Still Alive...

Wow, been a long time.  Sorry for the prolonged absence but the bulk of my extensive readership has been kept up-to-date via email for the past few months.  When last we spoke the European stress tests made us money, now it's Helicopter Ben who will put the final nail in the deflationary coffin.  QE2 was not only foreshadowed, but Ben himself defended his actions by pointing to a rising stock market as proof of its effectiveness.  Since when is our chief economist mandated to prod the market?  I thought it was money supply and employment.  Hmm.

Since our inception we have pointed to gold as the ultimate inflation hedge.  Just this week the head of the World Bank has called for a return to some form of gold standard.  But gold is only part of the answer.  Silver at 30-year highs.  Cotton, coffee, corn, name it, at multi-year highs. The concern always becomes are we in a bubble?  With an explicit policy of currency devaluation, the answer is no.  Faber, Janzsen, and Fleckenstein all think the dollar is going straight to zero.  The other side of that has to be commodities, priced in dollars, as the hedge. The market should rise for the time being as well, but my money is going 3 places:

SLV, GLD, DBA calls to at least 2012.  

 

This Time....

Was no different, as predicted. Would the Euro stress tests be too soft and scenarios far from the tail? Of course! This only brings to question the issue of timing. Paying the time premium before July expiration for HBC and STD August calls was premature, as our profits were tied to this post expiration event. Our cost basis could've been reduced by almost 50% had we waited. The Basel agreements were reached more quickly than expected and this, aside from huge earnings from HBC, actually drove us to gains as much as the tests themselves. No complaints however, as we sold on Monday for a 5+bagger on HBC before the expected fluctuations followed the rest of the week.

STD actually appears to be the best positioned of all banks, but like our own tests, it was the weakest and cheapest of the bunch that rose the most (RBS, BCS, LYG). Our friends on Wall St. have provided us with a new gambling tool that for us, may actually be the best way to leverage our positions. These come in the form of weekly calls. No need to wait a whole 4 weeks anymore, we can now place our bets on one-off events for that day alone while paying less of a time premium. For example, if you think the Fed, fresh off miserable employment numbers, will hint at QE on Tuesday, simply place a directional weekly call on SPY or bank of your choice. You'll probably know by that afternoon if you're right or wrong.

2nd Chance

My biggest investment regret of last year was not putting everything I owned along into stress test bank calls. This was a foreshadowed gift that could only have ended up one way. While the gains on Citi and 5th Third (by far the best performer) recommended here made a year's worth of returns, I can honestly say that I didn't go all in. The Euro stress tests I don't think afford the same kind of opportunity given we are miles from the bottom and we have already been made aware of the Greek tragedy.

However, these tests may pale in comparison to ours in how bogus they are, and afford the larger banks an excuse to raise capital just as ours were. The best of the bunch, Santander and HSBC, are likely to benefit. As one analyst pointed out today, Santander survived a Spanish and European test when it troughed at $9. HSBC is just 15% off of its yearly low, and has been distancing itself from subprime for 3 years. Good news after the test results on 7/23 could also come in the form of a watered down Basel III, which probably won't force banks to raise capital rations until 2012. Given these factors, I think it's time to roll the dice again.

As another side bet, the first Apple hiccup in a few years may put a shine on its competitors in the short term. If Microsoft can produce and possibly throw in a dividend, it looks promising.

Here We Are Again

"Here we are again, I feel the chemicals kickin' in...."
Animal-Neon Trees

So sorry for the prolonged absence, a few life-changing events including a short sale and a move which I will detail here soon. Hopefully a summer lull in patients will allow me some more time to get the BBB rolling again.

Here we are again....the evidence is sufficient to prove that 2009 was a stimulus induced fairy tale. Bank reform, far from Draconian, was celebrated on Friday when it revealed what we already knew it to be. A worthless piece of legislation that will have no impact on curtailing systemic risk. We have hopscotched over the 10K level several times, each jump a little less enthusiastic as we realize it's12 years of negative returns that we're celebrating. Gold keeps banging out new highs and oil has run up 10% over the last 2 weeks. The yuan float brought us half a day of gains before, perhaps as Dr. Michael Hudson has asserted, the Chinese aren't going to simply let us obliterate the value of their treasury holdings.

Oh, and BP has lost $100 billion in market cap with the clock ticking at $4K a barrel. Sorry I missed this short, hope you didn't.

Too Many Holes, Not Enough Fingers 2

Almost a year ago, this title seemed appropriate as the market started its ascent from March lows. With Europe's bailout package near $1 trillion, the parallels to our own desperation are clear. Buying the debt of bankrupt countries with moneys from healthy economies seems eerily familiar to buying troubled assets with taxpayer dollars. No granted authority for such actions (the proposed package is in direct violation of the Maastricht Treaty on which the EU was based) exists, as Ron Paul has repeatedly pointed out that no such authority for the Fed to create their programs exist. There has been a refusal to let dying corpses (Greece only 2% of EU GDP, GM, Fannie, Freddie) fail at the risk of hyperinflation.

As HK emailed to me today, how in the hell is Europe going to pay for this? Will German pollsters allow hundreds of billions of their euros flow to the PIIGS without burning Berlin to the ground? Will the Greeks ever be able to reduce their debt burden to 3% of GDP? C'mon!!!

And perhaps while you were counting your temporary winnings today, you forgot to notice that we have reopened CDS agreements with Europe, or that our largest banks have $3 trillion in European exposure? How about Fannie and Freddie asking for another $20 billion? Perhaps Dr. Michael Hudson is right. When this thing implodes the Greeks will declare their debts in drachmas, the Italians in lira, and it will be every country for themselves. Black Swan author Nassim Taleb has pushed for the printing presses to stop. "My fear is that if we don't stop them now they're going to create hyperinflation...nobody has confidence in a guy like Bernanke."

Gold down today, but is another trillion going to discourage a flight to gold? I don't think so. It is imperative that some shorts be opened or maintained, just in case. That's what Taleb is doing, as Universa, the fund he advises, put in for 50K contracts on June SPY 80s Thursday, just before the market dropped 1,000 points.

Odd Timing

Just when it appeared that all signs pointed towards recovery, just as the market cracked 11K and some companies such as Apple and Amazon were hitting new highs, a wrench in the works appeared in the form of an SEC lawsuit against Goldman. Forget the Greece debacle, we've been privy to that for months along with the rest of debt filled Europe. Wasn't the initial Greek bailout supposed to be $30 billion, now $146 billion? No, it's the GS case that seems to come at an inopportune time for our oligarchs.

The SEC has sat idly by (or maybe passed the time watching porn) as some of the greatest crimes committed in the history of our country came and went. Stated-income loans, Countrywide, WaMu....the AIG rescue, all under a blanket of excuses and incompetency. Now, with GS striding towards $200 and the market regaining 80% of its losses, our biggest demon comes under the microscope. Forget the correlation with the Dodd bill too; banks know regulation is coming and we've already seen the derivatives component of the bill scrapped. No, this seems out of character for our SEC, the same agency that ignored ten years of evidence against Madoff.

Whether anyone ends up going to jail or GS is slapped with a mere billion dollar fine remains to be seen. But what is even more odd is that this trade with Paulson has been chronicled for 3 years, it's what made Paulson the premier hedge fund guru in the world. Only now is the SEC finding the position GS took illegal? This is what GS does! They make markets in murky waters with losers on both ends. They trade with computers that view blocks and prices before they commit to a position. Did anyone watch Blankfein before Congress? He clearly refused to answer questions he had direct knowledge of.

So what of it? Too late to short GS as it was never a cheap trade to begin with, unless you really think it will collapse into the ground which I think is highly unlikely. Oil and gold have actually rallied in the wake of this disaster, spurred not only by safe haven flight but the continuous money pumping our world banks have committed to in order to save one failing country after another. I think there is better leverage in short term SPY and DIA shorts than GS, and AIG should be shorted every month with OOM puts in case this month truly is their last. It's clear they have no equity once preferred shares are paid out. Should be a long and interesting year ahead....

Prince and the Paupers

Sorry for the BBB's absence, but at least my parting recos have left you up at least 60% if you bought Jan 11 or 12 Citi calls. I also added C Sept $5 calls and those went up over 100% this week.

Speaking of Citi, and more fuel for backing this government owned bank (or is it the other way around?), former CEO, Chuck Prince, ousted for running Citi into the ground in 2007, testified before Congress this week. After blaming Greenspan, the economy, the ratings agencies, and even his top employees for Citi's demise, Prince was asked, "What were you getting paid for?" There was ample evidence that Prince was aware of subprime exposure in the fall 0f 2006, and certainly by early 2007. Prince, in all of his smugness, concluded by saying that not only did we not see this crisis coming, but measures are not in place to prevent the next crisis.

So, with no punishment for these guys now or ever, no financial reform yet in place, new evidence that banks have managed to circumvent leverage ratios by simply reducing debt in the last week prior to quarter close, why believe for one second that things have changed? And why not profit from it? I continue to own Citi stock and calls, and would even recommend a strategy for passive income by purchasing in the money calls as far out as September, where you can effectively purchase Citi for only pennies more than the current price while accumulating 2-3x more shares. I have also purchased BAC Jan 11 $30 calls for .11, and see no reason not to buy April calls on JPM and BAC ahead of earnings this week.

Barron's had also recommended a GE straddle ahead of April 16 earnings with and $18 strike, but I was in and out of the $19 calls this week and would recommend these for better leverage. Thanks to Princeton for logging on, and we would welcome any comments.

I Recommend Playing With FIRE

FIRE, as in finance, insurance, and real estate. If the last few months haven't proven to you on top of the last few years just how corrupt our whole system is, nothing will. If our economy is improving, why is it essential to keep rates low indefinitely with that ability to enact new programs if needed? The Fed sure has a strange concept of what "improvement" means. Even the NAR had to admit this week that new home sales are being destroyed by the continuous influx of distressed properties on the market.

Vikram Pandit of Citi gave one, maybe two giant fingers to the American taxpayer this week by announcing that they are expanding their proprietary trading desk. Given the fact that this type of trading is supposed to be curbed under the Volcker Rule wrapped inside of the Dodd bill, Pandit is blatantly telling us he don't think it will pass. Citi just doesn't care. After taking $45 billion dollars of our money, they know that either the bill won't be passed, or that they'll be able to squeeze in a few million more trades without penalty. Citi remains interesting in both the medium and long term, but due to the recent rise, Jan. 11s at strikes of $4 and $5 hold more appeal than Jan. 12s.

In another excellent article exposing our economic reality, Randall Forsyth revealed why there has been a recent reduction in mortgage debt; people have simply stopped paying. "To the extent American families' finances are improving, it's because their liabilities are being reduced by default...not exactly the path to prosperity."

Don't Squeeze the U.S.!

Shares of fully or partly owned government stocks have been going bananas this week (which makes perfect sense given the nature of our government these days). Rumors on everything from "short squeezes" to government withdrawal from companies such as AIG and Citi have catapulted them and an anemic volume market higher. Jan. 12 calls on Citi as recommended here just a few weeks ago are up over 50%. Not unlike the stress test scenarios which were "too easy to fail," implicit government backing puts a low-end on these once bankrupt or should have been bankrupt entities.

An excellent article from one of the BBB's favorites today, Randall Forsyth of Barron's, explains why we should temper enthusiasm over this jobless recovery. Real measures of money supply (the government stopped printing M3 years ago so we wouldn't know what the hell they were doing) are actually shrinking despite over a trillion dollars in printing press dole outs to banks over the last 2 years. So if money supply is shrinking, uh, where are the small business loans coming from? Nowhere. They don't exist.

Recently we've seen a market celebration of increasing productivity with decreased employment and work weeks. Is this good news? Think again. Even Bernanke has admitted that as companies have found a happy medium between profits and payroll, they have destroyed jobs forever. With acknowledged unemployment at 16.8% and ticking up again, and the Senate scrambling to extend jobless benefits for the rest of the year, I see no hope for mass job creation even if we were to stop shedding jobs for a brief time.

Again, in the short term all we can do is embrace it. Over a million contracts on March and April $4 Citi calls this week, with Citi alone supplying more than the average daily volume. Maybe somebody knows something and maybe somebody doesn't, but those calls went up 1,000% in 3 days. Goldman anyone?

New Found Horrors

A look inside what a Banana Republic Congressional hearing sounds like:

Congress: So, Mr. Bernanke, explain to us how trillions of dollars of money printing has helped the American people?
BB: Well, the stock market is up and Wall St. bonuses are almost back to all-time highs!
C: Since the assorted stimulus and lending programs have been implemented, unemployment has continued to rise, length of unemployment remains at unprecedented highs, insolvent banks have become flush with cash, loans to small businesses have continued to decline by $12 billion per month, and only 100K home loans have been modified in a country where 25% of all homeowners are under water. Comments?
BB: Nascent.
C: Huh?
BB: Nascent. Oh, our economy is in just terrible condition. That's why I'm going to keep rates low forever until some sort of currency crisis hits or until it's too late to stop inflation from destroying us. I'm just hoping that the market will rise until then or that Dimon or Blankfein will be billionaires, at which point I can go into consulting.
C: And were you aware of GS' debt swaps with Greece along with their counterparty interest in the AIG Fiasco?
BB: Sure, who wasn't? Boy, you guys are really naive.
C: And what about Geithner's order to AIG to not reveal their relationship with GS or Society Generale?
BB: Duh.

With every new day, a new horror indeed. Not just the GS/Greece debacle, but repeated attempts from the NY Fed under Geithner's control to quash the magnitude of the AIG coverup in order to protect up to $60 billion in Ibank money, some of it foreign. Are you kidding me? Free money for banks to then hoard and purchase treasuries, not to loan out to a dying economy. And the market rising on every Bernanke promise, not on words of our current situation, but that interest rates will remain at zero forever. Anyone who chooses to bash Bernanke is blasted whether it be Ron Paul or Jim Bunning , because the market has risen. Only 50% from its ashes mind you, but risen nonetheless.

Embrace the Horror

Well put by Steve Buscemi's character in Armagaddon, who has simultaneously gone crazy and surmised the imminent destruction of earth as we know it. Yes, embrace it. Wall St. is not only paying out record bonuses again, but we found out within a few weeks that Toyota has been hiding safety flaws from us for 4 years, GS underwrote Greek debt in such as a way as to make them saleable as an EU participant 8 years ago, and our president has been bought and paid for. All of this, of course, makes the market go up.

In his most recent essay, Wall Street's Bailout Hustle, Matt Taibbi outlines the various con games Wall St. has employed since they hit rock bottom with the full backing of the U.S. government, to get the ATM rolling again. In describing PPIP, the brainchild of Timmy Boy, Taibbi writes, "Jobless dope fiends bought houses with no money down, and the big banks wrapped those mortgages into securities and then sold them off to pensions and other suckers as investment-grade deals....But what did the banks do instead, once they got wind of the PPIP? They started buying that worthless crap again, presumably to sell back to the government at inflated prices! In the third quarter of last year, Goldman, Morgan Stanley, Citigroup and Bank of America combined to add $3.36 billion of exactly this horseshit to their balance sheets."

Taibbi further references The Sting and Matchstick Men to illustrate the assorted cons being perpetrated, but I'd like to take a line from the lesser known classic Confidence. When Edward Burns is being interviewed by Dustin Hoffman, a.k.a. "The King," Hoffman says to him, "You're a good grifter man, it's hard to tell when you're lying." But that's just the thing. It's not hard to tell when these guys are lying. They're lying all the time. Greece has been lying about their national debt for 8 years! When called on it by the EU, their response was, ok, ok, we'll stop that now.

In an interview just last month, George Soros said that gold was the ultimate bubble. Apparently by that he meant the ultimate bubble you should be riding because Soros is now the
4th largest owner of GLD. Interestingly enough it came out that Soros and Paulson have also bought huge stakes in Citi, convinced as I am that downside is minimal while upside is high. These guys must be reading the BBB.

So the casino is open. While long term options (aside from C) are still too expensive, had you bought Sandisk calls last night you would have appreciated a 2500% one-day return. Whole Foods much of the same. Lazy Boy being pumped on CNBC for "top-line growth," sure. So embrace the horror, nothing has changed.

http://www.rollingstone.com/politics/story/32255149/wall_streets_bailout_hustle/5

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKs0jaibTSmY

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a1LiXQqHDMPk

The BBB Goes PE

Private Equity that is. This is the big announcement I referenced several months ago. The Big Big Bet is investing in a fantastic fledgling toy company based out of Philadelphia, Noasha Toys.

Noasha has invented a whole world surrounding illuminated marbles entitled, Warbles. The Warbles are mystical creatures that battle to save the integrity of their planet from the evil Wasteoids. These amazing toys are unique in that the characters stress a code of non-violence and send an eco-friendly message to all children and adults alike. Warbles also includes trading cards and a comic strip to expand their appeal. Noasha already has in-store and on-line sales of Warbles, and the company seems poised for explosive expansion.

For more information about Warbles, see:http://www.ewarbles.com/about.php

We are very excited to partner with Noasha Toys, and think Warbles will be the next toy to hit in the tradition of recent multi-million dollar winners Bakugan and Pokemon.

Greece x 5

No biggie. Just because Greece has 5x the amount of debt a little country like Russia had when their currency collapsed or 2.5x that of Argentina when it went under, rest assured the European Union has a plan to save Spartans from having to use drachmas again. I still can't quite comprehend the Crameresque market philosophy of celebrating the potential bailout of a crisis we didn't know about 2 weeks ago. Yet the markets rose on the rumor of a nebulous plan to save Greece from financial ruin.

Good thing the rest of Europe is in such stellar shape. Spain only has 20% unemployment. I don't know it that's a real figure, or a figure like the one we use when we say 9.7% if you don't count workers who have given up, underemployed workers, workers who have taken pay cuts to keep their jobs.....But I'm sure Sarkozy and company will do what's wrong, enhancing Western debt to even more unprecedented levels. The euro has been sinking fast as a result.

As I have mentioned recently, the costs of long term options have been borderline outrageous. With this in mind, all of Europe quickly becoming a danger zone, mortgage repurchases drying up in March, stimulus wearing off, and snow dampening an already soggy economy, I have opted for shorter term puts on the NASDAQ (QQQQ), buying the March 42s. Longer term I am looking at Citi 2012 $2.50 calls. This may seem in contrast to my previous statement, but the huge liquidity in this stock serves to keep costs low, and half of the premium is baked in. If Citi can make some token attempt to pay back the government, the stock could rise significantly. The downside is limited of course by the bailout itself and all of the implicit guarantees to our larger institutions.

Taleb recently spoke about his high-risk allocations. They would include shorting the S&P vs. gold (basket of metals), shorting short-term treasuries "as long as you see the faces of Summers and Bernanke," and OOM hyperinflation bets or European collapse. Shorting the euro seems very logical, but get in line; premiums on FXE puts are huge. Interesting to note also that the Chinese have made huge purchases of USO and GLD. Glad that we own these as well.

A good reminder of getting back to our core beliefs, as the Colts and Peyton Manning choked in yet another big game, losing by two TDs. Our game, however, is far from over.

State of the Union: FFF

Alright, it's a poor poke at a Vin Diesel movie I never saw, but by definition it must be terrible. Who knows, maybe we would be better off taking financial advice from Samuel L. Jackson than the cast of clowns who have run us into the ground repeatedly over the last 30 years. Tonight, Obama will give his State of the Union address, and supposedly fess up to the mistakes he has made over the first year of his presidency. My guess is that he will couch these in terms of necessary evils and unprecedented financial disasters that framed his decision making. Economist Michael Hudson thinks the rhetoric will be much worse, with any talk of recovery or recession implying that we are fighting to get back to the previous normal. Why would we want that?

There is zero chance that Bernanke will not be reappointed next week. We saw briefly last week what even a hint of that possibility will do to a fragile market. Geithner will be roasted this week before Congress, but no change is imminent there either as they will find no wrongdoing with the guy who was running the NY Fed while daily crimes were committed. But perhaps a paradigm shift is in order as the "Volcker Rule" is being pushed forward. This will be a blackhole as well because the odds of GS losing their prop trading desk are also zero. C'mon! The banks that have been so lavishly bathed in our money and who are the largest campaign supporters of our congress members are going to lose one of their biggest avenues of revenue?

So I still say sit tight. Expect a brief pop next week when Bernanke is reaffirmed and laugh at CNN with me while reps like Barney Frank seek to limit the size of FNM and FRE, the very institutions he allowed to behave like hedge funds.

http://www.itulip.com/forums/showthread.php?t=14105

Happy New Year

Sitting on my book shelf amongst other financial reading, placed well below my Philip K. Dick collection, is The Man Who Beats the S&P. Bill Miller, a fund manager for Legg Mason, had an almost two-decade run where his primary fund outperformed the S&P 500. Keep in mind, this included multiple negative year returns. But like the turkey in Taleb's opening Black Swan analogy, Miller did not see the crash coming, and his performance imploded over the course of the financial crisis. People looked to Miller for comfort, for a way to outperform, even as he recommended buying AIG and Lehman brothers all the way to the bottom, costing his clients billions.

In between a hotly contested game of Chutes and Ladders with my daughter, I saw Miller barking up regional financials and stocks in general, noting that risk has passed us by because of the crisis. It was as if losing 60% of all you clients money in a single year was simply a blip in time, an "oh-well, sucks to be you" type of commentary. Momentum into the new year has carried modest stock gains but a new spike in gold and oil. Where the conviction for buying stocks comes from I have no idea.

Eric Janszen of Itulip recently pointed to 4 possible stock/gold scenarios, with 3 of them reducing the S&P ratio/gold price even more dramatically. The mainstream media has remained bullish however, and the old guard is happily sneering after market success last year. A recent consult with BBB reader HK has reaffirmed my own hazy outlook aside from gold this year, and a need to stay cautious and in cash for the time being.

Aside from the market, the impending playoff games are coming in with big lines after a weekend of blowouts except for the instant classic Pack/Cards game. If this game didn't secure Warner's HOF credentials, I don't know what will. I'm torn by my always winning strategy of betting against Manning in the playoffs/always bet Colts against Ravens worlds colliding matchup. I like the Cards much better as TD dogs, and while I foresee the Chargers winning at home, 8 points is a lot. The Boys' as underdogs seems solid, and I think a Cards/Cowboys teaser may be in order.