Perpetuating US financial issues

America is NOT serious cleaning up financial issues is a borderline reckless charge to make.
After all the media and talking, America HAS to be cleaning up it's act, right?

Lets break it down, issue by issue, lets start with the original blame game on the financial debacle we are witnessing. To level set, as of today we are all aware that there was mass fraud in lending, America continue debt spending beyond most expectations, and an inflation rate of 10% annual. (likely to hit 12%)

Interest rates artificially low from 2001 through 2007, "causing the bubble", continues
In a normal market interest rates would rise to reflect higher risk in lending, and to curb inflation. Reality? Fed lowers rates to the point of putting the US dollar further at risk and "enabling" the bad behavior just a little bit longer, hopefully to lay it on the next presidents/administration lap. USA debt is purchased at these low rates since there is severe risk in every direction, and logic is USA debt is the best of all evils to preserve wealth. The "reasoning" for low interest rates has been if interest rates rise, the economy will crash. Probably right, but giving heroin for free doesn't incentive the drug addict to change its behavior. Strong discipline must follow holding interest rates low to give a grace period to secure fiscal stability. At some point, foreigners purchasing our debt may be cut off. We are squandering this final opportunity for cheap debt, as discussed below.

The Real Estate bubble was amplified by mass fraudulent mortgages, and it continues
This one seems pretty straight forward, in the hype a hair dresser could buy a 700K house making 25K. Looking back, not a bright idea. In American tradition, once a problem gets recognized "the cops" come in and force the behavior to change.
To my surprise, this time, the behavior didn't change but has been accelerating 42% first quarter in 2008? Oh my god, how big of a hole can we try to dig for ourselves?

Companies have debt "off the books" causing credit market crisis, and it continues
A NEW financial class of debt was created called Level 3 assets where created around 1999-2001 that not valued by open market trading, but by "computer models". Once this was recognized as not accurate, the credit markets completely halted. The solution seems obvious, go back to basic, honest accounting and properly value assets according to world accepted practices. This is scheduled to start 2010 into 2014. This still doesn't solve current accounting issues. Further, the U.S. Federal Reserve’s new lending program, investment firms such as Goldman can use Level 3 assets to secure highly liquid U.S. Treasury loans. This is a delay tactic in realizing true value of companies and assets/debt.

My Spin:
What message does this send to the world of US responsibility, the ones buying our debt? Even if the world continues to prop us up, this behavior will NOT lead to becoming a strong, financially strong work leader. Warren Buffet published his version of this line of thought on "Squanderville vs Thriftville. I remain a pessimist on the USA fiscal health until we change the behavior that got us here.

P.S. - Don't worry, we are all insured
FDIC has 45 billion dollars in reserve insuring 4.5 trillion dollars of deposits and it's desperately trying to raise funds. Yes, you read that correctly. It is probable that US will print money to insure deposits, but this will increase inflation, so technically your money is insured, but what will it be valued at for purchasing power? FDIC expects significant increase in bank failures in the next year, as well as industry critics.

Bonds are the foundation of debt lending, and bond insurers are at risk of failing, requiring continued influx of cash to stay afloat. Many existing monoline bond insurers are in danger of failure, as well as the FDIC. Warren Buffet has setup his own Bond Insurer to cherry pick bonds that need a new insurer. But what happens to bonds not re-insured in the event of a bond insurer failure?

China Financial Showdown, Them or USA

This is big news, but I doubt anyone will hear it on mainstream news.

China has told the USA publicly, if Freddie Mac and Fannie Mae fail, "it will be end of the international finance system". Translation "if China takes the hit for the failure of US institutions, its financial WAR!". China has over 1 trillion us dollars and can collapse USA system.
In previous email rants, I have warned that the USA debt is bad, unlike some people I know who think the USA is beyond blackmail.

It's a showdown, Bananna republic printing of USA dollars to cover 1 trillion dollar failure or fiscally responsible action, let capitalism behave as it has since the birth of the USA. In an open market system, the investor that takes the risk takes the profit or hit. Once USA starts paying for stock market values, bond, etc of private institutions to protect investors, well, we are socialists/communists.
Update: 9/5/08 Now we know what the noise is truely about. Main Bank of China Is in Need of Capital.

Home Builder Short?

The Housing market has way too much inventory, and prices are dropping.
Home builders kept on doing their job....building houses.
They where beat down hard in stock price, but recently rebounded significantly.
I don't believe sky is the limit for them....yet. We need to eat away at the multi-year excess built up in houses and free up lending.

Toll brothers, Centex, KBHome and others have recently rallied. But I like Toll brothers as a short.
Toll is probably not going to zero, but I doubt their stock is poised for a rocket ride.
So a short at 25 buck, if/when we hit it, and a "cover" of 26-27, so 1-2 buck risk if wrong. Otherwise target cover at 15, 2 buck risk if wrong, 10 buck reward if right.

Honest accounting being discussed by SEC

My primary rant about USA financial situation is the US has allowed the accounting rules to become corrupted. The US strength has been transparency producing a trust from around the world. We have now degraded that trust resulting in a complete credit freeze and impossible to value corporations.

The SEC has proposed honest accounting by adopting international accounting rules by 2014.
This would eliminate "level 3 assests" which are basically unknown value assets. I have said before, until the rules are fixed, no trust can be established. I am very happy to see this starting to get recognition from the US government.

Click for a interview discussing this topic, and the problems around accounting.
None of this changes the view for next two years, but a pinhole of light was created today and hopefully will get much brighter.

UPDATE: 8/30/08, SEC moves on proposed changes to take effect as discussed, 2010 for some companies, 2014 for all.

The myth of China decoupling and saving the world economy

Facts on China
China's Yuan has was pegged to the USA dollar for years, ensuring China production remains a constant significant cheaper than USA production. A year or so ago, China "decoupled" the yuan from USA dollar, but did so in a way to ensure the appreciation would be slow. China has wanted slow appreciation to the USA dollar, since it would adversely affect the symbiont relationship with China and the world.

My Spin
A UK article printed news (click) on China "on the sly" soaking up extra USA dollars. Probably to keep their currency from valueing higher and further hurting their economy. Also the impact of the Olympics to the China political sphere cannot be understated. I'm confident that China did everything possible to ensure best spin of Olympics at any cost.

Now that the Olympics are over, interesting to see how critical it is for China to take USA dollars and own our debt. China now has over 1.8 TRILLION USA dollars. Wow.
Even with China trying real hard to preserve the Asian tiger, some startling stats. Remember, China HIDES facts worse than USA, so I would expect that these numbers are optimistic:

"During the first half of this year, about 67,000 small and medium-sized companies went bankrupt throughout China, leaving more than 20m people out of work," said the National Development and Reform Commission. "Bankruptcies of textile and spinning companies have numbered more than 10,000. Two thirds are on the brink of bankruptcy."

Lehman Brothers warns of a risk that a housing slump and the 55pc equity crash since October could combine with a global downturn to set off a "vicious cycle". House prices have already fallen 18pc in Guangzhou and 9pc in Beijing. Prices are now falling in cities that make up over half China's population.

Now that doesn't sound like a country that is positioned to save world recession/depression. 50% equity crash? Boy I was shorting the wrong thing! Don't get me wrong, when this down cycle ends, I will likely move my investments to Asia, the tiger is awake, and it's hungry. But for now, a bit of reality is in order, and some painful decoupling must occur before China can claim the next 100 years as financial growth leader.

Dollar Rescue Plan (edit)
In a related US dollar news, March 2008 Europe & Japan also put into place to shore up US Dollar and could trigger the plan the next dowleg of US dollar. My Spin: US needs to shore itself up and stop taking the easy way out asking it's neighbors to do the heavy lifting. At some point your friends get tired of your wreckless actions.

Profit from Financial Weakness

Today's blog entry is a recap from an email I sent August 2nd to my mailing list.
A good friend of mine and long time winning day trader pointed out some financial stocks that are ripe for profiting from.
All of these stocks are down from August 2nd, but they still have more to fall.
Of particular is PNC. The reason I like this stock is the risk seems low compared to the potential profit of shorting this stock.

To the right is a graph of PNC over the last two years, and notice when its P/E ratio and EPS was good the stock was topish at 70-75 range. Recently it tanked hard, but came back in the financial rally to the 70-73 range. Why do I like PNC as a short?
1) Its historical top range is 70-75 bucks, its recent lows is 50 bucks, currently near 70 bucks.
2) Banks are NOT going to have banner earnings reports, especially large banks being affected by a cooling economy.
3) Risk to reward is "cover" at 77 or 50 bucks, assuming you shorted at 72 (august 2nd), 5 dollar risk against you, with 22 dollars (or more) for you downward.

Other stocks to look at are:
Bank of America (BAC), at 34 August 2nd, now 28, target 10-15 bucks to cover
US Bancorp (USB) at 32 August 2nd, now 30, target 15 bucks to cover
Wells Fargo Co (WFC) at 32 August 2nd, now 28.70, target 15 bucks to cover (maybe 10)

All of these should hit in next 12 to 18 months, yielding 50% or more profit. Look at the charts, look at their all time highs, consider the economy, set your pain point to get out if wrong, and roll the dice. Always consult a professional adviser over a free blog person's two cents.
UPDATE 11/23/08: see follow up comment

Questions to ask your Financial Advisor

I don't have a financial advisor. I am NOT one either.
However, I realize why most have one, it takes WAY too much time to read up on finance and keep current.

With the downturn, I have talked to people who have financial advisors, and often the response I get for their plan confused me, and questioned the value add.

A blog posted questions for your financial avisor. I particularly liked these two questions:

4. Did your adviser change his strategy as economic and financial events changed? If he didn't, why not?

6. Ask your adviser whether he "eats is own cooking" -- that is, did he invest along with you in the same investments, and are both of your interests aligned?

http://bigpicture.typepad.com/comments/2008/08/questions-for-y.html

While at it, read these 10 rules of investing and use them as discussion points to see how your advisor aligns with these rules. Click here.

A very extreme view of USA situation

I ran across a blog rant of how bad off the USA is positioned. This diatribe is even too gloomy for me to read in full detail.
I recommend you don't even attempt to read if you have sharp objects near you.

The entire diatribe on the "Prudent Bear" can be found here:

My Spin: The information here point to at "best" a flat year next year and at worst, well, read it to see. We are just not positioned for a rebound in the near future, based from this and common sense. USA went on a debt shopping spree starting in 2001 and the party is ending, we are not going to turn this around in a year, or two.

I DO NOT believe everything I read on the internet, I do pay more to the distributed media over the corporate media spin. Look back remember phrases like "contained", "contained to sub prime", "financials have hit bottom", "now is the best time to buy a house" and "Doesn't need to raise capital but doing so to show strength" what? Who are they kidding? Heck, if I took 100% faith what corporate media says, I'd be broke!

And you listened to individual stock picks, wow did you most likely lose out! Cramer recommending DSL, Bear Sterns, Countrywide, Washington Mutual, Centex in 07, almost all have falling 90%+ to below 5 bucks. Numerous recommendations "too big to fail", as we watch Fannie Mae and Freddie Mac shares go to near zero.

Anyway, before I go on my own diatribe, a couple of image bullets as a synopsis from the blog entry from "Prudent Bear".

The most stunning to me is the GDP if you EXCLUDE the money taken out of real estate (MEW Mortgage Equity Withdrawal). This paints a very dark GDP since Bush took office, with artificial inflation through trickery of playing with interest rates.

How to profit from the stock market collapsing?

UPDATE: Please see new blog post on double inverse funds broken
UPDATE2: See follow up comments
For most everyone I meet, if the topic of stock market arises, I can't seem to shut my trap. :)
Usually if asked, I'll recommend get out of the market and go into Federal Bonds or cash.
Problem with cash is, often, it's not true cash anymore but money market funds.
And money markets are NOT FDIC insured typically.

Often I hear people echo "but it's only 3% interest". Its much more if you count how much you lose by going long in stocks and the +3% you would have gotten if in bonds.

But for those of you out there, who want to take risk , you can buy funds that are called "reverse index funds" or "double reverse index funds".

An index fund is basically a bunch of stocks for a sector or market that are purchased and averaged to create a value. For example, say we pick 100 different stocks in the banking industry, and on average the value of the fund is "50 bucks a share", then the index fund we created for banking would be 50 bucks a share to buy. As the underlying stock values change, our index fund will change.

The good thing about index funds is you never take huge hits, but you also never have real winners. You get a piece of the action, but not extreme action.

A reverse index fund is the value of the target index fund, but it goes up when the target goes down. For example, if the bank index is 50 bucks, and the reverse bank index is 50 bucks, and the bank index goes to 25, the reverse goes to 75. For a double reverse index fund it would go to 100.

Unfortunately, it isn't this clear cut and simple, there are other factors that makes it not truely equal, but it's fairly close. Also, the change in a reverse or double reverse is NOT the same DOLLARS, but is the same %. For example, a bank index fund is 50, reverse is 20, when bank index goes to 25, the reverse goes to 30.

Double reverse has twice the reward and 3 times the pain. I say 3 times the pain since when the underlying fund goes up, the double reverse really accelerates down. Also it tends to "gap" down over night.

All are high risk relative to other investment vehicles. But for "relative" risk, lower is RWM, double short of transports. Does anyone thing transportation is a growth sector the next year? Next is QID, mainly since tech hasn't been crushed yet, QID has a bottom (not true bottom, historical) of 38-ish, now at 41. And high risk is SKF, short the financial stocks.

For information on the wide variety of double reverse or plain reverse funds out there, click on this link here.

*WARNING* These funds are not for long term holding, you buy and hold for a day, week, month, but not years.

Below is an example of QQQQ index fund vs the double reverse index fund, QID.
When the QQQQ goes down, the QID rises faster % wise. When QQQQ goes up, notice how quickly QID falls.

I.O.U.S.A

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End Game Near?

Chartists indicate we may finally be entering the next break down in terms of days, not weeks.
On the break down, it should dive down hard. It won't be straight down, but it will be down.

I have said this to everyone that knows me.
1) Cash and Federal Bonds are king - "As good as cash with some interest"!
2) Fixed income cannot be trusted, unless it is Federal Bonds
3) Get the heck out of stocks! (Perhaps staples such as utilities are OK, do you homework!)

We are talking scary times, Great Depression type financial markets.
We continue to have significant bad news, but the American people doesn't care, they don't read, they don't pay attention. Investing "for long term" is bullshit if your over 55. Don't gamble with your life savings. Be cautious, be safe, be ready.

The DOW rises to 11,550, I will place the last dollar of my life savings betting we collapse, that's how sure I am we are near the end of this upswing.

NOTE: GOLD and commodities are not guaranteed to be safe! Long term they may pay well, but when we collapse it will be across the board, maybe not at same time, but in the same quarter. I may buy gold if it hits 500 dollars an ounce.

And god I hope, 2 trillion of debt magically forgiven by the Chinese tooth fairy, inflation or deflation disappears, and all banks magically become solvent. Nothing would make me happier to be wrong on this next leg down.

Some news Today...
Ebay cuts fixed charges by 70% to drum up business
Freddie Mac & Fannie Mae are about to become insolvent, last ditch efforts to get funding:
Mortgage application lowest in 6 years
Russia cuts holdings of Freddie Mac/Fannie Mae by 40% (My Spin: Other 60% covered by recent spike in oil)
FDIC Reduces price paid for over 4,000 home buyers. (My Spin: Santa Came early. Maybe I should buy a house today and immediately ask the government to cover 25%)
2 Billion Dollar hedge fund fails
Lehman brothers fails to secure (trick) Koreans to buy their (bad) debt

News Roundup

Looks like my original call 12 days ago was correct, the 18th was the turn date. The market peaked at DOW 11,800 range and is now at 11,348. The market is buzz is we are going down. I agree that we are, but I still suspect a spike higher then the final collapse. Every time there is consensus for a downturn, there is a government intervention surprise move/rally.

In any event, if your a long term investor, the time to get out was a week ago, and today is still a good day. We are not going over DOW 12,000 significantly, and we have over 1,400 DOW points to fall still.

Various Financial related news

The economic news that was released this morning revealed that inflation is starting to surge, currently at an annualized rate of 10, heading to 12%;
My Spin: Unless you have a 12% raise this year, you took a paycut!
http://www.nasdaq.com/econoday/reports/US/EN/New_York/producer_price_index/year/2008/yearly/08/index.html

US money supply largest contraction since 1959. Money supply reduction is NOT good for the health of the nation in the near term, its deflationary.
http://globaleconomicanalysis.blogspot.com/2008/08/m3-contraction-future-is-now.html

My Spin: There are two Goliath forces at work, a deflationary and an inflationary one. Short term inflation has the upper hand, but eventually deflation should win, unless the government goes bananna republic and covers all bank losses and prints money.
Large US bank to collapse soon, former IMF Chief states
http://www.reuters.com/article/newsOne/idUSSP21695020080819

Goodyear to close 92 stores
http://www.reuters.com/article/ousiv/idUSN1932824420080819?sp=true

Unemployment spiking sharply

Stock market trend prediction

This blog entry is a reprint from an email I sent out before I created this blog, 11 days ago.
The comments I sent then is now in play.

date Thu, Aug 7, 2008 at 8:13 AM
subject Market "top" ?

I am NOT a financial consultant, and you should consult your personal financial adviser.
And any advice below is worth as much as you have paid for it.

We are looking close to a market top, between our current level 11,650 to DOW 12,000.
Once the upswing loses steam, we will continue down eventually DOW 10,000 (not in a straight line, up/down next 6-9 months)
It "could" go straight down if we hit great depression type collapse, which I don't expect but its possible.

I wouldn't get greedy, consider at any time getting money out of long stock play and into more secure investments starting now.
Remember, FIXED income is NOT secure, unless its Federal treasury notes.
Natural resources, Gold, Silver, etc is also not good at their levels yet.

If you want to play "press your luck" August 18th is a key "turn date" by some blog sphere people and August 16th is "options date", which historically has moved the market hard up or down.

To recap we are 0-4% near the local top on our way down with a 15% or more to go
Part of the reason I am sharing this worthless opinion, is to keep a record of my thoughts as this evolves.

My Spin as of 8/18/08:
Quite possibly one more hard rally up for a few days before we hit top resistance and move downward. We are talking days or a week(s?) before the market to get it's next leg down gains steam.

Looking at DJIA, the volume is falling even though the market is down recently, indicating that the downturn is not "confirmed". The Stockastic on a weekly chart view shows approaching overbought.

Dallas Fed Chief Speaks, and I listen

The Federal Reserve Board is comprised of various "Fed Chiefs" located around the country, one of them in Dallas Texas named Richard Fisher.
You can read his comments to a Dallas paper linked here, below are excerpts I found particularly interesting.
This isn't crackpot stuff, this is from a man with direct input on setting USA interest rates with respect to 30 year federal bonds and other financial instruments of lending.

The Alt A market had an enormous amount of low-doc and no-doc to it. There is sort of a balloon period of interest rate resets that starts in 2009. If you add that to subprime, the amount of resets in a three-year period – 2010, 2011, 2012 – is greater than anything we've seen.

My Spin: The mortgage crisis is just starting look for it to continue through 2012.

I do expect that after the Olympics, by the way ... inflationary forces will be increasing, not decreasing, in China. And I suspect we might feel the impact of that here.

My Spin: As China's expenses increase, they will pass their costs to USA and world in export costs, reversing the trend of lower prices we have enjoyed from "exporting" our inflation to china the last 10 years. Time to sell Walmart stock?

But you don't correct for the "excess excess" that we have experienced very quickly. We got carried away. I blame the regulators, including the Federal Reserve, for letting things get too far. Given that it went so far, given the natural pattern of the way creditors work, they sort of feel something is wrong, but they let it happen anyway, and then after the fact they slam the door shut. Bankers are getting much more parsimonious. And the credit markets are rough right now. ... So I expect us to have a rough patch here before we pull our socks up.

My Spin: Things will get worse before they get better, the BOTTOM IS NOT IN.

...the unfunded liabilities of Medicare. And I have not heard any discussion of what is the largest liability ever incurred by any country in history, relative to their GDP. Just to give you the number, it is $85.6 trillion that is currently unfunded. ... That's a lot. Our total output as a country is roughly $14 trillion.

My Spin: Reagan's plan of starve the beast is underway, (Advanced by Bush) and USA will achieve bankrupting social net (Social Security & Medicare) put into place during the last great depression. This will further free up profits of corporations long term by eventually reducing tax burden to pay for such programs.

Additional Proof Credit Crisis is starting to gain significant speed

American Express, by most American standards, a well regarded financial company, "decided" to borrow more money, in the form of issuing bonds.
This is a routine exercise by most companies, living in debt. However, typically bond yields (interest) are low, since American Express is normally a low-risk company to lend to.

However, the bonds are at "7.3 percent notes due in 2013 priced to yield 425 basis points more than Treasuries of similar maturity, according to data compiled by Bloomberg. That's 15 basis points away from the average spread on bonds rated Baa3, the lowest investment-grade rating, according to Merrill Lynch & Co. index data".

http://www.bloomberg.com/apps/news?pid=20601110&refer=&sid=akLM07dxOTJw

This may not seem significant to the average person, but what if, your mortgage was suddenly raised to 4% higher? What if all your friends and neighbors had this occur? Borrowing costs by companies to do "business" is as significant as your mortgage ratcheting up.

This potentially indicates that ratings of financial companies cannot be trusted, and everyone is now suspect of being junk bond dealers. And therefore "highly trusted and rated companies" will pay "junk bond prices". Until the accounting is fixed, and "level 3 assets" (assets are completely illiquid and nearly impossible to price.) are removed (open market valued), this will continue to spiral downward.

One of the USA's strength was open and honest accounting (most of the time), now we have systematic hiding of debt yielding lost of trust.

Disclaimer

The opinions expressed in this blog are not guaranteed to have the facts right or the opinion presented correct. The publisher may have long or short positions related to the information presented. Actions may have been taken before or after information is presented. Anyone following the information presented does so solely at their own risk, and the publisher or related person(s) shall be under no liability in any respect for using ideas presented. Material does not constitute a solicitation for the purchase or sale of any securities. Past performance does not guarantee future results. The publisher is not a professional financial adviser. Further advice presented is as likely to be correct as flipping a coin.


The information presented is worth as much as you paid for it.
Always seek advice from a registered financial adviser.

Credit Crisis spiraling out of control

For those of you who have unfortunately read my email rants, you'll recognize the theme, doom and gloom for USA & world financial markets.
My main purpose of "spreading the word" is to ensure people do what they can to prepare their financial situation for impact.

One of the bloggers I read most frequently is "Market-Ticker" by Karl Denninger. He is extremely savvy with stocks, a multi-millionaire originally from an internet business back in Y2K. Since then his hobby is true day-trading. He doesn't seem to buy & hold more than a week or two at most.

If you have some knowledge over bonds, credit ratings, etc, this is a good read.
If you think of credit as your MasterCard, and not for big business, move along.... :)
http://market-ticker.denninger.net/archives/541-Theyre-Picking-up-Fish;-Tsunami-Curling-Over.html

Welcome to my new Blog

Welcome to my new Blog. For those of you less internet savy, a blog is just a web site where I post my thoughts to share with others.
Probably this blog won't be read by anyone but my father (on occasion). For me, it gives me an outlet to share my thoughts with the ether, and if your interested, you can listen. (and give you ammo to bust my chops over my thoughts)

I plan on segmenting into multiple blogs, one for Finance, one for computers, and one for general BS/fun stuff.

You can "listen in" to my blog additions through RSS, and probably other features. Click on subscribe below, choose Google or Yahoo, and updates will appear on your search engine homepage.
For Google, you must change your home page to "iGoogle", click subsribe below, then click this link to see:
http://www.google.com/ig?hl=en