Wednesday, March 17, 2010

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."

Wednesday, March 10, 2010

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?