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.