Tag Archives: shorting

Overextended…

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… is exactly where the market was back in March when the S&P 500 hit 666.  Everyone thought the world was coming unhinged, and well it was and still is.  However, not everything comes tumbling down instantly.

With every play there are acts, and at some point the climax.  Without the climax how can we have resolution?  They are conditions dependant upon eachother unless we are speaking of the experimental genre.  With our money supply and government expendatures into the stratosphere we may be in the experimental, however let’s stick to the traditional for our discussion.

As this drama plays out I think we will have the main plot divided by smaller and yet smaller sub-plots each with their own climax and resolution.

While the market tops and is due for a correction we are jumping for joy at watching green shoots emerge from the abyss.  The media and figureheads talk about these shoots sprouting from here and there, but I don’t seem them.  Withered shoots perhaps.

Let’s introduce the buildup to the climax, and considering the climax euphoric the buildup sets the stage for euphoria.  In our case hope.  Beyond oversold conditions that we reaached in March we also had hit a stage of dénouement (catastrophy). However, this was only a subplot as if it had been the true bottom we would not have seen a short rebound in prices that have taken us up over 35%.  We needed complete disgust with the markets and an unwillingness to jump back in, which we didn’t see.

Instead will we go from Climax (the present) to catastrophe and back again I imagine a few more times before this is over.  We are fairily resiliant beings and can stand being pushed, pulled, and battered a bit before we completely throw in the towel.

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We are now starting a push into anxiety as the green shoot euphoria wears off.

Where are we going?
If the past is able to predicate the future, and if we are playing out subplots within the overall plot that leaves us with a theme of euphoria, despondency, optimisim and so on.  With despondency we will need to see disguist, lack of conviction in the government, and a swearing off the the financial markets. We aren’t even close.
Meanwhile as we go through these girations, while the Alt-A mortgages readjust, and commercial real estate weakens I’m expecting to see price fluxuations, and gyrations that flow with human emotion.  After all with so many players the markets are more emotion driven than anything else.

If the markets weren’t emotion driven then how can we explain people buying equities when the P/E ratio of the S&P500 is over 100, or how technical traders use patterns to profit?  After all we humans tend to do the same thing over and over again.  History repeats whether we like it or not.  The Romans clipped gold coins to fund increasing government expenditures, and in the modern era we print. Nothing has changed except the means in which it is accomplished with the same outcome.

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Short-Term:
A recovery in the dollar based on nothing more than everyone else is hurting perhaps worse than us, and it is very oversold.  Bernake and co might pull-in some liquidity to lessen foreigner’s fear of a devaluing dollar to support our debt markets.  This however, will undoubetly cause a collapse in the equity markets, commodities, and precious metals, while the dollar will rally as will bonds.

Winners: The US Dollar, Bonds
Losers: Everything else — Note: I’m cautious in shorting commodities due to when the next scenario will hit.

Intermediate-Term:
As liquidity is reduced Bernake will realize if he hasn’t already that there is no way out and that we will never be able to repay our debt.  The only way out will be a default via inflation, but that will prove futile once inflation hits 20%.  Wages will not rise and people will protest.  A depression will follow.

Winners: Precious Metals, Raw Commodities, Real Estate
Losers: Everything else

Longer-Term:
We will survive, and I hope we will change our ways to more responsible Americans.  The case for responsibility is huge as it has gone by the way side.  Instead of takeing care of ourselves, we look to others to make our decisions, pay for our health-care, take care of us in retirement, and essentially wipe our asses.  Fiscal responsibility needs… needs to happen.  No longer can we live off of debt that has we have no way of repaying.  I’m sorry, but a hummer purchased via your HELOC adds no value to your income.  Hence it is a poor investment and you must increase your earnings in other areas (no, housing doesn’t go up forever).
And here is our reset.  The New American emerging from the ashes. This is a ways out in time so we will revisit it as the cycle ticks on.

A bond bubble… Really?

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Bonds, bonds, bonds…  United States Government bonds ARE the safest investment in the world besides cash.  Right?  They are aren’t they?  I mean they are backed by the taxing power of the United States Government so they have to be.  Well, sure you will get your money back at a measly 2.x% these days.  Isn’t that below the rate of inflation you ask…  why yes it is.  T-bills are paying tenths of a percentage so you choose.  Besides stocks and commodites have cost many a small fortune so investing in bonds is a wise decision.  Right?

There is much talk about a bond bubble, and I’ve been watching bond prices and their rates take off recently and also have a nice correction.   Generally I watch $TNX, which is the 10-year government bond yield.  Remember bond yields move inversley to their prices.  So, if yields go down then prices go up and vice versa.

So, we have seen equity and commodity prices collapse, housing prices, and while that was occuring treasury bond prices have taken off.  This MUST be a bubble right?  Perhaps, but you have to take into account who buys and sells bonds.  We have the individual investor, which makes up a small group.  The major purchasers of bonds are large institutions and governments.  For institutions let’s look at the money market industry.  They must hold a number of bonds based on their funds requirements.  For governments they buy and sell bonds all the time.  They sell them to raise money and other governments or institutions buy them for a “safe” return.

As a last resort the Federal Reserve will purchase bonds directly, thus monetizing debt (PRINTING MONEY), thus keeping bond prices high and yields low. Therefore bonds aren’t really controlled by investors as we like to think, but much larger fish in the sea.

So, what might we see when the world loses faith in the bond markets?  Auctions will be devoid of foreign buyers signaling that foreign demand has dried up.  This will spark the necesitated increase in interst rate as an incentive for others to borrow.  Simultaneously we might see a flee from bonds as investors are concerned about their future safety.

If you look at the news you will see exports are way down from exporting countries, which means that importing coutries aren’t importing anywhere near previous levels.  Welcome to a major recession, yes there are grumblings of this being a depresssion.  I supose it depends on your viewpoint.  Now what happens when these net exporting countries decide to stop buying our debt because they have their own problems at home and have to use their saving?  They will no longer be purchasing our debt, which will make it more and more difficult for the USA to spend, and service existing debt.  Being that most of our debt is short term as the interest rate rises so do the debt servicing costs.  As these costs rise, tax income decreases then we are stuck with either printing more money (the short and easy “solution”), we cut back on gov’t services, or a combination of both.

Watch out for rising interest rates and a falling dollar.  So far we have neither, but once we do this will signal a shift from the US Dollar as secure to the US dollar as a high risk.  Expect other currencies in better situtations than us to see their currencies gain value, while the major winners will be commodities and gold.

Fun with Numbers 1929 vs Now

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I thought I’d have a little fun comparing the highs and lows of the crash of 1929 to today.  I’d love to say that I came up with a wonderful prediction, but alas I can’t even read palms (yet).  So, to explain what I’ve done a bit the top section is from 1929, and the bottom from 2007.  What makes comparing the two time series is that we have incomplete data for 2008 as it is still unraveling.  For the 1929+ period I used the weekly timeframe whereas for 2007-2008 I used the daily.  For illustrative purposes this shouldn’t be a problem.

I was mainly curious to see the relationship between time and price descent.  As you can see from the Cumulative Days and % from start it only took 69 days for the Dow to crash (49.39%) starting 1929 and it took 365 days for the Dow to reach a (44.48%) decline starting October 2007.  So, in comparison our crash has been slow and steady with the main sell-off occurring from August through October.  The only reason we aren’t in further decline is because of a few recent rallies, however they are all over a very short period of time.

From about October 14, 2008 we have started to see huge swings in the market creating new highs and lows on a daily basis.  These will eventually be normalized when we have more data, but this is crazy.  Up 24.25% in 4 days, and then down (16.30%) in another 2.  Granted these are from the highs and lows of the session and not the closing, but either way you cut it the market is bouncing all over the place.  

Take the sell-off today during the last 15 minutes… The Dow was at 9358 and then fell off a cliff to close at 8990.96, a difference of 367 points in 13 minutes.  13 minutes and any gain was completely erased and we closed down from the prior session.  WOW

Conclusion?  Basicallly I wanted to demonstate that we are moving at an accelerated pace.  Many think that we are going to see a rally over the coming months.  I’m more in the camp that due to the volatility any gain because it occurs so swiftly will be shortly thereafter followed by another low.  

Time will tell….

Look both ways before crossing the street

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I received an email from a friend and here is my response.  You ought to be able to decipher what the questions were about.  These are my opinions of the present situation, and are by no means recommendations.  

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1) Voting for McCain…

I really don’t think voting for A or B is going to matter.  I’m voting for Ron Paul because I believe that change has to come from going against the herd.  I refuse to be partially responsible for either of them being in office.

The odds are in favor of the democrats getting into office and taking over Congress.  I’m actually a bit frightened by this, but either situation is grim. Hopefully it will be better than the last 8 years.

2) Deflation / Inflation
This is tricky and something I’ve been trying to better understand.  There are many many many factors at work here.  We are headed into a MAJOR recession… thus your cutting spending was a wonderful idea.  A recession is a drag on the stock market.  Many think that after a brief rally it is going to drop much further.  I know you are invested at the moment.  One way to hedge against a drop is to invest in a inverse ETF fund such as SDS, QID, DXD, or TWM (these are leveraged 2x FYI).  These ETFs have saved me much pain.  The overall trend in the market is down.  Bear market rallies tend to be severe and swift to the upside, while the markets overall continue to decline.

As for Deflation and Inflation what this means is a decrease or increase in the money supply.  Generally during inflation when the Fed is creating money prices of everything goes up because there is a surplus of money that has to go somewhere.  When the money supply contracts either by the Fed reducing the money supply or debt is paid off.  Then prices decrease.  However, under a fiat monetary system credit and continued inflation are essential to keep it up.  At the moment with the Fed creating TONS of money we are looking at the potential for hyperinflation in the future, which nobody wants.  So, the Fed is walking a tightrope between deflation and inflation.  I imagine they will lean towards inflation over deflation ultimately.  At the moment we are primarily seeing deflation as prices are coming down everywhere (commodities, housing, stocks).

During deflation the market will come down as will all prices.  I think that regardless the markets will continue their descent due to the upcoming recession, decrease in consumer spending, decrease in imports and exports, and increase in unemployment.  Once the recession takes hold and the effects of the monetary inflation occurring now start to be felt we will probably start to see increases in commodity prices across the board.b  With companies facing difficult times I don’t foresee the created money moving into equity markets.

3) War with Iran
The conflict between Iran and Israel is heating up.  I received a report that said Israel won’t be doing anything until after the election, but who knows.  In this case we would see the value of gold skyrocket, oil go through the roof, and the dollar go through the floor.  This is slowly moving from a remote to more plausible reality.  I hope this doesn’t happen as the US can’t afford to be involved in another conflict.  We are already spread so thin.  Because of this and the enormous debt load the US government (its citizens) now carries I fear for the support and longevity of the dollar.  At this point I think it important to own some gold and have some money invested in foreign currencies.  <Thank you Gary North and Chris Martenson>  These are for the long-term and may lose significantly in the short term.  There are many uncertainties at the moment.

Oh and least I forget… At this juncture in the Republicans and Democrats are but different sides of the same coin.

Banks win with T.K.O!

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If I had to place a bet on who would win… The major banks or the taxpayer… The BANKS win!!  Hooray the institution is saved!  Round after round of talks end in someone getting bailed out or should I say supported or prevented from failing so the whole economy doesn’t come tumbling down.  The markets seems to be happy with the results of the weekend’s coordinated world-wide effort to support the financial industry.  The Dow is presently up 585 points and we are green across the boards.  

However, treasuries are losing ground quickly and Jim Rogers is shorting them.  I took that position earlier, but was too early and also got out too early.  Live and learn right?  I plan to reestablish that plan shortly.  Additionally, I don’t see how this is the “bottom” of the current crisis.  At every point along this decline since last October every time there is intervention the market rallies and then continues in is downward trajectory.  

I’m not watching CNBC, but I imagine everyone is talking about how last week was bottom and we are off to the races.  For a bottom to be in place we needed much more despair and hatred towards the markets.  Regardless of the long-term outlook (just wait for earnings season to really kick in) there is no point swimming up a waterfall.  Therefore I closed out a large position of ultra short index ETFs.  My bias is still short, but I’m not going to be surprised if we see an intermediate rally followed by the final shit storm of destruction.  Remember the fundamentals haven’t changed, only the fact that the world’s leaders are trying to hold things together to avoid a complete collapse.  This weekend only restored confidence to get people lending to each other again, and to prevent runs on the banks.

And alas it’s my 30th Birthday!  What a month to have a birthday eh!  I couldn’t have asked for a more excited, and hairbrained ride…

You just purchased AIG… Did you have a choice?

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The Fed is Heralded as a savior.  

 

 

 

I’d like to present a dissenting opinion and it will only take a moment.  The Fed is a quasi-governmental entity — read private bank.  It is a very large private bank that oversees the money flows between banks with the exclusive privilege of creating and destroying money granted per the United States government.  I don’t know when the destroying of money has actually ever occurred since 1913 when the Fed was created.  

Tomorrow (9/17/2008) will be a grand day for the markets as they celebrate the saving of AIG, which if left alone would have hurt a many people and companies.  In the long run it would have been better for everyone and helped people realize that the income’s of taxpayers aren’t for sale <pillaging> if they were left to fail.  It would also have prevented a precedent from being created that the Fed can and will purchase anyone if need or desire be.

However, the Fed is able to say they are “rescuing” AIG, Freddie, and Fannie all in a very short period.  Here is a thought to ponder…

If I am able to create money out of nothing or thin air then why wouldn’t I want to seem like a savior and help out distressed companies in the name of helping the economy?  I don’t have a great answer why I wouldn’t.  If I can shave a few cents off of everyone’s dollar who will notice?  At first it won’t be apparent, but eventually there will be consequences, and at the end of the day I will be the savior.  The consequences won’t be traced back to me.  Like committing a crime knowing you won’t be caught… do you commit the crime?

Revisiting the notion of buying low (through fictitious money that is treated as real money)… I’m the Fed and create $85 billion dollars to purchase 80% of AIG.  Great so now I own 80% of its liabilities and assets. No, not so great because nobody knows what the actual value of the assets are. <Remember I can create money>  For someone who can’t create money this is a problem, and the exact problem AIG ran into.  However, with the ability to create money I can now continue to add more “cash” to AIG’s balance sheet helping it though the crisis.  At the end of the day AIG, Freddie, or Fannie have been saved all though Monopoly money.  They will once again be players in the “free market”, but purchased at a unbelievably low cost. FREE  

Conclusion:  You and I purchased AIG, Fannie, and Freddie… however we will never see a dime of profit in return.  Do you see a problem with this?  Yet, the Fed will be treated like a king for saving the financial markets.  Perhaps the right thing to say would be using someone else’s money to purchase a failing company and then profiting without ever returning that money to the “lender”.  

That is Default. Fraud. Theft. Robbery. 

Final thought:

Do you think that income taxes are legal and necessary according to the constitution of the United States?

Probable Future Outlook for the United States

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What concerns me most is looking at the highly probable future outlook…

The gov’t is looking to bail out the Freddie and Fannie (dependent upon congressional approval), which will help out new, but not existing home buyers. By adding their debt the gov’t is using our tax dollars and inflation adjusted dollars to secure them. However, we are projecting a $500 billion dollar short fall this year in the budget, and the national debt is at about 9.7 trillion, and growing ever so rapidly. If we tack on unfunded liabilities now we are talking anywhere from 50-70 trillion in obligations. Effectively the government is insolvent. Now what happens when the gov’t revenues begin to decline due to the slowing economy, baby boomers starting to take their retirements, baby boomers soon to be taking Medicare, and the continuation of the Iraq war / Afghan war / maybe Iran war?

I’m failing to see the light at the end of the tunnel.

Consumers purchased houses as money was cheap. Everyone felt rich so they purchased more consumables, which had no productive value. These weren’t investments into something that would have future economic value, but only immediate gratification and immediate depreciation. Look at who is producing and who is consuming… we in the USA are primarily guilty of the latter and it is all funded through the rest of the world’s savings. At some point the rest of the world is going to tire of this. Then after our HELOCs were maxed out we started to use our credit cards.

What happens if the United States dollar loses its status as the reserve currency? Then everyone with dollars will flood the markets and purchase any tangibles possible. Money is a commodity just like gold and silver, but it can easily be created. However, due to the nature of its existence it is a exchangeable commodity and considered legal tender. As people want dollars the price rises and as people desire them less the price falls. Why would anyone want dollars when you look at the future for the US economy besides necessity and political reasons.

People are already losing their HELOCs because banks are worried that consumers won’t be able to afford them. Legal or not this is happening. I also heard from a Real Estate agent in Seattle that banks are asking for 25% down on new mortgages.

In an earnings call in late January 2008, Bank of America executives said credit card delinquencies in California, Florida, Arizona, and Nevada—states with high foreclosure rates—increased five times as fast as in other states, suggesting that consumers struggling with their mortgage debt are also finding their credit card bills hard to pay. “We’re focused on getting paid for the risk we take,” said Joe Price, chief financial officer. – US News and World report 2/28/2008 — Link to the story

The GSE bailout will help to prolong the issues that the financial industry is facing. The USG will do everything in its power to support the system through its tax system. It also gives individuals and institutions more time to pull their money out of the dollar. An immediate collapse would make that very difficult and costly.

And Gary North just posted this lovely article that illustrates that nobody has a clue as to the extent of what is really going on. Link to the article Unfortunately this is for members only, which I highly recommend subscribing to. I don’t get paid a dime on referrals.

I’m getting the sense that things could get a whole lot worse than any of us imagine. In that case I’d consider moving out of the county. Sure the dollar is rallying, and commodities are falling, but how long will this last? Peak oil has passed so we are biding our time before demand outstrips supply. Without oil or with really expensive oil life becomes much more difficult. Panic would ensue in the streets.

For those of us who believe in the concept of revision to the mean take a look at the Case Schiller index since 1890. Looking at the graph we have never seen housing prices rise so dramatically so quickly. Every boom period was followed by a bust or contraction and revision to the mean. We are beyond the mean… we are in outer space. Thank you Fed for the cheap money, and for removing banking reserve restrictions, and inflating the money supply. Hey it had to go somewhere and housing seemed the place to be. Then it went to commodities, which are now taking a fall as well. However, I see no reason that the long term forecast for commodities won’t be higher. The commodities I speak of in this case are precious metals, petroleum, and food. Essentially all the necessities to keep the world moving.

As for housing it will have to come back down to reasonable values. If we encounter a period of hyperinflation then housing will be a good asset to hold onto. However, if we have a depression I could argue the opposite. In a depression the purchasing power of your dollar increases. Depression means contraction of the money supply, which isn’t necessarily a bad thing. In fact part of the Fed’s charter is to contract the money supply when needed, but that hasn’t been the case as of late.


Full Story from Mises.org

And what’s next? Commercial Real Estate?
NEW YORK: U.S. commercial real estate prices are likely to tumble over the next 12 to 18 months as more borrowers default on their loans and regulators crack down on banks, pushing even more properties onto the market. Since the market’s peak in 2007, the availability of debt – the lifeblood of commercial real estate – has dried up and choked off sales.

Borrowers have resisted selling because of falling prices. Banks have not sold off their troubled loans, fearing a huge write-down of all commercial real estate loans. But it looks as if the clock is running down. “We’re going to see a whole lot more trouble going forward,” said Peter Steier, vice president of Inland Mortgage Capital in New York.
Link to the article

It continues:

Commercial real estate sales in the United States are expected to fall 66 percent this year from $467 billion to an estimated $159 billion. This is because debt, especially securitized debt in the form of commercial mortgage-backed securities, or CMBS, is either unavailable or prices are too high and the terms too strict for borrowers, Reis said.

“One of our biggest problem areas is pretty much the state of Ohio,” said Kevin Donahue, senior vice president Midland Loan Services, a CMBS servicer that steps in when a loan is showing signs of imminent trouble. “If we keep going, by the second quarter of 2009, I think the entire state of Ohio will become a subsidiary of Midland.”

I discoved this last bit from Chris Martenson @ www.chrismartenson.com.