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.