Mediocristan or Extremistan?

In his book The Black Swan, Nassim Taleb refers to the two worlds above. Mediocristan encompasses the vast majority of bankers and traders, who mistakenly believe that their success is tied into some sort of patterned knowledge and "intuitiveness" of markets, never believing that their success is purely luck. Then Bear Stearns fails and all of their gains for the past 100 years are wiped out.

In Extremistan, seemingly unthinkable events play out with huge banks failing, stock markets crashing, and the U.S. running debt levels to that of a third world country.

I mention these because we made two trades that at least doubled our money over the last 10 days and a third that made us a nice profit in one day. Citi soared at the open yesterday before plummeting back to $3.50 at one point, and Fifth Third went from $3.70 to the mid-$6s (Dr. Mike predicted BAC would be the most volatile player under the stress test charade and with futures leaning towards $15, his call is looking excellent). FAZ soared after the initial bank run yesterday, and $6 calls at 10 A.M. doubled your money by 2. So, my "if you can't beat em', join em'" theory proved to be dead on, and thankfully, both of my brothers and Anonymous joined us for the ride. But my brother insisted on asking the question, "are we still in Mediocristan, a.k.a. did we just get lucky," and it's a good one.

I would argue yes and no. The results of the stress tests proved entirely predictable, and as my other brother pointed out, seemed "choreographed." Sources close to the banks kept leaking out possible results which turned out to be incredibly accurate. Geithner chimed in a few times, stating results would be "reassuring." So no, the actual results were certainly no black swan event. But I would argue that our government being forced through public outrage to conduct the charade of putting our banks through a test, an industry that has internal and external regulators, may be an event we might never see again. Once that mechanism was put in place, the outcome was inevitable.

So now we are stuck in no man's land. The sigh of relief has come, but everyone knows the tests were useless. Unemployment rose to 8.9% this morning. Gold and oil are climbing rapidly, not only on tepid recovery optimism, but belief in inflation. As oil head back towards $60 and unemployment coasts towards 10%, anybody still believe in this rally? I don't, but with the SEC still holding onto their no short card, I'm biding my time in commodities and watching Build-a-Bear head back to $4.

What If They Don't Print It?

In 3 Days of the Condor, Robert Redford discovers a secret plot to invade the Middle East, which he relays to the NYT. Cliff Robertson, his branch director, asks him, "What if they don't print it? You can run, but how far if they don't print it?"


Well, the government is trying to see how long they can go without printing it, the stress-test results that is. The release has been delayed until Thursday after market close. They don't want too volatile a reaction to the news, but odd that they are releasing it during the week, especially prior to the April jobs numbers, which I suspect will be artificially low.


It's also interesting to note how much market sentiment has changed as GDP numbers were downright horrible at -6.1%. Markets still climbed on that news and fought through the Chrysler bankruptcy as well. Compare this to the initial Q4 GDP release of -3.8%, which was so blatantly false, the markets pummeled it. Optimism reigns over the big decrease in inventories, as the assumption is that reloading will spur GDP. Right, companies that are barely making at are going to load up on unsold inventories in our now booming economy....


Banks will spend the next five days trying to convince the government not to release bad results. Estimates on Citi range from a need to raise $10 billion, to a $500 million cushion. Estimates on BAC are all over the map, with the most dire predictions necessitating the need for $70 billion more. Fifth Third is on one analyst's upgrades, another analyst's list for possible nationalization.

At least some semblance of reality has returned, with BBW losing 30% this week. Turns out when malls keep closing and nobody goes to the ones that are open, it's tough to sell stuffies. Sales YOY down 20%.


This week promises to be incredibly volatile between the banks begging for mercy, the results that are released, the "real" results which we might never know, and the jobs report. Should be fun.

It's Like a Nightmare...

"It just keeps getting worse and worse." Vincent Lauria (Tom Cruise), repeating the line that was said to him in The Color of Money.

What we're seeing now are the biggest crimes committed in the history of our world, financially speaking. What continues to elude me is how they continue to be perpetrated without penalty.

Let's start with Ken Lewis, CEO of Bank of America. He revealed this week that Henry Paulson had "bullied" him into taking Merrill onto their books on Bernanke's orders to avoid another Lehman meltdown at the risk of his whole board being fired if he refused. First, Bernanke and Paulson should go to jail for circumventing the SEC in this whole process. Second, Ken Lewis should join them in the cell next door for knowingly taking on a company that would lose $15 billion in the 4th quarter without telling his shareholders. Not exactly the kind of leadership you would expect from your CEO.

MERS. Sounds like some sort of respiratory virus, but in actuality, is a private company that owns about 60 million loans. "Created by lenders seeking to save millions of dollars on paperwork and public recording fees every time a loan changes hands, MERS is a confidential computer registry for trading mortgage loans. From an office in the Washington suburbs, it played an integral, if unsung, role in the proliferation of mortgage-backed securities that fueled the housing boom. But with the collapse of the housing market, the name of MERS has been popping up on foreclosure notices and on court dockets across the country, raising many questions about the way this controversial but legal process obscures the tortuous paths of mortgage ownership." “I’m convinced that part of the scheme here is to exhaust the resources of consumers and their advocates,” said Marie McDonnell, a mortgage analyst in Orleans, Mass., who is a consultant for lawyers suing lenders. “This system removes transparency over what’s happening to these mortgage obligations and sows confusion, which can only benefit the banks.”

We'll see how this plays out as judges seem obliged to tell MERS lawyers to produce the note on the mortgage since they never loaned a penny, something that will make collection quite a bit harder.

And the "White Paper." The Fed's supposed explanation of how they are going to apply the stress tests, even with their new worst case scenario of -3.3% GDP this year and unemployment of over 10% in 2010. Well, the details can be summed up with the following quote. “The anticipation over the white paper appears to be much ado about nothing,” said Josh Rosner, an analyst at independent research firm Graham Fisher & Co. in New York. “The most significant numbers provided by the Fed in the paper appear to be the page numbers.”

The paper basically doesn't explain anything, avoiding what numbers they would consider significant enough to trigger a need to raise capital. "Yesterday’s report was “completely worthless,” said David Trone (of Fox- Pitt Kelton) in an interview. “We were looking or the translation of the economic forecasts to loan losses and we didn’t get that.”

This can't come as any surprise. It's clear that our government plan, even upon realizing the mistake of allowing a stress test, is to hide the horror that is our financial system. Upon seeing the markets drop 100 points in the first minute after the details were released, they were quick to provide the following. "The Fed says the 19 companies that hold one-half of the loans in the U.S. banking system won't be allowed to fail — even if they fared poorly on the stress tests."

Well, I for one, am tired of getting screwed by not only government but market manipulation. I propose the following to get some payback. None of the banks will be allowed to fail. It's not even likely that any of the 19 will be painted in a poor light. Two scenarios unfold. One, all banks rise like a rocket after the May 4th release of results. Two, most banks rise but a few with the poorest capital base are punished on fears of nationalization (not bankruptcy). The three most likely to fit part 2 are Citi, Fifth Third, and Regions Financial. All 3 are candidates for a strangle, but I think Citi provides the best leverage at $3.19.

As of close yesterday, May $2 puts were .10, $4 calls .17. Leaning towards the calls and the continued charade of bank profitability, I would buy the out-of-the-money calls to puts in a 3 or 4-1 ratio, with the puts really just being breakeven protection. Citi has traded between $2 and $4 just in the last 3 weeks, so to think a move this strong could take place post announcement is very reasonable. The other banks offer cheap options as well, but not as cheap as Citi. However, I do think Fifth Third and Regions are much more likely sacrificial lamb candidates than Citi, so you might want to distribute your put-to-call ratio more evenly.

Oh, and 4 more banks failed last night.

http://www.nytimes.com/2009/04/24/business/24mers.html?_r=1&sq=Mike%20McIntire&st=cse&adxnnl=1&scp=4&adxnnlx=1240610580-eGTm+O/CZLlGLugTvP0ZPQ

http://www.bloomberg.com/apps/news?pid=20601087&sid=aM3ONm5cSMK8&refer=home

http://www.msnbc.msn.com/id/30390411

Give Me $3, and I'll Give You $2

Great deal. That's what Congressional Oversight leader Elizabeth Warren, is saying is the "best case" scenario for taxpayer return on bailout funds. But don't tell that to Geithner, who was trotted out on his Obama/Bernanke leash after dismal corporate results this morning to assure us most banks were over-capitalized. This will again point to the failings of the stress tests, which will not end up having tested anything stressful at all. Even cattle-prodded bulls like Marketwatch chief economist Irwin Kellner, had this to say. "Regardless of the results of the government's stress tests, you can be sure of one thing: Every bank will come in above average, just like all the children who live in Lake Wobegon."

Wake up, Wake up, Wake up! Caterpillar took its first loss in 17 years today, and crapped on Obama for not providing more infrastructure relief. Bank of Mellon profits were down 51%, perennial bull Blackrock saw profits plunge 65%, the NYT...dead industry, dead profits, down 30% last 2 days. How can anyone truly believe things are getting better for those of us not sitting in Goldman's chair?

Credit card defaults are at all-time highs, ditto student loans. Delaying ARM resets is a sham because those loans are negative amortization; the balances are still climbing. We're just delaying the big kaboom until next year. Is it any wonder why banks are hoarding TARP funds in their coffers? Loaning money to Americans is a losing game.

A panel of economists, including Nobel winner Joseph Stiglitz and Simon Johnson, formerly of the IMF, testified before Congress today that basically their action to date have been disastrous. "In short, our bailouts run the risk of transferring large amounts of money, often in non-transparent ways, to those banks that did the worse job in risk management - hardly principles on which normal market economics is based," said Stiglitz. But if we've learned anything during this debacle, it's that our government won't listen to those who have been in the know, those like Taleb, Janszen, and Roubini. They will put our future in those already vetted by their banking masters, such as Summers and Geithner, those who have been dead wrong about everything to date.

http://money.cnn.com/news/newsfeeds/articles/djf500/200904211148DOWJONESDJONLINE000434_FORTUNE5.htm

http://www.marketwatch.com/news/story/Caterpillar-swings-loss-workforce-charge/story.aspx?guid=%7B0FDB4682%2D6C57%2D4F6D%2D89D3%2D95FA4A63003A%7D

http://www.marketwatch.com/news/story/Stress-tests-present-Catch-22/story.aspx?guid=%7B47C5F242%2D2B81%2D4D4C%2DB520%2D8FCBCDDDCC42%7D

Can't We Just Overlook a Few Things?

Such as Citi being able to record a loss on current debt as a gain due to accounting rules that allow them to claim this as an "unrealized" gain. Very convenient, along with the April 1st FASB changes that kept them from having to mark-to-market. But don't look too closely at the 10% decline in credit card revenue, an 18% decrease in consumer banking, or a 20% decrease in global wealth management revenue. Otherwise, you might think the results look pretty good.

Wells, who jump started this charade, probably bears a closer look as well. Wells got a Wachovia benefit that allowed them $7.5 billion in loan-loss provisions. They just take from the Wachovia pool without having to allocate future capital of their own until that $7.5 billion is burned through. This made their allocation of only $3 billion for future losses seem mighty small, especially with the Wachovia loan portfolio they're holding.

A few more things came to light this week that bear mentioning as well. With GGP's failure, we've witnessed the largest CRE failure in American history. Don't say I didn't warn you (recommended short 7/08 at $30). Bernanke, when questioned about variable notes this week when it was revealed local governments were caught paying double-digit interest said, "A large volume of variable-rate demand notes were forced back to banks and “exposed the vulnerabilities of the VRDN market, raising questions about the desirability of its continuation as a significant vehicle for municipal finance." Thanks, Ben, and none of this was supposed to spread to main street right?



The big matzoh ball hanging out there still is how to handle the stress-test results. While we were told yesterday that results would be released May 4, we have no idea what info will actually be released. As of yesterday, the Treasury and regulators were arguing over how much to let us sheeple know. "With a May 4 deadline approaching, there is no set plan for how much information to release, how to categorize the results or who should make the announcements, people familiar with the matter said. While the Office of the Comptroller of the Currency and other regulators want few details about the assessments to be publicized, the Treasury is pushing for broader disclosure." But I don't think that Timmy and Ben will let these results appear dire. They will paint the broadest, friendliest strokes for our largest banks and perhaps allow one or two sacrificial lambs. With the market rallying, the lies should continue at their greatest levels yet.



http://bloomberg.com/apps/news?pid=20601087&sid=aMAbMEGzRfco&refer=home



http://www.bloomberg.com/apps/news?pid=20601087&sid=aoIdHrfjJb0Q&refer=home

Pass/Fail

As the rally rolls on (financials are on a 50% tear), we are presented with "record" profits by Wells and the delay of stress test results by all 19 banks. This seems a bit strange doesn't it, and all too familiar (think last summer and the no-short rally)? There are 2 possible scenarios for the stress tests and why their release is being withheld, and at that, the results may only be generalized.



1. The results are so god-awful that their release would fizzle this rally immediately and make 666 on the S&P look like a dream.

2. The gubmint is reworking these numbers to make them shine, ensure no large banks fail, and add to the burgeoning rally with earnings propped up by sudden FASB changes and coffers filled with government loans.



Hmmm, I would lean towards number two. We can't afford reality when the market is on a roll like this! RealtyTrac said this week that they think banks are sitting on a "shadow" inventory of 600K foreclosures, the release of which would stifle property values and re-fis even further. So those who "trade" enjoy, and with the 5 futures of the uptick rule reincarnation pending, we may see a further rally. But penance and hyperinflation are coming, and we will be well prepared.



Happy holidays to all.

Party Like It's 1933

Why not? That was the last time we saw this kind of rally over a 4-week stretch, only to be followed by a 60% additional decline in the market. I'd just like to make a few points about this recent rampant optimism.

"Bridgewater Associates, the $71 billion money-management firm, has come out against participating in Treasury Secretary Tim Geithner's plan to get private investors to buy banks' toxic assets -- a week after saying it was interested in it." This should be viewed as shocking news as Bridgewater was viewed as one of the 6 or 8 firms that would be piling money hand over fist into this program. But apparently the leverage isn't readily available...."When the program was first announced, we were originally interested because the leverage the government was promising made the assets cheaper. However, as things now stand, very little leverage is actually being offered via the 'Legacy Securities Program,' " Dalio (Bridgwater founder) wrote, pointing out that the leverage offered is just 1-to-1."

"Charles Bowsher, who was comptroller general of the U.S. from 1981 to 1996, had a simple reason for resigning last week as chairman of the Federal Home Loan Bank System’s Office of Finance. He didn’t want to put his name on the banks’ combined financial statements, because he was uncomfortable vouching for them. Bowsher, 77, had held the post since April 2007." “I was not comfortable as an audit-committee member in signing off on the financial statements, after I became aware of the standards and processes for valuing the mortgage-backed securities.” Just to update you, the article goes on to say that the FLB is the second largest U.S. borrower, behind only the government.

January job losses were revised up 90K. Assume we'll do the same for Feb. and March and we are on pace to lose another 3-5 million jobs more on top of the 5 million we've already lost, even if losses slow down considerably. Where the hell are people going to get money to buy homes and retail when they're out of work?

Despite France and Germany's rebuff of Obama's plan for international printing, the G-20 has agreed to kick the IMF a trillion dollars. How in the world anyone can believe Bernanke's assertion that we can simply deflate this type of printing by selling assets that will be devalued by these very measures is beyond me. But shelter your savings and prepare for the superinflation that will result. Jim Jubak has apparently regained his sanity and wrote this about the impending inflation. "U.S. investors should take a clue from the Chinese. There's no reason to flee dollar-denominated assets en masse. But do make sure that your portfolio contains a big dollop of stocks and bonds that represent currencies other than dollars and that are backed by things such as copper mines and molybdenum deposits that will hold their value even if the dollar depreciates and U.S. inflation soars somewhere -- 2011? 2012? -- not too far down the road."

Point taken. We don't know if it will happen this year or even next. But we have to position ourselves for this impending event and that includes oil, gold, and food. By the way, the Rogers ETNs have halted trading, so don't buy those (RJI, RJA, etc.)!

We've added more BBW puts after this ridiculous rally, 9/09 5s. I also attempted to buy both TM 1/10 40s and 10/09 50s with minimal success. Despite a projected $225 billion yen loss this year, TM is up 35% in 4 weeks. Ok.

http://articles.moneycentral.msn.com/Investing/JubaksJournal/us-debt-sets-stage-for-inflation.aspx?page=2

http://www.nypost.com/seven/04022009/business/no_private_hedge_162512.htm

http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_weil&sid=aSWuIRVf5Q9k