
think tanks and academies.
Described as China's "nuclear option" in the state
media, such action could trigger a dollar crash at a time when the US currency
is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering
the US housing market and perhaps tipping the economy into recession. It is
estimated that China holds over $900bn in a mix of US bonds."

Great Analogy

Check out this video. This fella makes some very important points. 200 basis points? WatchVideo

Break from Doom and Gloom

There has been a lot of doom and gloom from me lately. Despite my genetic predispositions I try to maintain some balance. You need to make money both long and short. Bull or bear. In that spirit I would suggest biotech. It's working. It should be as it's a sector that won't be directly affected by the slowing economy. Or so the theory goes. Think AMLN, not AMGN.

Also, select basic material and resource plays look intriguing. Utilities bounced hard today and seem to have more upside. Check your favorite names in those sectors.

Monday Bearkill

The stock market emasculated the bears today. Dow up 286 points. Cancelling out entirely Friday's massive drop. A few thoughts:

1. For a day when the Dow was up 2.18% and the S&P 500 was up 2.42% the breadth was weak. NYSE had 1793 issues advance and 1570 decline. Not impressive. More telling perhaps was the Nasdaq which saw declines outpace advances 1617-1453.
2. There are some delicious short candidates out there. But who the hell is going to stick their neck out before the Fed meeting. No one. Therefore, only buyers today.
3. I'll be the first to admit that I've been waiting for a long time for this market to crack. I remember the other pullbacks and how every single one has been met with more strength and eventually higher prices. Obviously, betting against the bulls has a low probability of success. However, I look at hundreds of charts everyday and can tell you that damage has been done this time. I've not seen so many ugly looking charts since before the bull began.
4. The dollar index briefly dropped below 80 this morning before bouncing. Stay tuned.
5. "The Skeptic" welcomes a market rally as an opportunity to get more aggressively short. Unless proven wrong entirely in which case it'll be time to get reluctantly long...again.

Well. That's all for now. I understand that calling a top in the market or calling for a bear market is a fool's errand. You are the butt of every joke. Everyone is against you. Fine with me. Just like when I sold my home in the summer of 2005. I was ridiculed by everyone. No one is laughing now. The bulls had better enjoy this last dance because it won't be long before I'm sticking my foot up their asses. Good luck out there. It's going to get interesting.

Jim Rogers on CNBC

Here is the link to Jim Rogers' appearance on CNBC this morning. http://www.cnbc.com/id/15840232?video=456571213&play=1

Later in the day CNBC's Joe Kernen went on a rant about his theory that Jim hasn't made any money since his days with Soros and that he is a joke. Kernen speculated that Jim probably has had all his money in T-bills since the 1980s and that he has been a global bull but probably only buys one share of stock in each country just to say he owns it. He then added that Rogers has always been negative on US stocks. Kernen generally doesn't irritate me too much but this was over the top. For one thing Rogers called the secular bull market in commodities, before anyone else, when it was still in it's infancy. He also told you to get long China. Sure he has been negative on US stocks but it seems he'll be proven right eventually. You have to understand, Rogers is not a market timer or trader but a big picture thinker. Has Kernen even read Jimmy's books? I bet not.

Seriously, Kernen you just need to pipe down. You are a TV host! Not an investor, not a money manager, not a trader....and apparently not even a very bright light. Stick to the teleprompter Kernen, you dumb shit.

Bulls on the Run

Wow. That was some week last week. Tuesday it looked like the bottom might fall out. Then we had two big up days followed by the big FLUSH on Friday. Fun stuff. Volatility is back. Gets better next week when we throw the Fed meeting into the mix (Tuesday 2:15 et). That's good for 150 Dow points but who knows in which direction. The risks are heightened here not only for bulls but bears as well.

Friday's market was opened with a weak jobs number (92K is bunk), was spooked by Bear Stearns' call on which they said it was the worst credit market conditions in 22 years and highlighted by Cramer going apeshit on national TV. Link. That was classic. Oh please bail us out. PLEASE bail us out. Fed come to our rescue. All the spinsters who wrote and/or purchased this mortgage backed toxic waste should be forced to eat it. None of these characters deserve a bailout. Fine, whatever. Have it your way but it won't help much.

One thing I noted on Friday was the weakness in the dollar and the concomitant strength in gold. The dollar index is cracking 80 soon. The Fed will hit the panic button soon enough. The talk now is that they will change their stance to neutral and open the door to a cut this week. They do that and any cut will come too late. Maybe they'll cut now in a vain attempt to save the day which either shoots us higher a few hundred points or is interpreted as fear and we get destroyed. Either way, it's just a matter of time until the Fed cuts meaning dollar weakness which encourages "The Skeptic" (along with the strength Friday) to buy more gold. And silver. This is why I own it and the time I've been waiting for.

So Monday? The yen trade overnight Sunday could be a tell. We could go either way substantially. My guess is we work our way lower. Banks look due for a bounce (still wouldn't touch 'em) which could stabilize the tape. Maybe it's calm until Tuesday. Doubt it. Be careful. There are many stocks out there that have further to fall, bounce or no.

Disclosure: Long GOLD, Long SILVER

Take Heed, Ye of Bullish Persuasion

``So this bubble is the worst we've had in housing and it's going to be the worst before its over cleaning it out.'' -Jim Rogers

My man Jimmy knows his shit. A significant portion of the housing market is going to just disappear. Financing will not be available for all! As of NOW. This will result in significant consequences for the American consumption-based economy.

To anyone listening (and frankly most tune me out) "The Skeptic" would advise extreme caution going forward. DE-fense. Better to have a plan for unforeseen events, which you hope to not need, than to make one up on the fly. "The Skeptic" will be shorting stocks into oblivion from his gold-plated bunker, if necessary.

Don't Screw with Mother Russia

Seriously, I would not want to have to rely on Russia for energy. That's a bad bet. While all seems quiet now in regards to energy supplies to western Europe eventually Russia will flex it's growing muscle towards them as well. Here's a related story from the NYT:

MOSCOW, Aug. 1 — In the latest of Russia’s many disputes over energy payments with neighboring countries, the natural gas monopoly Gazprom warned Wednesday that it would reduce supplies to Belarus by 10 a.m. local time on Friday unless the former Soviet state pays an outstanding gas bill of $456 million.
The tough tactics could also affect Gazprom customers farther west along Europe’s natural gas pipelines, again raising worries about the reliability of Russian supplies and the wisdom of Europe’s growing dependence on Russian energy.

More Evidence of Slowdown Underway

July auto sales, announced today, were positively awful. GM and Ford are in big trouble. According to Bloomberg:

GM's July sales fell 22 percent, as none of the automaker's eight brands managed a gain for July. Hummer suffered the biggest losses, dropping 30 percent to 4,895.
Sales of GM's cars were off 26 percent, and truck sales declined 20 percent, including a 29 percent slide for the Silverado large pickup. That vehicle accounts for about 15 percent of GM's total sales.
``The industry has been underperforming in the past couple of months. We have housing prices and gas prices around $3 a gallon,'' Paul Ballew, GM's chief sales analyst, said in an interview. ``Overall, it's tough in the U.S.''
Ford's 19 percent July decline included an 18 percent drop in sales of F-Series pickups, the top-selling line of vehicles in the U.S.

Ka-Boom Redux

BloombergLink

July 31 (Bloomberg) -- Bear Stearns Cos., manager of two hedge funds that collapsed last month, halted redemptions from a third fund after a slump in credit markets prompted investors to demand their money back.
The Bear Stearns Asset-Backed Securities Fund had about $900 million invested in asset-backed securities, including mortgage bonds, spokesman Russell Sherman said today in a telephone interview. The fund was overwhelmed by redemption requests, Sherman said.
The fund's stumble is a setback for New York-based Bear Stearns and illustrates how the crisis in the subprime mortgage market has spread. The fund had less than 0.5 percent of its assets in securities linked to loans to subprime borrowers, Sherman said. The two funds that collapsed invested almost fully in subprime bonds. Losses have spread to banks, insurers and hedge funds in France and Australia, including one run by Macquarie Bank Ltd.
``This shows you don't necessarily have to be a subprime fund now to be having problems,'' said Bryan Whalen, a portfolio manager in Los Angeles at Metropolitan West Asset Management, which oversees more than $21 billion in fixed-income assets.

The LBO Ka-Put

At this point it's not a question of whether or not the LBO boom is over (toast) but whether "done" deals will start unravelling. The TXU deal mentioned in this WSJ is from what seems like forever ago. WSJLinkHere

"The breakup fee on an LBO deal typically runs from 1% to 3% of the total amount of debt banks need to sell to finance it. Loans and bonds for recent buyouts whose financing didn't clear the market -- and that banks got stuck with -- are trading at as little as 91 cents on the dollar (U.S. Foodservice) or lower. That means the banks who arranged the financing for these deals already have taken a hit of as much as 10% on the loans.
Take the buyout of Texas utility TXU Corp., for example. Citigroup Inc., Goldman Sachs, Inc., J.P. Morgan Chase & Co., Morgan Stanley, Credit Suisse Group and Lehman Brothers Holdings Inc. agreed to provide as much as $37.4 billion of debt financing. The breakup fee that the buyers of TXU -- Kohlberg Kravis Roberts & Co. and TPG -- would be on the hook for if they walked away is $1 billion. That is considerably less than the credit losses the banks could face if the volatility the markets is experiencing now persists when the deal is funded."

Ever Notice?

Ever notice how the market seems to get marked up at the end of every month? Yep, Wall Street is a shady place. The SEC might as well just close up shop as they are obviously ineffectual. Just announce to all market participants that there is no regulation as opposed to feigning regulation and doing absolutely nothing to actually regulate.

Although, to be fair, it may not be the SEC's fault entirely. It may just be that they are starved for resources, allowed to wilt on the vine, under the current administration. Like the EPA for instance.

Monday Bounce

The bounce is here however "The Skeptic" remains a seller. Going thru my watch lists I see a handful of promising longs but a whole list of juicy shorts. There is no reason this bounce couldn't last all week long. That being said I remain skeptical of the bullish gameplan which holds that every dip should be bought indiscriminately. Every once in a while that dip leads to a complete loss of altitude. We shall see.

Growl of the Bear

It's time to put in perspective more specifically where I think we are. Following a week in which the bulls were emasculated they'll be looking for the bounce. It seems likely at this point that any bounce, while potentially violent in the short run, will be short-lived setting up a failing rally and ending the bull market. Despite ending last week in incredibly ugly fashion the Dow is near a level which could potentially offer support. The S&P however has already broken, but nearing it's 200 dma, so it's a coin flip. At some point next week we'll get a bounce and it's a bounce to sell.

The market has ignored the bad news (or what I like to call reality) for-seemingly-ever. To my eye the market and the fundamentals have never diverged to such an extreme in the ten years I've been following the market. That's a bold statement considering that I remember 1999 very clearly (though at that point I had very little idea what the hell I was doing). In '99 the valuations were more absurd but things were good in the world. We lived in a relatively peaceful world in which the US was the only world power. We enjoyed super cheap energy supplies and solid economic growth. Household balance sheets were solid. Everything was, as they say, honky-dory. Very different picture from today.

Let's step back and look at the big picture:

The Economy: It's slowing folks. The Fed bailed out the economy following the tech stock crash by taking interest rates to historic lows. This action fostered the housing boom. Rather than take our medicine we leveraged household balance sheets in the name of overconsumption. Americans have developed quite a voracious appetite for overconsumption evidenced by the fact the 70% or so of our economy is services. We no longer manufacture anything and our exports are dwarfed by our imports (you can't export mortgage brokers). During the housing boom most of the hiring that went on was in housing related sectors. That plus is now a minus.

To keep the ball rolling consumers have leveraged themselves. Mortgage equity withdrawal and the wealth effect from skyrocketing real estate values have kept consumers happily consuming. That fairy tale (the Goldilocks economy I think it's called) is over.

Real Estate/Housing: In '99 I remember my co-workers tuned into CNBC (I prefer CNBS) throughout the workday. Everyone had a hot stock and we were all going quit to be daytraders. In 2005 everyone was a mortgage broker or had a condo to flip. We are a nation of speculators. Both were bubbles. The difference? In 2007 we are stuck with a trillion dollars in suspect loans. A trillion dollars? Well really who the hell even knows but the number is BIG and GROWING.

You know all the terminology by now...ARMs, cash-out refis, flex-pay, piggybacks, HELOCs, etc...Apparently if you give the American consumer enough rope to hang himself he'll do just that. As far as the financial institutions themselves, a bull would argue that banks have done a good job of spreading the risk around by packaging these loans into securities and selling them. Great. Instead of just cordoning off the troubled banks we have bad paper everywhere. The banks themselves are still holders but so are the brokers and the insurance companies. Probably even your pension fund. This is what they call a systemic risk.

Pundits have been calling the bottom on housing for six months now. Wrong. If we're lucky we've experienced the worst of the price declines but prices aren't going to see a bounce anytime soon. There is a ton of inventory and credit will be harder to get as the lenders begin to pullback thereby taking the final leg out from under the market.

Financial Dark Matter: (term borrowed from Bill Fleckenstein) Financial dark matter are derivatives. Financial nuclear weapons. CDOs, CDS, MBS, etc... Frankly, I only have a cursory understanding of this arcane marketplace. Here's what I know. This shit is toxic. There is a bunch of it, everywhere. It's highly leveraged (like anything else on the Street these days). It's mispriced, in some cases grossly mispriced, due to faulty assumptions and we don't know who is exposed and to what degree. Oh and it's highly illiquid. It all lies cloaked beneath the surface.

The Fed: These guys are a joke. They inflated the tech bubble then bailed it out with a housing bubble. Greenspan was particularly insidious in recommending ARMs just when rates were at their nadir. Expansionary monetary policies have fostered the most well-rooted inflation since Volcker killed it in the 1970s. Even after they do their best to strip from the inflation picture everything that goes up (i.e. ex-food and energy) they still have an inflation above the stated "comfort level". Commodities are in a secular bull market. Now growth is slowing. The Fed is trapped (sooner or later). Cut in an attempt to reignite growth or remain vigilant on inflation (that pesky mandate)? I maintain that the Fed will choose to cut. Growth at all costs. The market is trained to anticipate a bailout. We've had two down days in the market and traders are already looking for a cut in rates.

Bigger Picture: Domestic oil production peaked a long time ago and global production is peaking now. We do not yet have a viable replacement for fossil fuels. Meanwhile China and India are putting new drivers on the road at a breakneck pace. Oil exporters are also using more of their own oil at home. The worldwide scramble to secure energy resources has commenced. It will remain an increasingly hostile environment.
China has us by the balls. I love how we deal with them as if we are in a position of strength. Beating them up over exchange rates though will only bring us higher prices at the Wal-Mart. The dollar is doomed anyway. China is the world's next great power. Sooner rather than later if we continue to rot from within at our current rate. We suffer from a complete lack of coherent political leadership.



So it's all somewhat depressing. Maybe I've got it wrong in regards to the market. Maybe this is a buying opportunity and we are on our way to some sort of super-charged inflation-induced equity orgy but I doubt it. Maybe the financials have their issues contained but I doubt it. Maybe we will find a wondrous new energy source, hope so. I intend to remain flexible and profit either way but I think it might be on the short side of equities as it was this last week.

Dollar Bounce

The dollar is bouncing as market participants rush for the safety of treasuries. "The Skeptic" is not a buyer. Keep an eye on the Yen which has been even stronger. Yen strength = carry trade unwinding.
Today should be interesting. Never underestimate the bulls' ability to snatch victory from the jaws of defeat.

Late Day Thought

Larry Kudlow is an asshole.

No Fear

As I stated: No Fear. None. The predictable last hour rally came through for the bulls, though 15 minutes early, and we rallied from 13,338 to 13,500ish on the Dow. Everyone is a dip buyer in this market. It works until it doesn't.

Hubris

Dow Industrials down 280 pts. and CNBC is talking about what a big up day tomorrow is going to be. Absolutely unflappable. I smell very little fear.

Skeptical Prediction

Some of these previously announced buyouts won't get done as the credit market chokes on all this supply. There are billions of dollars of deals backed up and the terms at which these deals can be completed are changing everyday. When one or more of these deals falls apart it will be a sobering reality for the bulls.

Pain Ahead

It's been awfully hard to bet against the bulls lately. Bad news hasn't seemed to matter. However, there have been some menacing trends developing. The breadth of this market has faded and the advance has been led by fewer names. Sure AMZN and AAPL shot up after earnings but the entire banking sector is dropping like a rock. Pretty hard to sustain a bull market when the financials, which represent more than 20% of the S&P, are this ugly.

Housing is a debacle. The economy is slowing. The popular viewpoint these days holds that these two facts are unrelated. Not so. Housing has sustained the economy for several years and without it the American consumer is in trouble.

Don't forget oil at $76. Collapsing dollar. Inflation problem. I could go on and on. Never have I seen such a divergence between reality and the market averages. Increasingly a market dislocation, always a low probability event, is a possibility worth considering. Be careful out there.

Dollar Index to Crack 80?

Trading 80.01. Is today the day? Or do we bounce first?

Ongoing....

This Week's Stock Pick

No pick last week. You could call me a lazy son-of-a-bitch and not be entirely inaccurate. Every week, aside from two holiday shortened weeks, since this the groundbreaking of this "blog" I've granted you a pick. Last week I was asleep at the switch. So we'll get right to it this week and maybe I'll even get a bug up my ass and grant two picks this week...but first things first.

Without further adieu... I give you GSS- Golden Star Resources. Currently trading at $4.13. The dollar is collapsing and it's time to pound the table on gold. Now, it should go without saying that any single digit midget (stock under $10) is inherently speculative. Caution is advised. Nonetheless the set-up here is too nice to pass up. GSS build a huge base between 1999-2003, then ramped to a high around $8 before collapsing back to spend 2005-06 consolidating between $2 and $4. Now it has surmounted the four dollar mark and become an obvious buy.

Disclaimer: In no way should this post or any other be considered a recommendation to buy or sell any security. Should you buy this stock based on this post you may find yourself homeless by Christmas and have to scrounge trinkets out of a dumpster to give to your children as gifts.

Disclosure: Long GSS, Long gold

Dollar Continues to Slouch...

...dangerously close to key 80 level on dollar index.

Still developing...

Mortgage Backed Stench

Recently, rating agency Moody's came around and started downgrading various sundry mortgage backed securities. As a result they are now getting shut out of rating new deals as issuers shop for the best rating. Further evidence of an extreme conflict of interest. One of many on the street.

From Bloomberg article:
Moody's has been shut out of nine of the past 13 deals as underwriters sought better ratings from rival companies, Tad Philipp, a managing director at Moody's said today in a telephone interview. The securities had a face value of more than $25 billion.
``There's no doubt in my mind that it's because of the change'' said Philipp, who included a chapter titled ``Rating Shopping is Alive and Well'' in a report released today. ``Normally, we'd rate 75 percent of the issues, not 30 percent. I guess this is sort of like, no good deed goes unpunished.''
Linkhere

Beware!

Ladies and gentlemen...the shit is officially hitting the fan. Bear Stearns has announced that their (two troubled) aforementioned credit hedge funds have essentially evaporated. The equity is gone. Ouch, that's gotta hurt. Not just Bear Stearns either. "The Skeptic" wouldn't touch (go long) any US based financial company with a ten foot pole. Not even with your ten foot pole. The reality is that there is so much bad paper that we can't really be sure where it is hiding (likely it's everywhere). Don't expect any one of the holders to own up to it either. Until they are forced to. That will happen soon enough at this rate.

After hours tonight many of these financial stocks are trading down. Bear is down $5. Funny, I recall Cramer end zone dancing about the fact that BSC, after the initial revelations, had seen a bounce in it's stock price off of the lows. So surely this subprime mess is overblown and the bears are all assholes. Wrong! This debacle is in the early innings. It doesn't please me to say so but on the other hand the perma-bulls have it coming.

Another ramification to consider is the effect this mess is going to have on the dollar. The dollar index is sitting just above 80. This is a key number. I cannot stress how important the 80 level is. In fact, the dollar index has never had a sustained move below that level. We break that and there is no support for the dollar. Where it eventually stops falling is anyone's guess but it won't be pretty. Seriously, this is a BIG DEAL! This will affect every American citizen. As the dollar collapses inflation will surge. Commodities are priced in dollars and as the dollar erodes it will take more dollars to pay for things.

The way our house of cards is currently situated we rely on foreigners to finance our overconsumption. With a collapsing dollar we will need to make other arrangements. Why would foreigners want to own, much less buy, US assets during a dollar depreciation? Any positive return would be cancelled out by exchange rates.

What can be done to avoid a collapsing dollar? The Fed can start tightening. The result of which would be a severe recession but it would save the dollar and tame inflation. If we dealt with our problems we could probably emerge in one piece after some short term pain. But is that likely to happen? No. The Fed will do everything in it's power to avoid dispensing the medicine. As recent history clearly shows, the Fed will do whatever it can to bailout risk-takers.

It would be wise to consider hedging your exposure to the dollar. You need to have a plan. "The Skeptic" remains a long term buyer of gold. Good luck.

And So It Begins

July 10 (Bloomberg) -- Moody's Investors Service lowered the credit ratings on $5.2 billion of bonds backed by subprime mortgages and Standard & Poor's said it may cut $12 billion of securities after criticism they waited too long to respond to rising home-loan defaults.
Moody's cut ratings on 399 bonds issued in 2006 and said it may reduce rankings on another 32. S&P is preparing to lower the ratings on 2.1 percent of the $565.3 billion of subprime bonds issued from late 2005 through 2006, citing a deepening housing slump. U.S. Treasuries rose, the dollar slumped and financial company shares led stocks lower.
Ratings changes ``are going to force a lot more people to come to Jesus,'' said Christopher Whalen, an analyst at Institutional Risk Analytics in Hawthorne, California. ``When a ratings agency puts a whole class on watch, it will force all the credit officers to get off their butts and reevaluate everything. This could be one of the triggers we've been waiting for.''

When you push a dollar over a cliff, does it flutter or crash?

Here's another article for you...click-here.
For those of you too lazy to read the gist is this: despite the steady appreciation in the yuan (China's currency) US lawmakers are threatening protectionist measures with the aim of forcing a accelerated yuan appreciation (and dollar depreciation). I especially like Chuck Schumer's comment, "We'll know appreciation is enough when we see it.''

Granted, this tough talk has been going on for a long time and nothing has resulted as of yet. The idea is to correct the imbalances that result in the US hemorrhaging jobs (outsourcing). The correction or dollar devaluation necessary to even make a dent would not be gradual or measured. Buy gold.

We Need Nuclear

Nuclear power is our best chance to keep the lights on long term as it's the only power generation not reliant on fossil fuels. It's not natural gas and it's not coal. Furthermore it's not dirty.
Check the articlehere. A couple points:

1. Nuclear plants are not getting built. Prohibitive costs, mostly upfront.
2. Your electric rates are going higher. We will all be paying more to plug things in.

"The Skeptic" supposes we will eventually have to come around to nuclear. Stay long uranium.

This Week's Stock Pick

This week I'm going to pick the low-hanging fruit. Right now, that's energy stocks. MUR- Murphy Oil explores for and produces oil and gas. The company sports a $11 billion market cap versus something like $487 billion for Exxon. Obviously we are talking about a bit player here.

Better yet, and more importantly to "The Skeptic" anyway, is the $45-$60 range where it's been trading for almost two years appears as if it's about to be surmounted (currently $60.81). Hopefully in convincing fashion.

There are many other names in the energy space that look promising. Some of which I follow that look especially promising right now include SWN, DRQ, SU and VLO. There are myriad ways in which to play this game.

Disclaimer: In no way should this post or any other be considered a recommendation to buy or sell any security. Should you decide to buy this stock based on this post you may suffer from erectile dysfunction.

Random Opinion

Considering the state of the residential real estate market and the ongoing subprime debacle mortgage brokers will need to consider employment alternatives. Frankly, I just don't think there are enough used car lots to take all these guys.

Beachfront Contemplation

Back from a brief vacation and feeling refreshed, if a bit sunburned. There will be further vacationing, I hope soon.

This morning on my kayak, plodding the gulf coast, I observed an area of coastline that had probably an eight foot sand cliff due to severe beach erosion. All the mansions along this part of the island were threatened to some small degree by the menacing cliffsides in their own backyards. Some yards were losing trees and shrubbery over the ledge and it made good shade for me on my reflective rest. Where the vegetation is soon to go over you can see all the roots hanging suspended.

The benefits of living on the beach would be tremendous. For people who like that sort of thing anyway. But why would you ever buy or build a house there? Erosion is a constant threat which requires dredging, which costs money. If you can find a private insurer to cover your beach property your rates will be astronomical at best. Many states are in the insurance game as well encouraging risk taking on the part of buyers and builders with artificially low rates. In other words, taxpayers get put on the hook in a big way for risks taken by a small handful of property owners. Socialization of risk.

Worst of all for these homes is just the sand and salt themselves which persistently corrode coastal structures. These houses are literally build on shifting sands. We've erected these structures and drawn maps of our coasts and islands. Problem is we've failed to recognize that these coastal areas are constantly shifting and impermanent. It is sheer arrogance to think we can dictate our terms to nature. It's the other way around and we'd be prudent to anticipate and mitigate. Man wins today. Nature will win in the long term and from now on "The Skeptic" will only rent his beach houses.

NOTE: Actually man and nature will both lose.

NOTE II: Jet-skis are for filthy buggards only. The lame and weak.

This Week's Stock Pick

Generally speaking the stock of the week is produced through technical analysis. "The Skeptic" reads the tea leaves after every market session to predict the future. Most of the picks generated are short to intermediate term trades. This week though I bring you a fundamental analysis big picture call.

DBA- Powershares DB Agriculture Fund (current price $26.70). A straight up Ag play, this fund is 25% corn, 25% soybeans, 25% wheat and 25% sugar. A direct bet on higher agricultural commodity prices. Looking ahead a few years out, this is where you want to be. Oil, water and fertilizers- required inputs to produce these crops on an industrial scale have become more expensive. This is a secular trend that will continue for many years to come.

Disclaimer- The author owns shares in this fund. This post is not intended as a recommendation and if you buy these shares you may trigger a plague, thereby reducing demand for these commodities, making this fund a big loser.

Dead End

In the small corner of the world "The Skeptic" calls home the local government plans to spend $25 million, before inevitable cost overruns, to expand a nearby road. The road in question was virtually a white elephant when it was built just over twenty years ago. Now it receives significant traffic as an outlet for new communities that have sprung up everywhere on every available piece of real estate. It all just sort of sprawls out in every direction. Our closest interstate highway is planned to widen from 4 lanes to 10 in the upcoming years. More millions to be invested in our drive everywhere for everything lifestyle.

These are just plain bad investments. Every person having their own vehicle or two, that they then have to drive to accomplish nearly any errand, is just not sustainable. No way. We are going to have to find ways to drive less and stop investing in our motoring past/present. Instead we need to invest in public transportation and rezone our communities to a walkable scale through multi-use zoning. It's painful to think we might have to change our lifestyles and sacrifice some comforts but we had better start having this conversation now when we can still plan ahead. More likely though that false comfort and blissful ignorance will persist amongst the populous until we have a full blown crisis. The crisis of course is end of the cheap oil era followed by price and supply destabilization. Technology is not going to save us.

We are at an inflection point in the history of the world. We can either look forward or throw good money after bad. Most will not want to admit that we have invested our national wealth in houses close to nothing, accessible only by car, in the twilight of the cheap oil era. Our entire infrastructure is built around our motor vehicles. We are going to need a miracle to sustain this. "The Skeptic" doesn't believe in miracles or fairy tales.

More Gross

Gross on derivatives:
You were wooed Mr. Moody’s and Mr. Poor’s by the makeup, those six-inch hooker heels, and a “tramp stamp.”

Link

Anything but Revalue

Check it out. Read this article.

This is a slow motion train wreck worth keeping an eye on. Financial dark matter, hidden from sight and illiquid, is deteriorating. The players in these complex transactions are levered to the hilt. The Bear Stearns fund mentioned in this article started with $600 million in equity and borrowed up to $6 Billion!

This hidden from view market is a ticking time bomb. The players are not marking to market their exposure so until a trade happens or a rating agency downgrades your exotic security of choice you can pretend everything is OK and continue to value your exposure to this mess at par. Hence the reason Bear would throw another $3 billion of good money after bad. Normally when a fund blows up they admit their suckery and liquidate. In this case liquidation would cause all other players to come to grips. So the market is frozen and waiting for the inevitable downgrades which are very slow in coming since the rating agencies get paid by the players.

More Pain Directly Ahead

Good article from Bloomberg. I encourage everyone to read this one.

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Random Skepticism

Look here. We are going to have to get our heads out of our asses in this country. We are completely out of touch with reality. Our entire way of life is unsustainable. We drive everywhere for everything and haven't invested in public transportation. We over consume and under produce. Paris Hilton is news and we are still debating evolution in the 21st century!

The sooner we acknowledge the real issues we face the better. Yet, we are clearly lacking in political leadership. We are so preoccupied with the terrorist threat but we are rotting from within.

This Week's Stock Pick

OK. I have to admit something.

Last week's stock pick was suck-ass. WMT still looks good as long as the breakout is intact but it's a slow moving ship. Absolutely a play it safe pick. With the market weak it was a conservative large cap bet with a minimal defined risk.

Meanwhile there are stocks going nuts all over. Left and right. The market is a speculative orgy. More than a few oil stocks I follow went up 10% last week. Obviously it has paid to remain bullish on that sector. Many others too. Technology offers opportunities. There are so many good ideas. All with the economy at large in stagnation. Hmm.

So let's get speculative shall we. This week I'm picking a local favorite. ALCO- Alico Inc. They are a Florida agricultural company with interests in citrus, sugarcane, cattle and sod. The stock appears to be completing a long term consolidation. Friday's closing price was $60.60 . The risk in anticipating a breakout is that you're early.

Disclaimer: This is not a recommendation. If you buy this stock based on this post you should put down the bottle and seek professional help.

Gross Turns Bearish

Bill Gross, the kingshit of all bond managers, has turned bearish on bonds. In other words, he expects higher interest rates. Consider the implications.
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This Week's Stock Pick

This one is totally counterintuitive.

Often the market does things which seemingly don't make a lot of sense. A stock will go up despite substantial headwinds and/or headline risk. Or a company that's executing successfully will have a stock that just keeps dropping in excruciating fashion. This is just one way the market takes money from the crowd.

Enter...WMT- Wal Mart. A company facing several headwinds in a world of rising gas prices. First off, those gas prices especially hurt the low-end, or value-conscious, consumers WMT thrives off. If any company relies on trucking it's WMT so they face price pressures there too. For good measure, they are widely hated and have little to no growth.

The share price of this underperformer is pretty much where it was in 1999. More recently, WMT has traded in a range between $50 and $41. For two years. The only excitement for the bulls was a false breakout in October of last year. Well, it just surmounted $50 again. This breakout seems more likely to lead to higher prices but you'll know it's another false signal if it closes much below $49.

Disclaimer: The author does own this stock and is not a broker. In no way should this be considered a recommendation. If you buy this stock, based on this post, the company will go out of business.

Look Out for the Resets

ARM reset schedule. Click here

Translation: More pain ahead as ARMs reset at higher rates.

Don't Walk Away from the Dollar, Run

Syria drops dollar peg. Who's next?

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More Statistical Manipulation

Had been intending to post something on the subject of employment statistics and their intentionally misleading nature. Fortunately, someone did the work for me. Good article- check it out.

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Are You Ready for $5 Gas?

You should be. It seems all but inevitable. Maybe this summer, maybe not, though the farther out on the horizon you look the greater the likelihood. Our refineries are overstretched, not to mention frequently blowing up. There is a secular bull market in oil and supply is peaking. No coincidence, I'm sure. We've picked all the low hanging fruit and new energy sources will be increasingly difficult to exploit i.e. more expensive.

Hurricane in the gulf? $5 Gas.

Add to that, a weakening dollar and geopolitical concerns. The world's oil reserves are primarily in unstable regions. Think Venezuela or Nigeria. Iran and it's proximity to the Strait of Hormuz, through which 20% of the world's oil passes. Consider too that we face increased competition for resources due to growth around the world. There are an awful lot of Chinese buying their first cars. Chavez doesn't like our foreign policy so he'll sell his oil to China.

Bad news for GM. It's time to start planning for a future with higher gas prices. This country is going to need more public transportation. We're going to need to figure out how to grow and manufacture more goods locally instead of shipping in them in from across the globe.

This Week's Stock Pick

"The Skeptic" has been wildly bullish on precious metals generally, and silver specifically, since about 2001. This is how "The Skeptic" makes his money, by seeing the future. You may ask how it is that "The Skeptic" can see the future. Well that's none of your damn business.

Silver has been in a consolidation phase for just over a year now. Meanwhile, central banks around the world have continued to print money, the silver ETF (SLV) has continued to drain supply from a tight market and there have been a range of new products introduced that use silver. "The Skeptic" has been patiently waiting for silver to end this consolidation in anticipation of an explosive move in prices. That time has not yet come but it appears imminent.

Be aware...at some point silver is going to go ballistic. In anticipation of silver completing this current consolidation "The Skeptic" is ready to start putting some money to work. As a result this week's pick is SLW- Silver Wheaton. Buying Silver Wheaton is a direct bet on higher silver prices. Just like the commodity itself SLW has been consolidating for a year. You can bet that when this stock gets a couple closes above the $12 mark it will gain serious momentum. Currently SLW is sitting right at that magical $12 mark.

Disclaimer: Author does own this stock and is not a broker. Should you buy this stock based on this post you might lose all your money and end up living in the street.

More Debate Coverage

The Democrats were in New Hampshire tonight for their latest debate. CNN's coverage was loaded with second-rate commentary. Really contrasted poorly with MSNBC's coverage of their hosted debate. However, the questions to the candidates were better than previous debates. They wasted less time, relatively speaking, with assinine questions. Here is a brief synopsis, by candidate:

Hillary- She faced a lot of jabs tonight. Everyone seemed prepared to take their shot. She did reasonably well considering. As the frontrunner she appropriately played it safe. The only thing Hillary said that made me curse at the TV was a reiteration of her whole "I didn't make a mistake authorizing force in Iraq but if I knew then what I know now..." That's balderdash. "The Skeptic" does not get national intelligence breifings, nor does he have a staff of fact-checkers, yet he still would have told you invading Iraq was a bad idea at the time. Why? Mostly common sense. So either she has bad judgement or voted as she did in pure political calculation, which is worse. She also likes to claim that no one thought Bush would use the authorized force because he claimed he would let inspectors finish their work. So she is a bad judge of character to boot.

Obama- He fared better in the debate format that he previously appeared uncomfortable with. He spoke eloquently yet offers no real leadership. He's done very little to distinquish his positions from Hillary's.

Edwards- He was aggressive. He attacked Hillary. He mixed it up with Obama. Well done. I appreciate the fact he admitted more than once he was wrong to vote for Iraq war authorization. It's an easy dig at Hillary but nonetheless refreshing. They never even covered Edwards' big issue- poverty.

Biden- Did a lot to help himself tonight. He spoke forcefully about Darfur. Appeared passionate about the issues generally. Biden is likable and intelligent yet doesn't offer much beyond foreign policy experience. In this crowd you could do a lot worse than Biden.

Richardson- Likeable but not the least bit presidential. No longer worthy of consideration.

Dodd- yawn

Kucinich- "The Skeptic" loves the fact that this guy doesn't pander. Someone in the audience asked a question about what we can do to rebuild the military, which was directed to him. Part of his answer was that we should reduce defense spending. Overall, it seemed he, along with Biden and Edwards, fared the best tonight.

Gravel- Vitriolic as ever, Gravel continued throwing bombs. I'm sure, beyond this election cycle, the parties will find a way to exclude guys like Gravel or Kucinich or Ron Paul from future debates. That would be a shame. You'll hear more truth spoken by these fringe candidates then all the others combined.

Ron Paul- The People's Champ

"I don't think we have a republic anymore," he tells me, sitting up in his chair. "I think we have a very domineering federal government, where we have a world empire we have to manage every single day."

http://www.salon.com/news/feature/2007/06/02/ron_paul/?source=whitelist

GDP Shrivels

First quarter GDP came in at 0.6%. The slowest rate in more than four years. When you consider the government's wild underestimation of inflation that GDP number is, in real terms, probably negative. So the economy contracted in the first quarter.

Signs of Impending Doom

Lake Okeechobee is on fire. For those unfamiliar, Okeechobee is the second largest freshwater lake in the continental U.S. with a drainage basin that covers over 4,600 square miles. The water levels at "Big O" are at their lowest- EVER. The lake has receded far enough for 5,000+ acres of former lake bottom to actually catch on fire. The fire remains mostly inaccessible to firefighters as they are not really equipped to fight fires in lakes.

Maybe hurricane season, which starts June 1, will bring much needed rain to Floridians.

ATM Broken

The housing ATM is out of service. Those people who have been living beyond their means thanks to a rising tide of home equity had better start saving. The whole refinance game is kaput. What are you going to do now if you've been living comfortably by using your house as an ATM? Interest rates are higher and home prices are down in many cases. Time to stop going out to dinner three times a week. Time to stop buying all that crap you don't need...and charging it.

Equity withdrawal has certainly provided a wind in the sails of our economy. Without it we won't be seeing much growth in GDP. Furthermore, most of the nation's job growth the last couple years has been housing related. Brokers, appraisers, agents, roofers, electricians. Here in SW Florida you couldn't walk five feet without running into a mortgage broker and they were generally obnoxious and arrogant about their new found success. The number of available jobs in housing related sectors will not grow but contract.

Belt tightening time. Prices are drifting lower, rates are drifting higher, there is enough inventory to choke on and lending standards are being tightened. There has already been a lot of bottom calling. Strikes "The Skeptic" as premature.

Inflation Obfuscation Redux

Link-InflationArticle

Article:
Paul Volcker, the former Fed chairman widely credited for putting the clamp on the runaway inflation of the 1970s, once referred to rising prices as "a cruel and maybe the cruelest tax, because it hits in an unexpected way, in an unplanned way, and it hits the people on a fixed income hardest."

Comment:
Just for the record "The Skeptic" will take John Williams' (of Shadow Stats) numbers over those reported by our government. At the very least, Williams is using a consistent methodology instead of moving the goalposts.
Also, inflation is the enemy of a bondholder. Of late, bond prices have traded off with yields scooting higher. We've experienced a secular bull market in bonds. When that ends (now?) rates will be heading higher for years. It should be clear the implications for a nation up to it's ears in debt.

Dollar-Induced Indigestion

Recently Kuwait abandoned it's currency link to the dollar in attempt to quell inflation there. Many countries, including many in the Middle East, have home currencies linked directly to the dollar- the world's reserve currency. We've all heard much bluster about China's similar dollar peg.

This is an event that is clearly bearish for the dollar. If other Middle Eastern nations follow suit, for instance Saudi Arabia or Qatar where inflation was 11.83% in 2006, the dollar will be in more trouble. Central banks around the world have satiated their appetite for dollars.

Bloomberg article. Enjoy.