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.

Gold and Google

That's about all I own, along with cash and my oil calls until 2011. Google has risen from the dead around $275 back now over $620. Gold has obviously suffered lately as oil has risen $10 in the last 2 weeks and the continued "strong dollar" optimism is about as realistic as a jobless recovery.

2009 has been a strange year. Perhaps Black Swan author Taleb had it right in March when he said the unforeseen scenario would be for the market to go up. And perhaps Abbey Joseph Cohen, who hadn't been right about a call in 3 years, was granted the reversal switch by GS when she predicted S&P 1150 by the end of the year. Pretty close.

As for me, my belief that the markets would experience a second crash cost a wild ride back up. However, having destroyed the market last year, I was not chasing a retracement of my losses, but a way to enhance those gains.

Fortunately, I was right about 2 things. One, that when gold fell below $700 after buying in at around $860, I said buy more, a lot more. Gold eventually cracked $1,200. And, the stress tests. Buying OOM calls on stress-tested banks in retrospect, may have been an even easier call than the financial collapse of last year. Fifth-Third calls yielded a 2,000% rise in 2 weeks. The mistake I made, and hopefully the rest of you to a lesser degree, was not putting a lot more into this trade. This was not a 50/50 scenario. Geithner was never going to let these results look bad.

Heading into 2010 I advise caution. I have no conviction in this market, but a continued belief that we have done something systemically horrible by allowing banks to hoard printed cash and yieldless treasuries. I believe gold will still win out this year, and perhaps several other commodities as well. Hang tight, a lot can happen in a year as the last two have proven.

Happy New Year! I will be sure to fire up a bet against Manning when it counts signal depending on who their second round opponent is.