Wednesday, December 3, 2008

When $4 Billion Isn't Enough, Try $600 Billion

Alright, this isn't an apples-to-apples comparison. The first number is in reference to the GM time bomb that will explode in a mere 3 weeks if the government doesn't cough up $4 billion now, and $18 billion within 3 months. The second number refers to the amount of money we've pumped into banks so far with zero effect. Let's explore both.

The automakers showed up this week with a plan it seems. Ask for even more money and give a definite time frame for demise. Congress will inevitably give them their money and prolong the slow death of the worst companies in a horrible business. Even Toyota and Honda sales are down 30% and their products are vastly superior. More taxpayer money will circle the drain until these guys make another guest appearance, probably in mid-March, and ask for even more cash ala an SNL skit redux.

Itulip posed the questions yesterday of why all of the cash we've pumped into the system hasn't worked to get loans going again, and what kind of disaster is impending when we attempt to reduce the money supply to pre-October levels. Their anonymous interviewee pointed to one reason as the source of destruction, CDS. "Federal Reserve Bank of New York Staff Report no. 276 "Credit Derivatives and Bank Credit Supply" by Beverly Hirtle, February 2007 concluded that all of the nation’s largest banks used credit default swaps not to protect existing assets but to expand their balance sheets between 1997 and 2006." (Itulip) "So all of the largest banks relied on CDS to make new loans since 1997." (interviewee) "Correct, and that means that central banks cannot wave a magic wand and declare all CDS contracts null and void because if they do loans that were made in the US by the largest banks only because they were insured by CDS will have to be declared null and void, too. No one knows exactly the total loan value is of these CDS-dependent loans but it must be high enough to call their solvency into question because these banks refuse to lend to each other no matter how much the Fed increases reserves." He concludes by saying the banks are dead and the inability to declare these products void will cost us $10 trillion. You see my skepticism in calling a bottom.

ADP spun their lottery wheel and picked 250K out as their November job loss number. This will be dwarfed by the government numbers on Friday, which will then by revised in January to a bigger number. Meanwhile, mortgage rates coninue to fall along with gas prices, providing a "tax cut" to the American consumer. Will this stimulate growth and spending? Well, with real wages falling, and predictions for a 15% decrease in available credit next year to go along with rising unemployment and the potential for sudden inflation, I'm not too excited. I'm as happy as anyone else to pay $30 for a fill up instead of $70, but my family, like most, looks for ways to cut spending every day, not to spend more.

This volatility is good and bad. We love being in early, but it's making options pricing very expensive. I have failed multiple times in the last week on bids for ETH and MLHR, along with KBH. Just too expensive and not going to chase. I managed to fill 1/5 of my order on Monarch Casinos on 3/09 $7.50s, and the stock has bounced up and down 20% this week. Should be fun to watch.

A few things we're watching going forward. Oil is plummeting. It may hit $40. I like the USO as its tracking ETF, which generally runs about $10 below the current price/barrel. It's about $38 now. If it gets into the mid-to-low $30s, we're going long. Too many oil producing countries despise these prices and literally can't afford oil to be this low. We can get contracts out to 2011.

The other one to watch is a favorite, WSM. Up almost 30% yesterday on great news of an analyst upgrade, who still thinks the stock stinks, could go bankrupt or breach its covenant, and continues to lose market share to Crate and Barrel and discount stores. Ringing endorsement. I would put a shorter time frame on this and look to buy the $5 puts.

http://www.itulip.com/forums/showthread.php?p=63569#post63569

10 comments:

Tiger Coach said...

Ax... CDS appears to be the un-sung story of bloggers everywhere as I have heard this recurrent theme. However, I was unaware of the potential destruction that could possibly lay in wait for our entire financial system should this come to fruition. It sounds as though there is no way out except for a hyper-inflationary period... I am curious to know ITulips counter-measures should this come to fruition...

I personally believe that Bush and friends will do anything to keep this ship floating until January...

BD

AX said...

We are in fantasy land, waiting for the government to fix everything. Big 3 bailout next, then what? Oil might go below $40 this week. Was today the kablooey before the jobs numbers tomorrow or just the warning bell?

Anonymous said...

Market has tended to "find" reasons to rally on bad job numbers day... no rhyme or reason. I predict a BIG sell off the last two weeks of the year!!!

DC North said...

I agree with Anon.

It seems to be the market is saying "Wow, the unemployment is only this? This has got to be the bottom, since it is a lagging indicator so it can ONLY get better!"

Regards.
DCNorth

AX said...

I don't know how the market can fight through these numbers. Post Christmas layoffs will accelerate. AT&T 12K, financials will continue to cut back, if anything, it might get worse. Prepare for strong rallies like we just saw but keep some cash ready. I can't get anything filled the last 2 weeks but USO is getting prettier by the day.

DCNorth said...

Hey Ax,

Another thing to consider if you want to go double is the DXO a double long index for oil. May be worth having a look at.

Regards,
DCNorth

AX said...

DC, did you mean DBO, getting a bank result for DXO?

DCNorth said...

Hey Ax,

Really? That's odd. It showing up as the Powershares Double Crude for the DXO on google and on seekingalpha as well.

Regards,

DC

AX said...

strange indeed, DC, still not finding it. Looking for USO to get near $30, then we go long. Lowered my limit all day today on SRS, gonna load up again, think at 75, but if can get it cheaper, why not? Was $300 2 weeks ago and I don't see CRE holding up once retail officially implodes.

DCNorth said...

Hello Ax,

My mistake! You are correct, the DBO is the double long oil. The DXO is the double long ETN!

My apologies for any confusion that I have caused!

Regards,