Wednesday, April 30, 2008

How About That GDP Report?

It appears three things are working. We are selling more capital goods abroad so those countries can make more junk to sell back to us, the government is hiring while running substantial deficits and the military is booming. That's a recipe for sustainability.
posted by TimingLogic at 9:27 AM links to this post

Tuesday, April 29, 2008

Are We On The Verge Of More Market Melt Downs?

In an act of seppuku, I thought I'd put up a post before the Federal Reserve's policy announcement. In other words, I believe the market has discounted any possible announcements tomorrow and will do whatever it will do regardless.

Commodity markets have been on a partying binge this past month and some surveys of Wall Street professionals now point to a consensus the worst is behind us. Remember, these same people didn't see any of this coming. And, they still are oblivious to what caused the problems in the first place. In other words, those that believe the worst is behind us are clearly groping in the dark. Given that fact, what is the chance they'll pick the particular moment when the economy is in recovery? I'd say just about zero.

The only equity index in the U.S. that really matters is the S&P 500 regardless of what sector one may be invested in. It's deep, it's liquid and it's where the big money roams. And, it's probably the best bellwether on earth for gauging both the American and global economy. Guess what? It ain't done nothing since the herd called the market bottom (again) over a month ago. Yes, it's up one hundred points in the last six weeks but that was basically comprised of two days worth of action on March 18th and April Fool's Day. It might also be of interest to note I received the first 2008 buy signal on my S&P trading system on April 1st. But since it wasn't confirmed I believe we must prepare for a reversal if the market falters within the week.

On that note, there is some reason to believe we will complete a corrective pattern this week. That may have happened as early as Monday. That corrective pattern I am referring to would be the five wave count move marked by three up moves interlaced with the two down moves contained within the rising triangle or wedge pattern in the S&P chart below. If this pattern resolves itself as I am anticipating, we could be about to start the next leg down. This move could be very painful because regardless of what is being reported, the global economy's weakness is picking up substantial momentum. If market weakness does develop, it will likely be because many have finally realized the largest risks lie outside of the U.S. This could therefore be the impetus for a turning point in the dollar I have been anticipating. We shall see. As I wrote before, I anticipate the next down leg to be between 1100-1150 on the S&P. Let's see how this pattern resolves itself around the Fed meeting.


posted by TimingLogic at 9:09 PM links to this post

Thursday, April 24, 2008

Is The Oil Bubble About To Crack?

Timing a top for oil has been a fool's game. And, I have been a fool on occasion. Oil has been much easier to trade as opposed to picking a specific top. There is so much speculation in this market that it has taken on a life of its own. But, bubbles always disconnect from fundamentals and that is what has happened with oil. And housing and private equity and emerging markets and derivatives and and and.

Gasoline has disconnected from demand. Gasoline has disconnected from gasoline-related equities and now we see the chart below where demand is disconnecting from oil-related equities.

The only plausible rationale for oil remaining elevated through a substantial economic slow down is if global production drops and demand rises because the market speculators are going to run out of money. But, that scenario has not been representative of any facts about demand or supply to date. So, that is a purely speculative position. Given that such a position is purely speculative, as is everything else this cycle, and we are seeing a significant slowing in the global economy, there is zero evidence of such an outcome developing any time soon. Regardless of the incessant bantering, this is not what has driven oil to date. Nor could I ever believe traders anticipated this would be an outcome. Traders are paid to follow the trend and make money. Not to think. And, few likely understand commodity cycles other than what someone showed them on a historical chart. Which is why we have this bubble and why they are going to be punished severely.


The chart above shows the Amex Oil Index with a buying pressure algorithm superimposed on it. For the first time in this cycle, we have seen a large rise in oil stocks and the oil futures with buying pressure literally cratering. (When the red buying pressure algorithm falls below the blue horizontal line, that means there are more sellers than buyers. The direction of prices should also follow the direction of the algorithm. So, as an example, the December price breakout was not confirmed with buyers and ultimately failed substantially.) You'll notice we had a general equilibrium on the left side of the chart followed by substantial buying. And, now very substantial selling. Something very significant has happened. That is, prices are rising significantly without a preponderance of buyers. Not only that. But, it appears as if there are not any buyers. There was one other time this happened. That was the Nasdaq going into 2000. I am not comparing the two but is there anyone on this earth who believes oil is going to drop precipitously over coming years? Or oil stocks? Do more people hold the belief that high oil prices are nearly a guaranteed outcome than held belief in the future of technology in that bubble? I should think so because this is a global phenomenon. The technology bubble was mainly an American phenomenon.

Does that look like a head and shoulders pattern on the chart? With no buyers on the right shoulder?
posted by TimingLogic at 3:52 PM links to this post

Wednesday, April 23, 2008

Market Manipulation Due To Lack Of Regulation And Tranparency

Free and fair trade? Free markets? Fair markets? Honest markets? Competition? We don't need no stinking honesty! (That's my imitation of The Treasure from the Sierra Madre.)

The new world order has decided the little people are not important to the future of society. ( I use this sarcastically to describe financial institutions because I do not believe some incompetent bunch of elitist boobs could actually create such an order as is subscribed to by many.) They have decided the world will revolve around money while little people are enslaved to perform labor at the lowest possible rate that can be found on the planet. And we shall call it free markets. The entire supply of world labor gets bludgeoned. All while bankers, who espouse this view, attempt to further their monopolistic practices. This reminds me of a comment made by a regular meathead on the comedy channel a year or so ago that we should outsource all of our production to China and simply run the world's money. Brilliant! The irony to that statement is that he was likely top ticking the financial economy for the next decade or more.

So, what am I talking about? My last post referenced a trader telling me he was about to retire due to excessive market manipulation. How coincidental (Not really. Although it was nice timing.) that a few days ago Reuters wrote of market manipulation by scheming financial entities. Regardless of any unintended consequences outlined in this article, these were schemes meant to deceive the general public and to give large financial firms a significant advantage to either run investment purchases or dump their investment trash before you had opportunity to respond in the open markets. Or, simply put, to rig financial markets and leave everyone else holding the bag. How many more ways can Wall Street try to screw Main Street? Seriously. Thank your friendly financial institution because most of the major players appear to be participating. And thank your government for enforcing transparency and regulation to protect the consumer and other market participants. Better yet, why don't you write your government an email or two or three and tell them you demand some action on all of this.

Here's the Reuters' story. I don't advise you to read this on a full stomach.
posted by TimingLogic at 9:38 AM links to this post

Tuesday, April 22, 2008

Wall Street Continues To Make The Mess Even Larger. And Many Are Paying The Price.

This wasn't the original post I had said I was going to put up but I'll get that one up within a week.

I decided to put up an interim post on the massive speculation we've been seeing over the last few weeks. Forget about sentiment surveys. I'm talking about actions in the markets. Any time we see large capitalized stocks going up 5-10% in a day, we are seeing massive speculation or enthusiasm for risk taking courtesy of our unregulated friends in capital markets. Remember, the long term annual return for the Dow is mid single digits. Not 5% in four hours.

I talked to a trader this weekend who told me that he's about to hang it up after twenty years because the market manipulation is so severe. This is from someone whose portfolio is up over 1,000% this cycle. We effectively have unregulated pools of capital similar to the last 1920s with a massive ability to distort markets. All markets. Global markets. I had a few prior posts on 'stock pools' and you can find them by searching the site in the search box on the right side of the blog.

Right now the U.S. equity markets are incredibly overbought. So, this could be close to an intermediate term top as each time we've been this overbought over the last year, we've been close to a sell off of some sorts. If I would attempt a shorter term prediction, which are very difficult, I'd be inclined to lean towards a top between here and 1460 in the S&P. One reason for this position is some commodity stocks are likely near an exhaustion point after a re-ignition of their parabolic trajectories over the last month. But, yet, again, as in the last attempted rally, the S&P hasn't made any progress. In other words, the only trades working are based on the emerging market inflation trade. (This point will dovetail nicely into the next post.)

One of the most astonishing performers in the last few weeks has been a stock I wrote of as being my favorite stock this cycle, U.S. Steel. U.S. Steel is now up 1,500% this cycle. Mind you, from a buy and hold standpoint, the volatility has gotten pretty extreme and anyone who has held through its gyrations has a stronger gut than I do. This has become a trading stock with such high volatility. Without looking, I believe it's up about 40% in the last month. I never would have imagined a move anything like 1,500% was possible. Never. Not even once in a hundred year or even thousand year event. The speculation we are seeing in global asset markets is simply massive. In the last few weeks companies in a few of these commodity sectors were trading up 5%-10% in a single day. U.S. Steel's return over the last eight years has been about forty percent annually. That is nearly incomprehensible for a legacy business. This bubble is massively larger than 1929. Using a conservative approach, U.S. Steel is now discounting between thirty and fifty years of earnings and cash flow. Think about that for a second. What does that mean? That means whenever we see the finality of price exhaustion, its stock could very well not make another new high for another thirty or forty years. That sounds like an amazing impossibility doesn't it? But, is it really any more amazing than its rise? If that isn't a worrisome point for future asset prices, then I don't know what is.

So, what has re-ignited parts of the asset bubble? Well two things are most likely. (You'll notice neither has anything to do with economic demand.) One is that the Fed actions have, in part, helped to provide a temporarily reprieve of the forced asset selling that was taking place. And, second, is the actual use of the liquidity that the Federal Reserve has provided. There is little demand for economic capital so how are these financial institutions going to use the Fed's liquidity or any liquidity to improve their capital positions? By doing what they have been doing. That is by using the same schemes used to create this massive asset bubble to make even bigger asset bubbles. Because now these firms make more money trading against you (their client) and providing services to hedge funds that trade against you in the asset markets than they make serving you as a client. In other words, the only reason they want your money now is to collect management fees and to use it as a basis to bludgeon you with higher commodity prices.

Given financial institutions are no longer able to re-ignite consumer credit, commercial or residential real estate, private equity, securitization, mergers & acquisitions, IPOs, significant new debt origination, commercial paper or any of the other bubbles they've created, they are using that liquidity on what works. That being emerging market investments and ramming the same old stocks and commodities to even greater bubbles. This is an ominous sign and not a sign of recovery. I wrote a few years ago that Wall Street wouldn't quit ramming commodities until they killed the economy. Just like they rammed every other asset until they killed it. Or demand for it. We most assuredly are seeing significant demand destruction for commodities. Two prime examples are gasoline consumption in the U.S. and emerging market food riots given many are now unable to afford foodstuffs. There is no shortage of food. That is Wall Street speak. There may be food hoarding because of price rises and affordability issues but what does that have to do with shortages? There is money hoarding too but that doesn't mean we are running out of money. The only shortage is the growing shortage of money needed to buy food. And of regulation to keep Wall Street from extorting impoverished people. But, why is this any different than predatory lending we've seen this cycle? When a monopoly gains an ability to do so, it can be expected to do anything. Didn't we already say this? Anyhow, this is all symptomatic of what happens when Wall Street believes it can drive the economy instead of the natural homeostasis of supporting it. Wall Street will return to its constructive and necessary role of supporting the economy whether it wants to or not. It is the will of the gods. And, being omniscient, the gods are never wrong.

The Fed should have the ability to restrict use of its liquidity to domestic economic use of capital in situations such as this. But, they don't. Of course, the Fed didn't need to really worry about that historically because banks served a traditional role of supporting the economy. No longer. So, we get more rampant banker speculation at our expense. The end result is that society gets to pay even higher commodity prices courtesy of financial institutions. A government bailout for Wall Street again has the unintended consequences of creating economic pain for its citizens. And, for many citizens around the globe.

This all means the mess continues to grow as opposed to what the intended consequences of intervention were. That being mitigation of outcomes. Party on! It's a Brave New World.
posted by TimingLogic at 8:07 PM links to this post

Thursday, April 17, 2008

What Do Bankers And Gamblers Have In Common?

The answer? It appears they both enjoy playing Liar's Poker. And, it appears bankers are quite good at it. Following are excerpts from Bloomberg today. What does all of this mean? Libor, or bank to bank lending rates, and what many clowns are using to validate their silly position that the crisis is passing, are likely based on...........well............shall we say less than forthright information. (That pleasant interpretation is for the English ladies and gentlemen that read my blog.) Or, what us common folk in the U.S. usually call lies. And, that the mess is getting much larger and doing so much more rapidly than anyone wants the general public to believe.

But as I roll over to the BBA web site today, (the BBA is responsible for Libor) it has a lead story of "BBA warns against legislating in haste". Of course you do, my good man.

Here are outtakes to the Bloomberg story. The entire story can be found by clicking on the text.

The Bank of England said financial institutions bid for 50 billion pounds ($99 billion) in its weekly auction, three times the amount offered and the most since January, as banks sought more cash to improve liquidity.

The comparable rate for dollars jumped the most since markets seized up in August, climbing 9 basis points to 2.82 percent. The British Bankers' Association yesterday threatened to ban members that deliberately understate their borrowing costs. Participants complained that banks may be submitting inaccurate information amid the global credit squeeze.

"We need more liquidity and on longer terms,'' Sue Anderson, a spokeswoman at the Council of Mortgage Lenders, said in a Bloomberg Television interview. "Wider collateral would be helpful, and longer maturities would be helpful. We'd like lending to go out 12 or 24 months.''

Of course you do Sue. You want the good Bank of England to eat all of your trash. Indefinite lending would be most preferred now wouldn't it? Would you like a bailout with your tea and crumpets?
posted by TimingLogic at 12:30 PM links to this post

Morgan Stanley & National City Update

I think it's telling that since we said someone needed to downgrade Morgan Stanley for its clownish National City upgrade, that National City's stock price is down about 25%. How long did that take? Wasn't that post about a week ago? Great call Morgan Stanley. Of course, I suspect John Mack to be one of the most incompetent CEOs on Wall Street so no amount of idiocy out of Morgan surprises me. Incompetency pays well. Mack made $41.7 million in a year he drove his company's value down significantly and cost shareholders nearly $4 billion in losses in the fourth quarter alone.

Is everyone on Wall Street in on this incompetency scheme? Oh that's right. I forgot. (Not really but I say it for effect.) What did the greatest investor of all time say? "Wall Street learns nothing and forgets everything." Put another way, incompetency has always been the rule and not the exception on Wall Street. Society is going to learn a lesson the hard way. And, I am part of society so I too will pay the price. It does not make me very happy to put it mildly.

A few final remarks. Google's earnings are coming out some time this week. Google has been one of my punching bags and I have an interesting post on this topic but I probably won't get it up until later in the month. Needless to day, regardless of what results they post, I remain extremely bearish on the stock. And, for that matter, I am not a lot more bullish on the company.

Of course, I'm not bullish about anything Wall Street is bullish about. Every single thing they've told us this cycle is highly likely to turn out to be completely wrong. But, then that's one of the reasons I started this blog. This is an opportunity of a life time to dispel all of the myths society has nearly universal faith in. Including the fact that these very myths are believed by those on Wall Street. Next post is on Monday or Tuesday. It will be worthwhile. I've been holding it for the right moment. It will support my statement about myths. And, of course, about clowns.
posted by TimingLogic at 10:49 AM links to this post

Crocs Was Indeed A Crock

I've written on here about how ungodly overvalued Crocs was. With the stock price down about 90% and closing in on zero, a lot of people have lost a big bunch of money. Crocs was a favorite stock of one of the big clowns on the comedy channel. What that clown doesn't seem to realize is that ninety nine percent of people aren't traders and getting in and out of these risky schemes pumped up by momentum morons is often very difficult.

When Crocs was in the mid sixties, I told a friend three times in a week to sell because I saw some things that led me to believe the stock was setting up for a significant dump. She sold two days before the stock collapsed. All I got was a free lunch. At the time I told this person the fair value of Crocs was about $5. I am sure she thought I was kidding given the price at the time was thirteen times higher than $5. If you read this, I wasn't kidding and given how far it has dropped, you owe me another lunch.

By the way, for any of the bottom fishers who bought the stock after the initial dump, let me give you some simple advice. Never, ever, ever buy a stock that is reporting a substantial rise in inventories and trading at nearly twenty times book value. You'll always be a clown.

posted by TimingLogic at 7:54 AM links to this post

Tuesday, April 15, 2008

Russian Banking Bailout Behind Change In Foreign Policy?

We've talked repeatedly about emerging market financial systems being cobbled together with toothpicks. In other words, if you think the mess in the U.S. is fun, wait a while because it's going to get a whole lot more interesting. It has only been a decade since Russia had a major financial crisis and now Wall Street is fawning over the country. A few years ago we mentioned the potential for crisis in the Russian banking system. We followed up earlier this year with a post that Russia could be one of the next problems in the world. Soon thereafter were the following comments from the Russian central banking chairman:

"Russian Central Bank deputy chairman Alexey Ulyukaev, speaking at an annual meeting with bankers in a Moscow suburb yesterday, acknowledged for the first time that there is a substantial crisis of liquidity in the Russian banking system. He stated that the Central Bank will shift its priorities away from inflation control to concentrate more on stability in the Russian banking system."

People are constantly pointing to emerging market foreign exchange reserves as proof of their economic health. The concept of healthy emerging markets due to foreign exchange reserves is completely laughable. That is, if the situation weren't so concerning. One of the outcomes I believe has a very high probability of arising out of this cycle is that many emerging markets will be left using accumulated foreign exchange reserves to deal with their own crises. Thus leaving them broke and destitute. Again. If this does occur, the implications could be very ominous on many levels. Not just economic. So, are we already seeing the first instance of a country needing to use its accumulated reserves in the case of Russia?

I read a while ago that Julian Robertson (an investing legend) has made significant bets that the Chinese will not buy any more U.S. Treasuries if the U.S. government continues to spend with reckless abandon. And, that will force ten year Treasury bond rates higher in the U.S. I disagree with Robertson's logic. As I have written, there is no plausible argument that China is going to overtly attempt harm to the economy most responsible for its exports and growing wealth. Or, as I have written, more appropriately their perceived wealth. There needs to be an impetus for a change in policy to occur on either side. China isn't going to upset the U.S. relationship that literally keeps the communist government in power by providing jobs and social stability. China and the U.S. are benefiting from an unstable and transitory equilibrium. I wrote elsewhere back in 2006 that I viewed this relationship as a possible Nash Equilibrium. This will not be interrupted as long as both parties are achieving perceived benefits that outweigh any costs of change. The only question remains what will occur first to break the equilibrium.

I do agree with the potential for an outcome similar to Robertson's position. But under completely different circumstances. In other words, as China's financial and economic problems become exposed, and they will, China will likely need dollars to prop up their financial system and their economy. Exactly during a time when dollar supply will likely start diminishing. And possibly significantly. (Dollar strength hasn't developed yet but rather than this pointing to my analysis being faulty, the dollar cycle appears to be in slow motion and hasn't run its course. Fundamentals are still lining up for what I believe will be a dollar rally regardless of the emotions of dollar bears, fears of hyperinflation by many or any government policy responses.) Where will the Chinese government get these dollars? Why yes indeed. Their accumulated U.S. Treasury reserves. What would that do to the bond market? Likely spike Treasury rates as Robertson predicts but under a completely different scenario.

I bring this up as background because I find it ironic and perplexing that Russia has made a very significant change in their foreign policy over the last few months. And, for no reason. A policy they have steadfastly refused to change. In the first quarter Russia announced they will support United Nations sanctions on Iran if they do not stop uranium enrichment. Russia has resisted pressure for years on this topic for what I believe are five or so primary reasons. 1) They are profiting tremendously by supplying Iran with knowledge and product for their nuclear program. 2) Russia has a significant population sympathetic to Iran. 3) Russia and Iran are relative geographic neighbors and they seek positive influence in the region. 4) Russia feels slighted in the world of international politics and is looking to re-exert its eminence as all political powers do. 5) Russia achieves this counter weight by taking an opposing position to the U.S. in an international event. An event that doesn't threaten its economic ties with the West.

So, what would change Russia's position? A position they have benefited from greatly? Russia's banking system is under severe duress and their banking officials have expressed concerns about foreign exchange reserves possibly not being sufficient to deal with their crisis let alone to support economic expansion. In other words, Russian authorities have expressed a need for access to foreign capital. Historically, we know it was lack of access to capital and foreign exchange reserves that caused the demise of the Soviet Union. Is history repeating itself? Has the U.S., in some nontransparent act, given Russia access to capital in exchange for a u-turn on Iran? Is there any other plausible explanation? I've been monitoring Russia for many years and comments about the banking crisis out of Russia have gone silent over the last few months. In fact, the only public comments have subsequently been that a Russian official has said they now are confident the banking crisis is now contained. Huh? It seems obvious to me that something has changed. And that something is not being reported by the media either in Russia or outside of Russia. Unless, that is, the Russian banking bomb is getting larger and officials are simply partaking in U.S.-style happy talk in an effort to maintain confidence.
posted by TimingLogic at 7:58 AM links to this post

Wednesday, April 09, 2008

Joke Of The Day. It's On You.

The SEC's Edgar database has just been updated with an interesting bit of data. Take a gander at the bottom of page 66. "Level 3 assets for which we have exposure". Level 3 Assets have risen by over 50% in three months. So, let me see if I can get my mind around this very complicated point. Shareholder equity is dropping and level three assets are rising? Oh, now that's an investment I'm excited about! Many clowns, including Bozo himself, were recently telling us this is the opportunity of a lifetime to buy financial stocks. I believe those were the exact words. Well, at least Bozo did make me laugh. Party is just starting folks and you get a front row seat.

Update:

Bloomberg put a story up at 10:30AM on the Goldman Sachs 10-Q I highlighted early this morning in the original post. A company spokesman is quoted as saying, "Just because an asset is defined as Level 3 doesn't mean we're uncomfortable with the value of the asset..........It also doesn't provide any insight into the relative risk of the underlying asset.''

Indeed that is true. Technically. The problem isn't that they hold level 3 assets per se. The problem is that they hold level three assets that are associated with the biggest financial mania since 1929. With the biggest global asset boom in history. All while we have the largest structural risks to the economy in decades if not longer. And, they hold them just as we are entering a period of economic weakness. And, that they are now valued at over 2x shareholder's equity. So, technically, the Goldman statement is accurate. But then again, technically in the long run we are all dead.
posted by TimingLogic at 7:06 AM links to this post

Tuesday, April 08, 2008

Bernanke's Congressional Testimony And Wall Street's Greatest Hypocrisy

Thursday's testimony by Federal Reserve Chair Bernanke, SEC Chairman Cox and others is available on C-SPAN. It is listed under the recent programs and the title is Senate Banking, Housing & Urban Affairs Committee On The U.S. Credit Markets, Panel One.

For what it's worth, the questioning by Senators Bunning, Tester and Menendez was very thought provoking although the entire process was interesting and comical at the same time. But, it is necessary to go through a discovery process before any impactful changes can be instituted. The video loads immediately from C-SPAN at the link above. You can then go directly to the their questioning. Bunning and Tester's questioning starts at 2:05 and Menendez's starts at 2:43 of the video.

I'm going to take the rest of this post to address the positions and comments by many regarding free markets, bailouts, moral hazard, truth and a dose of reality. It was easy to predict the outcome of Wall Street's ongoing fiasco would be testimony and blame games between Wall Street, regulators and politicians. And, that we would enter a period of more regulation as I wrote back in 2006. The entire process is very disheartening but necessary. First let me say that I have great respect for the political leaders and regulators involved in these proceedings. I truly do believe they have the best interests of the country at heart. But this brings up a key point that is one of the most important I'll ever write of on here. One that we as society generally do not contemplate. In any great monopoly on power, in this instance government, bankers or regulators, there exists a paradox in the wants of individuals within these institutions to do the right thing and the bureaucracies themselves. The very fact that these institutions are seeking truth is a paradoxical event. The root of this crisis was indeed caused by these very institutions. Or put most eloquently by a great American, Henry David Thoreau, in his essay Civil Disobedience:

"Others--as most legislators, politicians, lawyers, ministers, and office-holders--serve the state chiefly with their heads; and, as they rarely make any moral distinctions, they are as likely to serve the devil, without intending it, as God. A very few--as heroes, patriots, martyrs, reformers in the great sense, and men--serve the state with their consciences also, and so necessarily resist it for the most part; and they are commonly treated as enemies by it. ........

Let me use Senator Bunning, a fine man, as an example of what I am talking about. Senator Bunning asks the legitimate and necessary questions of how we could get to the point in our economy where one institution could threaten to bring down the whole financial system and secondly what ever happened to free markets allowing companies to fail. I'm glad Senator Bunning asked this question and unlike the panel before him, I'm going to answer it clearly. Not that the panel might not have answered this question but it is as Thoreau states above, they've likely never thought through the answer. Or clearly understand the answer. They serve the state with their head as opposed to their conscience as Thoreau advocates.

Congress has responsibility for writing law. Amongst others, it is your fault Senator Bunning. Not yours per se but that of the institution you serve. That being Congress. As far as the question about free markets, who ever said Wall Street is a free market? It never was and never will be. It is no different than the OPEC cartel controlling access to much of the world's oil. Wall Street controls access to America's capital. The only difference between Wall Street and OPEC is that Wall Street's monopoly is even more encompassing. And, with lax enforcement of anti-trust (anti-monopoly) regulation, we have actually seen even greater consolidation on Wall Street to create mega institutions thus reducing competition even further. Allowing mega institutions also creates increased risk. These institutions control capital through monopolistic access to the Federal Reserve. Something I cannot do. Nor can any other person or corporation or entity in the world. Free markets? Now that's funny. As long as the financial markets are monopolistic, there will be systemic risk. Moral hazard is a fundamental building block of a financial market controlled by a cartel and not by free markets. Moral hazard was created the minute we restrict access to capital as is the case with the current system. Not that the system it replaced, and many yearn to return to, didn't have moral hazard. Because it did. Senator, because Wall Street is a monopoly, regulation is a necessary evil and why those opposed to regulation in the spirit of free markets are completely misguided.

What society gets without regulation of a monopoly is effectively hegemony over any and all parts of society and the economy that particular industry or institution influences. Hegemony that is often tyrannical in its methods. Which is why monopolies are regulated. With the industry of capital, that influence would be all aspects of the economy and society. The very problem this presents is also why we have checks and balances in the Federal government and a further check of State's Rights against the Federal government hegemony. It's also what Thoreau was writing about above. It is what the founding fathers of this country understood all too well. The founders of this country went further with checks and balances against concentration of power than has ever gone before them or after them. Why? Because they were historians. Because the outcome of concentrated power is a timeless truth. It's time to think about the monopolistic practices of Wall Street and the implications for the economy as the founding fathers of this country thought of concentration of power in their day. Tis no different. Nor are the outcomes.

Free markets? Let's give everyone equal access to capital in the U.S. and around the globe. Me, you, the Chinese government, the Australian government, Siemens, Wall Street, Toyota, citizens of the Sudan, small business owners in Brazil, etc. Everyone. Today, in a world where dollars are generally required for international trade, even countries are often at the mercy of the U.S. financial system for access to capital.

Let's make Wall Street compete in a globalized world as they believe I should compete. Let's make them compete equally with every entity and person on earth for access to the same capital. Wall Street is very clever. It is good at telling Americans free markets dictate that they compete with someone making $2 a day in a far off land. But that is the greatest hypocrisy and scheme ever perpetrated on the American public. I'm as pro free markets as anyone but if you believe this hypocrisy perpetrated by a monopoly shielded from international competition, you've been deluded by the greatest mind bending machine ever created.

To make matters worse Congress jeopardized our deposits by allowing depository institutions to partake in risky schemes with our money by risky trading, risky leverage, unsound risk practices, risky business models, risky derivatives and on and on and on. Something that never should have been allowed. Something I have harped on repeatedly. Commercial banks have absolutely no business being involved in these risky schemes if they are also charged with protecting our monetary system. Especially because they represent a monopoly. A monopoly that has an amazingly powerful ability to truly distort international markets. But, of course, lobbyists have worked their miracles at our expense. There's your answer Senator Bunning. Congress helped create this mess.

I am simply pointing out the hypocrisy of the system. The system being the status quo. And, now we see that as in any great concentration of power, the status quo will do and say anything to maintain its livelihood. For history also tells us any great bureaucracy will first act to save itself when threatened. That includes telling us that the crisis has passed. That all is now well again. That we are now seeing the greatest opportunity of a life time to pick up Wall Street's assets on the cheap. I am not espousing some conspiratorial position held by many fringe thinkers that hidden forces control the world economy. Or that central bankers are somehow part of some grand scheme to control humanity or reap billions for a secret society. To the contrary, I have significant disregard for those messages. They are not based in substantiated fact and many have racist undertones that I abhor. As I have stated often, I am not opposed in the least to the Federal Reserve. I'm simply stating the fact that access to capital in the U.S. is controlled by a monopoly and as such, must be regulated. The same situation exists in every country with a central banking structure similar to the U.S. Is that all bad? Not if managed properly. (That is a systemic problem in itself. To allow discretionary management of a monopoly is a moral hazard.) Has it served society well? It has served some very well, many reasonably well but many not well at all. Have I personally benefited from it? I suppose. Could it be better? Yes. Could it be worse? Yes. Is there a better model? Yes. Is it the gold standard many point to? In my estimation, no.

If nothing else changes, one thing must. Society has the legal and moral authority and responsibility to be granted increased transparency. In a society that cherishes freedom as a fundamental truth, we can achieve no truth without knowledge. And we can achieve no knowledge without transparency. Therefore there is no truth without transparency. Transparency in all government policy, transparency into all lobbyist activity, transparency into all Federal Reserve policy, Transparency into all SEC policy and transparency into all of Wall Street practices. It is any society's basic right to have fundamental truth and we are at a point where there is no truth. Politicians aren't truth. Wall Street isn't truth. Opinion isn't truth. Knowledge is truth. That is one reason why the system as it is cannot save itself.

As was said thousands of years ago, "Only truth will make you free.". How timeless is humanity's brilliance at knowing universal truth? Yet, how foolish we have become.
posted by TimingLogic at 10:15 AM links to this post

Saturday, April 05, 2008

What Do Toyota, GM, Ford & Chrysler Have In Common?

Imploding sales. This past week all reported sales down 10-20% year over year. In an industry with very high fixed costs, significant capital requirements and large debt loads, this is a very serious issue. Of course, we've beat this drum repeatedly so I'm not going to beat it alot more. Should this continue, it will jeopardize the very existence of any of these companies that have serious debt loads. Most specifically, in the U.S. Cerberus Chrysler would likely be the first to go bankrupt. The last few years have likely been the worst economic environment for the auto industry since the 1970s. Yet, to their credit, American auto makers have remained marginally profitable.

One month does not a trend make but we are now seeing Toyota's sales drop significantly. Toyota has now fallen to number three in U.S. sales. As we wrote some time ago, Toyota is very vulnerable because of its aggressive move up market and into sport utility vehicles. Toyota and Nissan have grown to be very reliant on aspirational consumers in the U.S. And, amongst other factors, I'm not sure aspirational consumer tastes can be defined by prior trends to larger vehicles. As an example, do many aspirational consumers still view sport utility vehicles with primary appeal? Possibly not. Society is now recognizing excess has possibly led to an endangered planet. Or has possibly led to increased financial obligations and angst. Product mix for most automakers is still very undesirable in a weak economic environment. One I expect will continue well longer than anticipated.

I still believe Honda remains the best positioned global car company should a significant downturn develop. Yet, I remember some on Wall Street telling us Honda could not survive without a global partner at the time Daimler was buying Chrysler. The premise being Honda did not have the economies of scale to compete with a consolidating auto industry. That argument was completely ridiculous. What a surprise. In a bit of irony, Ford has now sold off all of its premium brands at a time when I believe we could be seeing a major peak in premium auto sales for years to come. Did Ford see this coming or was it simply coincidence?

While everyone was fawning over Toyota in 2006 and early 2007, our view was that Toyota's stock had been priced to perfection. And, the days of taking candy from a baby were over. They were and they are as reflected in the significant drop in Toyota's stock price. American auto companies were in the midst of massive efforts of finally rationalizing their business models and unlocking the economic capital within their organizations. Oh, and as many were pumping Toyota's stock in 2007, car sales in Japan at that time were the worst in thirty years. That's right three zero. No one ever told us that now did they? But, hey, no need to worry. It's all good.
posted by TimingLogic at 12:56 PM links to this post

Friday, April 04, 2008

Speak Of Morgan Stanley...............

in the last post. The second largest public pension fund in the U.S., and major Morgan shareholder, has just withheld support for it's CEO.

"CtW Investment Group, which advises union pension funds that hold about 5.7 million Morgan Stanley shares, is calling for shareholders to withhold votes for Mack and two board members, Davies and Kidder, saying they should have been responsible for better risk management at the firm. CtW also wants the firm to name an independent chairman instead of allowing Mack to keep his two roles as chairman and chief executive officer."

Ya think? I expect more of this because before we make it through this mess as I would not be surprised to see Morgan Stanley stock trade into the teens or even single digits.
posted by TimingLogic at 11:20 AM links to this post

National City Upgraded. Are You Kidding Me?


National City Bank, one of the largest banks in the U.S., is teetering on the edge. In a matter of months the company has lost twenty years of shareholder value. That's really quite an amazing feat. How much did the CEO make for his accomplishments? Whatever they paid him, I could easily destroy this company for much less. Management 'managed' this one hundred and sixty year old institution to the precipice in a matter of a few years. National City was founded in 1845. National City's death occurs in........to be determined.

In recent days rumors have started to fly about KeyCorp, Fifth Third or Wells Fargo acquiring the company. Rumors are just that. We've seen numerous short lived rallies in the stock based on pure speculation the company would be sold. Yesterday the stock was up over five percent at one point. The speculative juices are still very much alive in the stock market as investors are still taking tremendous risks. Buying this stock is a prime example.

It might be of interest to note that the perception that National City is a conservatively run super regional appears to be anything but. National City is one of the largest users of derivatives of any U.S. bank. And their lending risk management practices this cycle were brilliant as witnessed by the company's implosion.

National City has just hired Goldman Sachs to help it map out strategic options. What strategic options? Let's see. Option 1) Go out of business. Option 2) Pray the company is taken over for peanuts. Option 3) Start selling off the company's good assets and create a death spiral. How much more shareholder money are they wasting to hire Goldman? The only value Goldman brings is finding a buyer. Why don't they simply take out a full page newspaper ad? 'For Sale' or 'We Need Cash'. Management might have thought about strategy before they made a mess.

What is really quite amazing is that Morgan Stanley just upgraded National City. If Morgan is upgrading National City, someone needs to be downgrading Morgan because their decision making is impaired. Did banks learn anything about catching a falling knife after Bank of America's financial fiasco with Countrywide? With the Bear Stearns' plunge to $2? How about a little word association? Upgrading a company with as many problems as National City reminds us of what words? Gambling comes to mind. Incompetence is another word that comes to mind. How about Clownish? It's a mad, mad, mad, mad world.
posted by TimingLogic at 9:00 AM links to this post

Wednesday, April 02, 2008

Manhattan Condo Sales Fall Most In 18 Years

Obviously with my premise that Wall Street is in a massive bubble that will result in its bust, we should expect New York City to see one of the worst real estate corrections in the U.S. To date, New York's real estate has been held up as a beacon of hope by many. Yet, we see negative data starting to develop in Manhattan. A large jump in uber expensive real estate transactions, substantial price appreciation, a large increase in NYC foreclosures and the largest percentage sales decline in eighteen years.

I was living in New York during the late 1980s and the price drops I recall in Manhattan were substantial. I can actually remember reading of a specific story after a large Wall Street layoff. The asking price for a particular condo that was being purchased by a Wall Street executive fell a substantial percentage almost overnight after he backed out of the contract. As liquidity recedes to its source, Manhattan would logically be the last real estate market to be impacted. It now appears that process is underway.

As an aside, I find an interesting parallel to history. In the late 1920s, there were weekend traffic jams to the Hamptons as New Yorkers headed to their second homes and to weekend getaways. I remember reading somewhere in the last year or so that a private developer was proposing a new traffic artery to.......you guessed it, relieve traffic from New York City to the Hamptons. We've already seen real estate in the Hamptons start to crater. Next will be New York. The more things change, the more they remain the same. Note, this does not mean I am predicting another Great Depression for the U.S. Just that the last Wall Street bubble had similar circumstances re the Hamptons.

(By the way, Tokyo residential real estate remains very attractive nearly twenty years after their real estate bubble popped. As an example, $350,000 for a new two bedroom condo overlooking Tokyo Bay. This in a city comparable to New York and London in its sophistication and wealth. In New York what would that be? $2-5 million?)
posted by TimingLogic at 8:04 AM links to this post

Shanghai Index Down 45%


As we have written ad nauseum, China's economy is a bubble. Likely the biggest bubble since the American economy in 1929. It's quite obvious the Shanghai Index issued a sell signal some time ago. All of the pumpers telling people that China's stock market was going to outer space as late as mid 2007 (There were many. Although by then only the completely brainwashed were still pumping.) only have to achieve returns of about 100% to get back to break even. Given investment returns around the globe are likely to be negative to single digits for the next decade, it will likely take twenty to thirty years of returns to make up any losses incurred by investors buying into this scheme in the last year or so. The index has fallen drastically so a rally could develop at any time. If there are Shanghai rallies, there will be plenty of opportunity for adept investors to hop back on the bubble. But given some data is showing global trade is cratering and more reliable data out of India (more reliable than propaganda out of communist China) is showing their industrial production growth rate has recently fallen by 50%, I'd tend to doubt we'll be seeing Pax Asia any time soon. Uh, what? But the elitist intelligentsia has told us emerging markets are going to counter the U.S. slow down. If I had a dollar for every time............
posted by TimingLogic at 5:42 AM links to this post

Tuesday, April 01, 2008

The Race To Be The Bigger Fool. The Fools Rule On April Fool's Day!

"The positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation write-downs of subprime ABS."
--Standard & Poor's credit analyst Scott Bugie on March 13th

"UBS wrote down an additional $19 billion in ailing assets, bringing to $37 billion the damage wrought by the subprime crisis and causing a net loss of $12.03 billion in the first quarter."
--Reuters, April Fool's Day

As I've said before, this is not a subprime issue. The world does not return to Goldilocks if and when subprime write downs pass. But, in the mean time, it's nice to see how utterly incompetent the entire financial industry is. UBS sacked it's leader. But, how much shareholder money did he take with him for jeopardizing a venerable institution that will need bailouts to survive?

If there are any CEO search firms out there reading my blog, I'd like to put in a personal plug. I am extremely confident of my ability to lose $37 billion. I will also do so with significantly more flair than any CEOs have to date. I'll even do so without my head up my ass as seems to be the common form of leadership seen to date. (That is so unbecoming.) And, I promise not to go the the Fed or any other government agency for bailouts. I'll simply let the tens of thousands of hard working people that work for the shareholders lose everything they've worked a life time to gain because it's all about me. And, I promise to leave the shareholders in a similar situation. And, I promise to do so for less pay and severance than the growing list of April Fools. Am I hired?
posted by TimingLogic at 8:44 AM links to this post