Wednesday, October 31, 2007

How Long Is a Fed Light Year?

A light year is the distance light travels in one year. Light moves so fast that we perceive its motion to be instantaneous. Light travels at 186,000 miles per second. It seems to many of us that we receive information at the speed of light, while the fed receives it at a snails pace. The fed statement today was merely a review of what everyone all ready knew. Housing is a problem and inflation is out of control.

Here are some excerpts from the statement:

"However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction."
"but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully."
The fed is going to solve this problem the only way it knows how. It is going to print money.

The Boardwalks and Park Places of the Market

You need to put your money into high growth stocks to beat inflation. Stocks like AAPL, GOOG, BIDU, ISRG, UA and FSLR are the place to be.

If you want a steady climber that will profit the most from this inflationary environment. Get into gold stocks. These stocks have the potential to double or triple over the next few years. Stocks like GG, NEM, GOLD, and AEM are the place to be (all of those stocks are all ready multi-billion dollar companies).

The pain is not over for stocks like PMI, MTG, ABK, RDN, TGIC, MER, CFC, KBH, LEN, and MBI.

I'm not arguing that these companies will all go bankrupt, I just do not see the point of risking so much for a relatively small return. I have found that sometimes, when you go bottom fishing the fish bites back.

Gold Briefly Crossed 800 (It will be up there to stay soon)




Oil is Currently Touching 96/Barrel ($100 Doesn't Look So Far Off Now)


Tuesday, October 30, 2007

Mainstream Media VS. Bloggers

What do these two have in common??
(Hint, it's not the tan)



Angelo "Angie" Mozilo
(CEO Countrwide Financial)


Robert "The Grenader" Genader
(CEO Ambac Financial Group )



There are some bloggers out there who are good at blogging. Then there are others out there who are so amazing that they deserve their own TV channel. Michael "Mish" Shedlock is one of those bloggers who deserves his own cable TV channel, maybe even his own network. He broke a story today on insider selling at ABK (he was also early on the case of CFC). It always seems like Mish is first on the case.

Stories like these me scratch my head and wonder why places like the WSJ do not pick this stuff up. These are clearly violations of Sarbanes-Oxley insider trading laws. Those laws were put into place to avoid what happened at Enron. It seems like dozens of Enron's are popping up everywhere.

This blog author is credited with the addendum.

Link to article:

http://tinyurl.com/3ahzeb
Ambak Financial

Sunday, October 28, 2007

A Spooky Halloween Video

Gold is currently at $791.40/oz in evening trading. Things could get crazy if it crosses $800/oz in the overnight market. I am expecting gold to come into strong resistance at 800/oz. It could also encounter fresh short covering at that level as well. A rate cut of 25bp seems guaranteed at this point, and the futures markets have priced it in all ready. Oil is up $0.50/bbl to $92.34/bbl.

Here Are Some Things I Find Scary This Halloween

A Bank Without Checking Accounts For Customers

On the Countrywide bank FAQ site. They say that they are no longer accepting new customers for checking accounts. That is pretty spooky, and just in time for halloween. However, during the conference call officers of the company said that loans were now being funded through the countrywide bank as the company no longer has access to outside sources of credit.

Does anybody still use savings accounts anymore? How do the countrywide executives expect people to hold money in a savings account where you earn 3% interest (if you are lucky), inflation is running at 2% (according to the fudged CPI data), and the dollar has fallen 10.4% against other major currencies this year. Dollars kept in savings accounts lost 9.4% of their value this year subtracting for interest.



CFC Faq Site

Saturday, October 27, 2007

"Quality Rated Paper With A High Yield!!!"

This is what currently qualifies as A rated paper:

Last Price (35.86)

If you do not know much about bonds. They always start out at 100. This bond has lost 65% of its value. The rating agencies should issue downgrades on these bonds soon, but they can only downgrade them to BBB- (one notch above junk status). That is because many large institutions are not allowed to hold bonds with ratings lower than a BBB-. If the rating was below a BBB- the institutions would be forced to sell all of their holdings of the bonds. That would cause further price declines and even more selling.

The question also has to be raised: Who has the capital to buy them from the large institutions???

Here is the worst preforming sub prime bond. The BBB- rated bond. You should keep a garbage can close by for puking into if you dare to click on the thumbnail for a larger image.


Last Price (18.57)

Friday, October 26, 2007

The Sultan Of Slime Is At It Again

"Freak of Nature"
"Alien Predator in Subprime Slime"

Anyone who can sell 500 million in stock and have people believe that the company is ok must be a freak of nature. No one person is directly responsible for creating more personal tragedy in in the housing market debacle than the Freak of Nature pictured above. At the same time there is probably no one that profited more. (Sent in by reader Steve)

Just take a look at:
RDN
MTG
TGIC

You can thank Mozilo for the gap up in those stocks today. In three months you can also thank him for those companies filing for bankruptcy.

CFC Conference Call:

"Loans are now being funded through banking deposits because CFC can not obtain funding in the capital markets"

They are giving out loans from their bank assets and deposits. These funds are not unlimited and will eventually run into negative territory, when there is a run on their bank. I am sure that bank customers are happy that their money is being handed over to save home-owners who are close to bankruptcy. This is a recipe for disaster. I would take my money out of CFC as soon as I could if I banked there.



If You Had a Bad Trading Day

Just take a look at the chart below and you will feel better. The company is WCG, and they had the pleasure of being raided by the FBI on Wednesday. The stock was subsequently halted and as you see below there was a small gap down at the open on Thursday.




"The nature of the investigation is unknown at this time. A release from the U.S. Department of Justice was generally vague. It said the ongoing investigation does not directly concern, nor should it have an impact on, the delivery of any health care service to any person."

My guess is that they were actively participating in Medicare fraud. I know someone who used to work for the office of the inspector general and he would tell me that it was rampant.

P.S. Take a look at the RSI reading (overbought/oversold indicator) it went from above 70 (overbought) to below 30 (oversold) in ONE day!

Thursday, October 25, 2007

What Is In Store For Today?


What will the master of disaster say?????

The price action in MTG, PMI, RDN, and TGIC will be totally based off of what CFC says today before the opening bell. It looks like they are all going to pop, and catch a lot of shorts off guard.



CFC was a loan originator for 2.5% of all mortgages.

If they offer any good news (they are masters at making up BS) expect these stocks to bounce. They are all oversold right now, and most will eventually go bankrupt. Almost nothing, except for New Century Financial (NEW) goes straight down to 0.

What they said:

Countrywide loses $1.2 Billion

"But the Calabasas, Calif.-based company said it will be profitable in the current quarter and in 2008, as it restructures its business to take advantage of the current market."

Honestly, I do not believe that they are going to just waltz right on through with only one quarter of loss. This is the biggest credit bubble in history, and I think that they are going to suffer along with everyone else. After all, most of the mortgage resets have not even hit yet.


Heisenberg and Einstein Take On Inflation

Have you ever tried reading a newspaper when it is pressed up against the tip of your nose? It is pretty much impossible to do without straining your eyes. That is how I view inflation, it is constantly in front of our face, and it is also constantly in motion. Also, prices tend to move so slowly that it is difficult to even see that they are moving at all. Whoever thought that Einstein's theory of relativity could be useful to economics?

It is kind of like seeing an old friend that you have not seen for a few years. Sometimes they will look drastically different, maybe they gained weight, grew a beard, or even had plastic surgery.

Imagine if you were able to transport yourself back 8 years and come back today. Would you perceive prices differently as they are now? Lets find out

Cost of gasoline in 1999: 1.33 per gallon (12 month average sampled 4 times per month)


2007: 2.95 per gallon

That is a 121% increase in the cost of gasoline over an 8 year period

Well, lets be honest. We all know that crude oil prices have skyrocketed because of increasing demand. I'm sure that prices for other things have not gone up. After all, the fed keeps telling us that inflation is under control.

Product 1999 Price Price Today % Increase
Electricity per 500 KWH 45.375 61.457 35.44
White Bread 0.899 1.212 34.81
Eggs Grade A 0.92 1.825 98.36
Orange juice 1.822 2.59 42.15

It is comforting to know that according to the federal reserve, people do not need to eat or use energy. Don't you feel better now that you moved that newspaper away from your nose :) ?


Wednesday, October 24, 2007

Gushing Oil and A Golden Shakeout

I do not like high oil prices any more than the next person, but pretending that everything is ok with the supply and demand of the commodity is just as good as sticking your head in the sand. If U.S. consumers really cared about the price of oil, more pressure would have been put on congress by the public, and congress would pressure the auto makers. The end result would be an American made hybrid vehicle. Pretty soon people will be wondering if taking that extra 30-60 mile trip is really worth it. Without the implication and utilization of fuel saving vehicles within the next 10 years, "going out for a drive" just for the fun of it might be a thing of the past. The car I took on a 1,200 mile trip was a hybrid vehicle. It got 50 miles per gallon, at an average highway speed of 80 MPH (no exaggeration). Why are people so against hybrid vehicles? Is there anything wrong with getting 50 miles to the gallon while going 80 MPH?

Today, oil gained $2.70/bbl and bounced off the $85 support level.


If you think that oil is not going to $100/bbl you are fooling yourself. The current fed policy is to lower interest rates during a commodity bubble. It is the wrong move in every respect. The fed should have held interest rates steady and let the housing and credit bubble work its way out of the system. Instead, they decide to support the housing bubble with cheap money while it is popping.


I fully expect consumers to start feeling that pain again at the pump. Right now the average gasoline price in the U.S. is $2.82. I expect the average price to increase along with the price of crude oil. The spot gasoline price has slowly been moving up and testing out new levels.

The gold market tried to shake out weak longs in the last couple days.


I suspect that $800/oz is closer than people think

I'm currently counting on another fed cut as the 10yr yield dropped to 4.33% today.


Thanks for reading, and best of luck trading this volatile market.

The Squeeze Is On

Tuesday, October 23, 2007

Mortgage Insurer Blood Is Running In The Streets

The last time I saw stocks trade like this. It was during the late summer stock market plunge, and it was lenders who eventually went out of business.




Here is a chart of NEW (Formerly New Century Financial) before it went bankrupt.



The similarities between the charts of NEW, MTG -2.13 (-10.23%), and PMI -1.84 (-9.07%) are uncanny. The question that many have is: Why are these companies suffering so much today?

MTG released earnings 5 days ago, and the stock can not seem to gain any ground.The pain in these lenders over the last few days is likely coming from the fact that all of the brokerages could not exit their positions at the same time. So they have been forced to bleed these stocks down. Also, the pain in recent days is likely coming from devaluation of the company bonds (speculation, but more than likely considering the recent deterioration of subprime bonds)


PMI has upcoming earnings on October 30th before the market open. Will the stock have plummeted enough by then to stave off anymore pain? That is anyones guess, but I wouldn't bet on it.

These charts are scary to say the least, but short squeezes are more likely than not at this point. Here is a recent example of one:

(Don't get caught off guard if the insurers squeeze like this)

I am not a "perma bear" on the market. I do think that China is on its way to taking America's lunch. I just do not see any point in trying to catch falling knives. Why would you when you could own solid companies like AAPL +11.12 (6.38%), GOOG +13.95 (2.14%), ISRG +12.94 (4.53%), BIDU +19.93 (6.30%), or AMZN +5.79 (6.34%)?

The oil price zombie.

Many of those on CNBC and around the financial universe have been chanting, praying, and doing rain dances in hope that oil prices decline. I decided to consult the best possible source when it comes to oil prices. Why not go with the man batting 1,000 on converting supply and demand data into great trading information (in more categories than just oil). He was the man taking the other side of the Amaranth trades (now that is guts!). For many it seems that oil is a zombie that just keeps rising from the grave rather than a commodity in a prolonged uptrend. Oil is going to $100 just based on supply and demand. Adjusted for inflation oil should cost around $102.97 per barrel (Inflation Calculator)


The current support in oil is at 85. As this chart shows, there is support everywhere.








Maybe it is time to think about conservation of energy rather than driving H3's

Monday, October 22, 2007

Kudlow Gets His Wish

The dollar is rallying huge against the euro.




I wonder how coincidental it is that Kudlow was begging the fed to do something on Friday. I guess that wishes can come true.


Sunday, October 21, 2007

Who is to blame?

Current World Market Activity

S&P 500 Futures 1493.75
Down12.00
Euro/USD 1.3150
Up.00210
Nikkei 225 16,277.10 Down537.27 (3.20%)

Asian Markets


This week is shaping up to be one of the most volatile weeks we have had all year. It has come to the point where the average investor is starting to wonder why they should believe the HB&B's (Humongous Banks and Brokers) anymore.

Fingers will start to be pointed and capitol hill is likely to start calling people to testify in the coming weeks and months. When Enron collapsed it was a few billion dollars ($70 billion at its peak). We are now talking about many orders of magnitude greater. Some estimate $300-$400 trillion dollars (with a T) of OTC derivatives outstanding. I know what you are thinking. Dollars are not worth much any more in the world market. Isn't that just a few hundred euros?

Nope, "
that's roughly 8.5 times the world's gross domestic product" -Tim Colebatch

The same sleazy tricks are being played with balance sheets, but this time they are allowed to get away with it.

"So much for the worst of this crisis being over. Just a few weeks back, there was some optimism building in the marketplace that the end of this bumpy road was near. Those upbeat views now look like they were just wishful thinking.

Why else would a consortium of banks — including Citigroup, JPMorgan Chase and Bank of America — be uniting with a plan to keep the housing-related debt crisis from worsening. If they thought conditions in the credit market were about to improve, would they be gathering for this group hug?

The banks have proposed creating a fund that will buy around $100 billion (€70 billion) in debt from structured investment vehicles, or SIVs, in an attempt to break the logjam in the market for short-term debt instruments that hold mortgage-related assets."

Below is a short video of who is partially responsible for this mess




This market is in repricing mode and things are going to stay extremely volatile. Remember that the fed can intervene at any time with another surprise rate cut, and you should be prepared for that to happen. Protect your capital.

Saturday, October 20, 2007

Quarterly Housing Data

Everyone knows that this mess has stemmed from the current housing market bubble bursting. The data are showing that the housing price data are just starting to show signs of a top. A trend is usually defined as 3 data points. According to the quarterly housing data, we have 2 out of three points. I created a chart showing where the median housing prices are now, and where I think they will be in 2009. The chart forecasts a 16.6% decrease in the median price of a home. In dollar terms, that is a pretty big decline, but in real percentage terms, it is not that much. In parts of the country (California, Florida) where homes have went up 100%-300% in the last few years, a decline of 16.6% wont make much of a dent.


(Click For a Better Image)

My point is that housing prices still need to decline and that the mortgage crisis will only be exacerbated by this. Eventually, this is going to bleed over into consumer spending.

As a German economist once told me: "The rest of the world freaks out when American's stop spending"

What Is the Emergency Number To the Fed?

On Friday, the market suffered terrible losses.



The question now is:

What is going to happen on Monday????


The market is going to open lower on Monday. How much lower is anyones guess. This current "dislocation" in the stock market is going to take a while to sort itself out. Expect trading to be choppy, rumors to be flying, and volatility to increase.

Expect these companies to go bankrupt in the next few weeks. The current pain in the market is coming from these companies.

MTG

TGIC

RDN

PMI

At some point in the coming couple of weeks, the fed is going to show up in a helicopter and start dropping money. The fed knows that if they do not start helping to restart the credit markets, the stock market will suffer further losses.

If you are short, you should be expecting the fed to intervene in the market at any time.

On Monday the 15th, the fed announced that is was creating an SIV fund. This fund would buy debt currently not on the balance sheets of the large banks. The whole point of the SIV fund is to make sure that the big banks like Citibank (C) do not go under.

The question I have is: How was Citibank allowed to pull an Enron and get away with it? Enron went under by shifting debt off balance sheet in SIV's. When that debt was called on, Enron could not afford to pay it. You may remember that the Enron execs brilliantly tied the debt to the price of the stock. Once the stock breached a certain level. It caused the company to implode.

If the fed does not do more, people will start asking why the fed did not do anything to step in. After all it was them who created this problem by keeping interest rates too low for too long.

Personally, I would like to see them do nothing and let the market work itself out. Isn't that the point of free markets? After all, the S&P 500 is still up on the year: SPX

All the data is showing that the current problem is too big for the fed to fix. They can only keep putting band aids on the severed limbs for so long. This whole thing is just a flesh wound.

Right?

Thursday, October 18, 2007

Go Go Gadget Gold!!! Gold Hits 775.70!

In afternoon electronic trading gold hit a new high of $775.70/oz. $800/oz is now just a stones throw away. I think that it will get there by next week. Now is not the time to get thrown off the gold train. The XAU index is just about to power to new highs.

The XAU is patiently waiting to fly to new highs.



Worse Ideas and Mortgages

As most people all ready know, the majority of the adjustable rate mortgage (ARM) resets is going to hit in early 2008. It is likely that these resets will force all ready stretched homeowners into default.

In the late 1990's before CDO's were invented, a catastrophe like this could be avoided. This is because the loan originator and the borrower could renegotiate terms and find a payment plan that suited both of them. The borrower would keep their house and the lender wouldn't be stuck with a defunct mortgage.

With the advent of CDO's the borrower and the lender can not renegotiate. Even worse, some firm in Germany or France might own your mortgage. How could you renegotiate if you can not even speak the same language?

Most people do not understand that this is a bubble of the greatest proportions. During such famous bubbles as the "South Sea Bubble" and "Tulip Mania". All of these rich people used large portions of their money to speculate. During the current housing bubble the average person borrowed 8X-20X what they were worth and purchased a house. Some of these people (like most Americans) actually have a negative net worth because they are so shackled with debt. The housing monster has lost it's food source and it is now in collapse.

The newest victims are companies that most people did not even know existed. What did these companies do? They insured the toxic mortgages now being defaulted on. They are also starting to look a lot like the lenders did before they started going bankrupt. One of the best no brainer trades (besides being long gold) for the rest of the year is long term puts on these companies. If you can find shares to short, that is even better. Take a look at the charts. I don't see how these companies can survive.

Click on Image For Clearer Picture
(It's worth a look)

These charts are terrible. It wont be long until the bankruptcy rumors start swirling. These companies insured the mortgage originators during what will be one of the greatest financial busts in history.

Disclosure: I own puts on MTG and PMI . These are not to be viewed as trading recommendations. Trading in stock and options involves serious risk and should only be done by experienced traders.

Sunday, October 14, 2007

The Subprime Mess, Is it over??

It's Over!!! It's Not Over!!!

Listening to the CNBC on this issue will make your head spin. I personally do not think that it is over, but I do believe that it wont affect good quality stocks. If you are putting your money into lenders, banks and builders, you are asking for trouble. Housing inventories are still climbing and prices have not declined substantially yet. I check this site regularly to find out if everything is OK:

http://ml-implode.com/

5 lenders imploded just this past week. Looks like more pain is on the way. Will helicopter Ben cut rates again? That kind of speculation is a shot in the dark at this point. Do what I did at the last fed announcement. Wait until the news is in and trade on it after it is released. Gold went up huge along with the rest of the stock market, and the dollar sank. This all happened after the fed announcement. Let the other traders do the dirty work for you before the announcement.

Welcome


Thanks for stopping by my blog. This is the first post, in what will be a series of daily postings on the economy and financial markets. The super brilliant people at the federal reserve continually say that inflation is not a problem. It is good to know that they do not have to eat or use energy. Whether it be in the form of crude oil (closed at a record 83.69/bbl) gasoline, heating oil, electricity, or natural gas.

Gold is now basing in the 740-750 range with short term support at 742.50 (where I would try to buy on a break). There is even better support at the 732 level. Don't listen to the people telling you that gold shouldn't be that high. It has been consolidating for over a year and creating an ascending pennant ( a strong chart pattern I follow). Gold is in an early breakout stage right now. Remember when AAPL just cracked 90-100 a share and people said that was too much? Well that is where I think gold is right now.


Listen to the market. The market is voting all the time with billions of dollars and it is saying that gold deserves to be at this level. This is an early trend, and it is solidly up for gold.

Thanks for reading,

Michael

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