Today in the Washington Post David Sokol wrote about how we are being gamed by the government. Read the whole article here. Here is the juicy part:
If you liked what credit default swaps did to our economy, you’re going to love cap-and-trade. Just read Title VIII of the bill, which lets investment banks, hedge funds and other speculators participate in the cap-and-trade market. They don’t have emissions to cut; they have commissions to make.
Now, I am up for making money no matter what the market does, but I would prefer good versus evil. Credit Default Swaps (CDS) never made much sense to me because it allowed people to buy insurance on stuff they didn’t own. Now, you may say that buying a put option on a stock you don’t own is the same thing, but put options cause a companies ability to issue debt to blow up. Options are also regulated and despite the pits of traders you see on TV, they are ‘orderly’. After all, we keep them in a pit!
Cap and trade will do nothing but give hedge funds and investment banking houses the ability to speculate on a new ‘green’ world while driving up prices to the consumer and killing off industrial companies. In the end, I really don’t look forward to making money off these side bets as they blow up entire industries. Maybe the bill won’t pass. . .
Ok, I know I have been hard on banks, but just read this piece below from the Wall Street Journal.
One question mark hanging over the tests is whether they will be perceived as tough enough. From the start, some economists and bank analysts argued that the Fed’s worst-case economic scenario was overly rosy. Since the Fed informed banks of the preliminary test results, the government appears to have softened somewhat as banks pushed back.
Among other things, regulators accepted banks’ bullish arguments about their profit outlooks. The Fed initially planned to use banks’ lackluster 2008 revenues as a jumping-off point to predict future incomes, according to people familiar with the matter. But many big banks logged robust first-quarter profits and argued that should serve as the “run rate” for the stress-test period.
Any bank needing more capital will have until June 8 to develop a plan and Nov. 9 to implement it. The banks must also review their management and assure regulators that leadership has “sufficient expertise and ability,” to manage through the current environment.
I just did my first piece for www.investorwatchdog.com. For my first blog, I wanted to underline the issues with 401K fees. Our firm has tried to come up with a better mousetrap, but many of the fees involved are a necessary component. The best we can do is keep them low, be upfront, and educate the participants. So far, we have had no takers, which just goes to show some people really don’t want to know what is in the hot dog!
Exactly what does my 401K costs me in fees and expenses every year? Good question! Recently, 60 Minutes aired a segment on the problems with 401K plans-little advice, conflict of interest and lack of disclosure. The CBS Evening News followed with another look at the way the plans are structured, hidden fees, and lack of choices.
Just a word to the wise, and cross this list with any longs you have outstanding. Some crap does live, but why bother these days? This is the list of the bottom rung for first quarter of 2009 from Moody’s. Just because they sold their soul for a few bucks on sub-prime waste doesn’t mean they can’t spot pestilence when they see it.
One of worst bonds I ever bought from a bond desk were some crappy Harrah’s 10 year notes. This was at the peak of the buyout boom and you could not find anything of quality that paid much more than a Treasury. At the time, the press was having a bru ha ha over the stupidity of the Chinese government that were buying 10 year Treasuries at 4.5%. What were they thinking? You could get 8% on Harrah’s notes and of course rates would be going up soon. Plus, TPG and Apollo wouldn’t be buying it for $30 billion if it wasn’t a good deal. How wrong we were. The Chinese ate our lunch as Treasures rocketed in price two years later, they made billions, and I was sitting on notes dropping in value each day. After cutting my losses and moving on, I wanted to look back and see what the last hand. In this weeks Business Week Christopher Palmeri writes about the aftermath. In the end, it makes me sick to see firms simply renegotiate the loans under the threat of bankruptcy. I thought 60-70 cents on the dollar was a horror show, but this month that is exactly what Harrah’s tuned the chips into - 63 cents on the dollar, and less interest to boot! Read more at BusinessWeek.com
Harrah’s Entertainment is having a little luck. The wounded casino giant has persuaded bondholders to forgive some of its debt, twice now. In the latest deal, on Apr. 9, investors agreed to exchange $5.9 billion in loans for roughly $3.7 billion in cash and new debt, taking a 37% cut on their principal.
Read the whole article on how the house brought down the investors here.
BY MISREADING the risk in mortgage-backed securities and other “structured” products, the rating agencies Standard & Poor’s, Moody’s and Fitch played starring roles in the failure of finance. Their punishment? Oddly, the further entrenchment of their dominance, thanks to the Federal Reserve.
So, screw up any faith in your ability to rate securities, have the government start a program to buy up the toxic crap, and get the Fed to pay you 400 million to rate the same crap. I am in the wrong business! This is sick. Other firms should be allowed to bid for this work. I am sure there are hundreds of laid off bankers out there can actually earn a decent living providing a decent service to the Fed and the taxpayers: giving an accurate rating to toxic waste.
Today on CNBC I was talking about the Euro/Yen relationship. First, I have to give all the credit to Helene Meisler for pointing it out. You see, I worry anytime I have an original thought! It could be a trap my ego set up. So, the currency pair started to make this perfect head and shoulder pattern over the last few weeks, but I needed to be sure it was going to break down. The bottom line is that until you have a chart that is valid, you are on your own. On Monday, the breakout happened and today I took on a position in FXY.
I see the strong Yen as an early sign of weakness in the stock markets. But, I was reminded that it usually takes a few weeks to work into the stock markets. So, instead of using the indicator to short the indexes in general, I just went long Yen. Now, I have also started to short the retail services sector, but that is more of an observation that this group is way overextended. Will the Yen be the tell this time? We will know in about 2-4 weeks.
I still think we will retest the March lows, but it will take some serious damage to get the correction going and we probably will not see a lower low. The bank stress tests are surprising. I am not encouraged when the rooster says there are a few hens missing and needs more capital. Also, we are close to May, which is the start of the ‘dry’ season until November if you are into the Almanac stuff. The FOMC meeting is tomorrow and all I know is that it will bring volatility. A nice change from the last do nothing days.
No, this is not a reference to HBO’s True Blood, a favorite of mine (I can’t believe we have to wait until June for season 2). I am talking about the V formation of most chart patterns including the S+P 500 over the past six weeks. The issue is that V’s are not generally found in nature. Usually, we get a W or something that will either fill in a gap or at least try to retest the bottom of the V. Seven weeks ago I went on CNBC and said to raise some cash because we could see the DJIA get to 6000. Boy was I wrong! I no longer think that will happen, but DJIA 6300-7000 would take very little in this environment. Today we see CAT hit their first loss in 17 years and some M+A activity is heating up. This is good, not bad. Just keep in mind this just means we are starting to get to the bottom of the economy when solid firms go into the red and mergers of equals start popping up. It does not mean it is over, though.
In the end, I would still rather wait to see some consolidation and keep trading short term until we either retrace more than 3-6% or can go sideways for a while. Even if you don’t like the money the government is spending doesn’t mean it won’t work. The problem is that it will debase the currency. So, check out the potential double bottom on the gold charts, remember that people will still need office space in Manhattan, and keep some cash around for a mild to wild pullback. Just don’t be afraid to dip your toe in when it seems the world starts looking like ‘the end’. You generally only get 2-3 times to jump in and after that you are a broken record or a clock that is only right twice a day.
Good question. While I feel we are heading for a correction, my best guess a few weeks ago that it would occur by mid April is not happening. Today we are seeing a typical blow off the Monday after options expiration. I am using this opportunity to play Treasuries on the short side and pick up some gold stocks. Nothing ground breaking, and I am keeping my limits tight. Meaning, we are still just hanging out until we see some real changes in volume. The Euro started to break down, but Helene Meisler has reminded her readers that this is a leading indicator and it could take a few weeks before the weakness works its way into the stock market. So, now we are looking at the beginning of May before the fun starts. What you want to avoid today is buying ‘long-term’ positions just because the market is down a few points. It could easily reverse and start to rally over the next few days. So, unless you like the feel of a meat grinder, keep the swings ultra short or go out and enjoy the sunlight.
