Tuesday, August 25, 2009

Bernanke Has Saved the World, Now What?

"It's… almost peaceful. No need to believe in either side, or any side. There is no cause. There's only yourself. The belief is in your own precision."
Max Von Sydow's character, Joubert, from 3 Days of the Condor

My biggest mistake as an investor this year has been forgetting about "what if." In Michael Lewis' Liar's Poker, one of his early influences was a boss who was constantly asking this; what if a tsunami strikes Asia, what if a foreign currency blows up, what if we return to the gold standard (yeah, right!)? My guess is that this guy probably eventually blew himself up in a Black Swan event, but the question should be asked.

Rooted deeply in bearness and having killed the market doing so lulled me into a false sense of security. When Citi dropped under $1 and BAC under $3, my question was, "who's next," not, "how much longer can this last?". Believing strongly that world economic collapse is and was upon us, I did not prepare well at the time for the ridiculous rally that ensued. And as Bernanke gets reappointed and markets continue to rise on the scantiest of really good news, I realize that our 2 best trades this year have been calls on stress test banks and on the market after a tough June.

Have no fear. This market, this economy, are all a sham. Nothing has changed my opinion on that. Jobless rates are over 10% (gubmint, not Shadow Stats data) in 15 states. Twenty-percent of the entire trading volume was in Fannie and Freddie yesterday, and the Fed might actually have to tell us which banks were insolvent without big-time loans. And don't forget H1N1, your friend, the swine-flu. If the government report that came out yesterday turns out to be half right, the economy is sunk. 30-50% of the population getting sick and 30K-90K deaths? The sheer panic alone would cause most businesses to operate at diminished or useless capacity. And let me tell you as someone treating 20 cases/week, this thing feels under reported.

So Joubert was right. No need to feel like a bull or a bear. Just make good trades and hedge appropriately. I'm feeling flush after huge returns on SSO and DIA calls, with hedges on FAZ, Citi calls making a run, and longer-term calls on oil and gold. Inflation? S&P up/down? Oil at $50 or $100? Sure.


Thursday, August 20, 2009

AIG is Going to Pay Us Back and Other Fairy Tales

"Robert Benmosche, who took over as CEO earlier this month, told AIG workers he'll rebuild businesses and won't be rushed by the U.S. into dumping assets at distressed prices, Bloomberg reported Thursday, sourcing a recording of an Aug. 4 meeting for employees. "I don't liquidate things, I build them,'" Benmosche said, according to Bloomberg."

Wow, tough talk from a man sitting on a company propped up by $180 billion in taxpayer money. We wouldn't want AIG to be forced to liquidate anything under fair value. Ah, and speaking of fair value, there was a resurfacing of mark-to-market accounting talk this week. However, given the plunge to 12-year lows the last 2 times M2M was left in place, and the subsequent 6-month, 50% charge since it was lifted, I don't give it a significant chance of reappearing in its old form.

Jonathan Weil of Bloomberg wrote an article today detailing an accounting change that could effectively wipe clean the tangible assets of insurance companies. He was referring to "deferred acquisition costs." "Under a unanimous decision in May by the U.S. Financial Accounting Standards Board that has received little attention in the press... the board is scheduled to release a proposal during the fourth quarter to overhaul its rules for insurance contracts. If all goes according to plan, insurers no longer would be allowed to defer policy-acquisition costs and treat them as assets." Uh oh, what does this mean. "The impact of such a change would be huge. A few examples: As of June 30, Hartford Financial Services Group Inc. showed DAC of $11.8 billion, which represented 88 percent of its shareholder equity, or assets minus liabilities. By comparison, the company’s stock-market value is just $7.3 billion." He mentions one of my favorites again, Genworth, whose DACs are worth twice its book value.

However, our resident market insider informs me that yes, this rule will pass, there will be large one-time chargeoffs, then a return to profitability. I'm shocked anytime the FASB does something that might hurt the market, so let's wait and see what happens.

One thing that is not surprising is Congressman Alan Grayson's continued efforts to find our money. "Neil Barofsky, inspector general of the U.S. Treasury Department’s $700 billion Troubled Asset Relief Program, agreed in an Aug. 3 letter to audit the program after a request by U.S. Representative Alan Grayson. Barofsky will examine why the guarantees were given, how they were structured and whether the bank’s risk controls are adequate to prevent government losses. 'What kind of toxic assets did the Federal Reserve guarantee, and what off-balance-sheet liabilities have been pinned on us?” Grayson, a Florida Democrat who sits on the House Financial Services Committee, wrote yesterday in an e- mailed response to questions on the audit. “How much money have the taxpayers already lost? We need to know.'” Grayson is quickly becoming a hero of non-MSM sites for his constant hounding of our financial felons.

Enough blabbering, what's next? August expiration hits tomorrow and we'll see if the market runs a little further into fantasy land, shaking off news like negative consumer spending and a return to rising unemployment claims. The bounceback from Monday has put China and emerging market puts all the way to March back on the map as DIA and SPY remain expensive beyond 2-month windows. The concern with China is not it's 80% runup, it's how far will the government let it fall on the way down? They're not playing by our rules. If you're feeling lucky, however, Itulip is predicting the S&P crumbles back under 600 before year end. SPY 60s for .19 anyone?


Friday, August 14, 2009

Tick, Tick, Tick, It's Getting Louder

Another interesting week that found our last blog right on point. DIA $97s doubled in value this week before imploding, making for a very nice trade. Regional banks were called out on Wednesday by Elizabeth Warren of TARP review fame as undercapitalized. “We haven’t really resolved this problem of illiquid assets on bank balance sheets and it’s more acute for the small banks,” Warren said. This caused an 11% drop in Zion in one day along with other smaller regionals.

A Bloomberg article today also exposed flailing regionals, stating more than 150 publicly traded banks have at least 5% non-performing loans. "'At a 3 percent level, I’d be concerned that there’s some underlying issue, and if they’re at 5 percent, chances are regulators have them classified as being in unsafe and unsound condition,” said Walter Mix, former commissioner of the California Department of Financial Institutions." As an example, Colonial Bank, which had 6.5% of its loans non-performing, was just shut down and enveloped by BB&T this afternoon.

Even Dick Bove said this week that the bank rally is "running on fumes," shocking coming from the man who told us Lehman was grossly undervalued at $10 (he must have meant 10 cents). David Tice, who runs the Prudent Bear Fund, said today that stocks are "grossly overvalued" and expects to break our March lows. D.R Horton and Genworth Financial were downgraded this week as analysts finally looked at their prices and said, "C'mon!"

But optimism persists. J.P. Morgan predicts a V-shaped recovery that shoots right through predictions of sluggish growth. However, the news today wasn't so rosy as consumer spending shrank instead of grew, and sentiment retreated as well. How quickly we forget that our economy is a giant Ponzi scheme and when people don't spend, our economy craters. I still think we could sputter out a few large days over the next few weeks or even month, but the ticking is getting louder. Colonial was the largest bank failure this year. There are plenty more to come. Until then, we'll keep our eyes on these smaller banks and overseas for opportunities.



Sunday, August 9, 2009

How Long Can it Last or How Quickly We Forget

Americans have short memories and even shorter attention spans. That's why in a space of 4 months we've seen comedy shows applauded for lampooning stockpickers replaced with a return to in-your-face/you're an idiot screaming from the MSM if you don't think the economy is roaring again. The disaster of LTCM was swept under by soaring internet stocks. The destruction of internet stocks replaced by a housing bubble. And while the collapse of the housing bubble is ever-lingering, our "newly" found source of hope in the form of infinite government spending has lifted stocks 50% in a very short time.

Chinese markets have rebounded 80% this year, with government pumping up bank Tier-1 ratios in an equally useless effort to increase loans to real economy users this year. Eric Janszen of Itulip has written that this is our second and last chance to short China, as he expects an implosion by their fiscal 4th quarter in both finance and real estate (the WSJ jumped in with a copycat article the day after, but actually recommended a few long picks).

Right on cue, regional banks got an upgrade the day after my last post, with our watch list banks rising between 11% and 26% in the last week. Citi rose over $4 for the first time since our stress test call in April, and is up almost 50% in the last week. So as the S&P crosses 1K and looks for 1050, what's changed since we last saw these levels?

Unemployment is much higher. Continuing benefits on hundreds of thousands of people are set to expire. Another $10 billion in consumer credit was lost last month (quite a bit higher than the $4 billion expected). State and local governments are bankrupt like no other time in our history. CRE is closer to imploding. And we still have all of 2010 and 2011 for ARMS to blow up.

So the race is on to see if the government can fool us into thinking the economy is better until it actually is, or, if as Paul Krugman just suggested, stimulus #2 is inevitable to keep this charade afloat. Until then, we'll keep an eye on the bubbling pot of regional financials, homebuilders, and emerging markets, and relish the opportunity to short them again. I'd be wary of shorting the market through August expiration though, and have even added DIA 97 calls as protection.



Saturday, August 1, 2009

The Government is the New Economy

Early GDP numbers came in, yes, better than expected yesterday, at only -1%. Of course, Q1 was revised downward to -6.4% and all of last year's GDP was revised downward to an anemic 1%. But green shoots are strong, and the stockpiling of inventories and more importantly, massive government spending to the tune of 20.9% of U.S. growth, kept GDP afloat and will push it into positive territory Q3.

So where are we really? With markets 40% off their March lows, it begs the question of where can it go from here? If 14K was based on corporate fraud, and 6,600 was based on fear, what does 9,300 tell us? Does the market really price information in 6 months ahead? How did that work for you in 1999 and 2007? Not so good.

We've never seen the government intercede in the way they have over the past year, pumping money into large banks (who have not yet lent that money to anybody). So, if Q3 is the pinnacle of influence as per GS and Itulip, and inventories don't float higher in Q3 as expected as Karl Denninger predicts (for an in-a-nutshell view of how the MSM treats anyone who doesn't push a recovery, watch this http://www.cnbc.com/id/15840232?video=1201848678&play=1), are we primed for collapse #2?

Yes. But over the next month be wary. I sold out of SSO yesterday with a 200% gain in 10 days, wary of a sudden and drastic retreat, having held my cards through the jobs number and GDP (scary couple of days). When July jobs are revealed on Friday, economists are looking for a meager loss of only 275K. This seems impossible, but anything near this number should shoot the market higher. But as regional banks and other laggards rise 300, 400% off their March lows, it's at least time to make a list for that day in August or September where we again pull the trigger.

In the meantime, anyone else appalled over the bonus list just revealed from TARP recipients?
BAC ($45 billion in TARP) doled out 28 bonuses over $3 million. Citibank 124. GS 212 with the average bonus over $160K, after they've borrowed up to $60 billion of our dollars. We really must be a bunch of suckers. At least Alan Grayson asked Bernanke this past week how handing the equivalent of $3K to every New Zealander helps our economy. Ben didn't like that question much.

Regional Banks on our watch list (some from my blog last year, more recently from a Markman article that will not qualify as too big to fail):

Zion $13.58
RF $4.42
Key $5.78
SNV $3.49