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goldminingXpert (29.79)

Not So Fast Bulls--A Canary Is Fluttering About...

Recs

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June 05, 2009 – Comments (17)

A repost of Denninger's latest ticker as many of you choose to ignore my repeated warnings about the dire crisis that is the bond market collapse. Hopefully reading the prose of a far smarter and more experienced trader than myself will show you what I've been unable to. (If you've been wondering why the frequency of blogs has risen, it is because we're running out of time to dump stocks before the tsunami hits and I don't want you getting crushed. I warned you all about HEB last night and then it dropped 50% in 15 minutes today. Don't get crushed again.) Karl writes:

So the NFP comes in down only 3xxk instead of the expected 6xxk.

The futures go on a tear, up 15 and change at the peak.

Everyone's playing "Green Shoots" again.

I have just one question, and its expressed in these two charts:

See that nice bullish flag on the right side of the chart?  It targets this level.

4.3%ish.

Now let's talk about what this means.

It means 30 year mortgage money in the mid 6s - about 30% higher than Bernanke and the Real Estate market were looking for.

What does this do to valuations in real estate?  It slams them.

How do we get a real recovery without defaulting all the bad debt in the real estate market (both commercial and residential)?  There is only one way to try to, and that is to force down rates on a stable basis.

But, as I have repeatedly pointed out, you can't do that when the problem is excessive debt, because risk premiums go up and as a consequence prices for bonds go down and yields rise - the exact opposite.

"Quantitative Easing" has failed to produce the claimed result - just the latest in a long (indeed, nearly unbroken) series of failures of Bernanke's thesis.

The equity market today is trading on a GAAP P/E higher than at any time in the 1990s "Bull(shat)" market.  The claimed P/E ratios in the WSJ and elsewhere are on "operating earnings", which obscures charges and investment losses - as if money you lose in certain categories isn't real (of course it does count!)

If you recall, the PPIP was the reason for the market rally off the bottom - the government was finallyIt appears that's over: going to take all the bad assets off the bank balance sheets.  Really? 

June 4 (Bloomberg) -- The Federal Reserve may not start lending against residential mortgage-backed securities under its Term Asset-Backed Securities Loan Facility, Federal Reserve Bank of New York President William Dudley indicated.

I said at the time the PPIP was announced that the only way it would "work" is if the banks were able to cheat - that is, bid on their own assets, thereby taking a known-size hit but exiting their positions, dumping them on the taxpayer.  The banks are carrying this stuff at or near par, and to recognize market value would render them all insolvent. 

But the FDIC has said "no cheating" - and as soon as Bair came out with that statement the writing was on the wall: No PPIP.

Unemployment increased to 9.4%, and if you look at U6 (my favorite) the rate is really 16.4% (!)  Those numbers come off the household survey, as opposed to the book-cooking games.

Now maybe you can tell me how we take an economy with 70% consumer spending, take 16.4% of consumers out of the spending force, add rising (rapidly!) long-term interest rates for mortgages (which will prohibit the banks clearing all that bad paper), shut down the PPIP and tell us all how with a GAAP P/E on the S&P north of the 1999 highs equity prices make sense.

They don't, of course, but you have fund managers chasing the market.  If you've ever done it, you know how it usually ends for your portfolio P&L.  As for the banks, here's a few comments:

Citigroup’s $1.6 billion in first-quarter profit would vanish if accounting were more stringent, says Martin Weiss of Weiss Research Inc. in Jupiter, Florida. “The big banks’ profits were totally bogus,” says Weiss, whose 38-year-old firm rates financial companies. “The new accounting rules, the stress tests: They’re all part of a major effort to put lipstick on a pig.”

Further deterioration of loans will eventually force banks to recognize losses that their bookkeeping lets them ignore for now, says David Sherman, an accounting professor at Northeastern University in Boston. Janet Tavakoli, president of Tavakoli Structured Finance Inc. in Chicago, says the government stress scenarios underestimate how bad the economy may get.

Watch out folks.....  Yeah, the market can levitate for longer than you can remain solvent if you're short, which is a good reason not to get aggressive in that fashion.

But - if you're a long-term investor, ask yourself this: We've risen 40% off the bottom.  How much more is there - really - given the above facts - and in which direction are the risks?

Disclosure: No specific positions material to the sectors or firms mentioned; short idiot fund managers chasing this spike.

 

 

 

 

 

 

 

 

http://market-ticker.org/archives/1090-Bullgasm-Watch-The-Birdie!.html

17 Comments – Post Your Own

#1) On June 05, 2009 at 5:12 PM, LongTermBull (94.26) wrote:

But - if you're a long-term investor, ask yourself this: We've risen 40% off the bottom.  How much more is there - really - given the above facts - and in which direction are the risks?

I am not sure what your consideration of long term is since you seem to only concern yourself with the here and now, but the fact is we are still 60% down from the 2007 high.  So since my view of long term is farther out then say, next week, I think we still have plenty to go.  And I feel the risks are far less for a long term investor than a market timer trying to short a sell off.  I'm not sure if you understand this, but by shorting in hopes that the market sells off in the near term you are taking on far more risk then someone who is buying good companies at cheap prices for the long term.

You see, even if the market does sell off, it allows a long term investor to invest more into good companies at lower prices, thus reducing their long term risk.  If you short this market and we are indeed at the start of a bull market, well, I am not sure how you make money that way. 

So go ahead and keep trying to help people by telling them to short a market that no one, not even you, really knows were it will go.  Keep assuming the majority of the risk.  Go ahead and call me a troll for not agreeing with you.  And go ahead and keep predicting a drop because if you do it long enough, you will be right.

 

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#2) On June 05, 2009 at 5:16 PM, jstegma (29.46) wrote:

Well, he's definitely not fluttering about.  Maybe he's just sleeping.  Anyway, go on ahead.  I'm sure it's safe.

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#3) On June 05, 2009 at 5:22 PM, binve (< 20) wrote:

GMX, another excellent post. Thank you.

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#4) On June 05, 2009 at 5:29 PM, portefeuille (99.55) wrote:

the link

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#5) On June 05, 2009 at 5:30 PM, portefeuille (99.55) wrote:

http://market-ticker.org/archives/1090-Bullgasm-Watch-The-Birdie!.html

sorry, there it is

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#6) On June 05, 2009 at 5:32 PM, Recover22kplan (40.14) wrote:

US Treasury Bloodbath Soaks Fund ManagersTopics:Fixed Income | Corporate Bonds | Municipal Bonds | Bonds | TreasuriesBy: Reuters | 05 Jun 2009 | 04:38 PM ET Text Size

Investors have been blindsided by one financial catastrophe after another over the last 18 months, but throughout the tumult, the government bond market has been their friend.

Until now.

A brutal drop in long-dated Treasury prices has caught even the best money managers off guard—in some cases wiping out as much as 60 percent of the gains they booked in last year's huge rally in U.S. Treasuries.

http://www.cnbc.com/id/31128840

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#7) On June 05, 2009 at 5:43 PM, goldminingXpert (29.79) wrote:

Recover22kplan: but it's normal, regular return to average--it's no bloodbath! ;)

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#8) On June 05, 2009 at 5:57 PM, Recover22kplan (40.14) wrote:

Trust me I don't know what any of it means.  I just thought it might match up with the article you referenced.

The bloodbath part caught my eye and seemed a little extreme when I read it.

 Anyway, I always enjoy reading your blog, thank you for the faithful attention you pay to the caps game.

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#9) On June 05, 2009 at 5:59 PM, Recover22kplan (40.14) wrote:

oh and have a great weekend  ;)

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#10) On June 05, 2009 at 6:26 PM, portefeuille (99.55) wrote:

If you recall, the PPIP was the reason for the market rally off the bottom - the government was finallyIt appears that's over: going to take all the bad assets off the bank balance sheets.  Really? 

June 4 (Bloomberg) -- The Federal Reserve may not start lending against residential mortgage-backed securities under its Term Asset-Backed Securities Loan Facility, Federal Reserve Bank of New York President William Dudley indicated.

I said at the time the PPIP was announced that the only way it would "work" is if the banks were able to cheat - that is, bid on their own assets, thereby taking a known-size hit but exiting their positions, dumping them on the taxpayer.  The banks are carrying this stuff at or near par, and to recognize market value would render them all insolvent. 

But the FDIC has said "no cheating" - and as soon as Bair came out with that statement the writing was on the wall: No PPIP.

 

You might want to have a look at this video on the PPIP (the fellow videos are here) ...

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#11) On June 06, 2009 at 10:00 AM, alexpaz (29.22) wrote:

Great post GMX...I feel sorry for the investors that think the market is taking off and never looking back.

 Disclosure:

Short: EDC

Long: DBC calls, ACAS calls, SRS calls (ouch)

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#12) On June 07, 2009 at 10:37 AM, TigerPack1 (99.09) wrote:

DON'T FIGHT THE FED!!!

The FED and TREASURY can start a new PPIP like program on Monday and add trillions of new dollars without any feedback or vote by others!

The FED is now giving large banks loans at 0% to buy risk-free Treasury bonds earning 3%-4% annually (which will be in large supply with our deficit spending).  This spread is THE MOST IMPORTANT IN THE PAST TO REFLATING THE FINANCIAL SYSTEM AND BANK BALANCE SHEETS, AND THE BASIC CARRY TRADE HAS GROWN MORE PROFITABLE FOR INSTITUTIONS WITH THE RISE IN TREASURY RATES THE LAST FEW WEEKS!!!

Risk yields and spreads on bonds are coming down, consumer confidence and spending is increasing, the banks are selling tons of new equity to recapitalize SUCCESSFULLY and pay back TARP money, and the list is growing each week of the things that are moving in the RIGHT DIRECTION for the economy and stock market's long-term direction.

An 8%-10% correction in stocks is quite possible over the summer months, but betting on anything beyond that today is incredibly foolish in my opinion.

Higher Treasury yields are a GOOD thing at this stage, to help bring in foreign buyers of our enormous fiscal deficit financing needs.  The greater the spread between yields and inflation (real yields), the better the U.S. Dollar will perform.  As a net result of a stable U.S. Dollar, confidence in the global financial system will GROW, which will then encourage additional spending and confidence by business interests and consumers worldwide.

The next part of the equation/cylce that will confound bears and chicken littles will be a sharp rise in the U.S. Dollar value (the next 6-9 months) and a collapse in fear-based pricing of assets like gold and silver....which are clearly over-owned and over-hyped at this point in the economic cycle.

 

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#13) On June 07, 2009 at 10:46 AM, TigerPack1 (99.09) wrote:

The FED is questioning whether they NEED parts of the PPIP program, BECAUSE THE ECONOMY AND THE MARKETS ARE DOING MUCH BETTER THAN EXPECTED!

The economic "recovery" is happening quicker than conventional wisdom thought possible just a few short months ago. 

Reading this situation as a negative, is like reaching at straws in my opinion.

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#14) On June 07, 2009 at 7:39 PM, DeerHunter73 (72.43) wrote:

Tiger you will never convince him the market is going to continue going up, He will call it insane or ignorant buyers. Only beacue he prefers shorting. Someone else said something that made alot of since. He happy when the market drops as he makes money. But when the longs are getting there shares he's all bent out of shape and calling for a plunge. I'm like ALOT of people yes the marker has gone up 40% but were still down 60% and theres alot more room to go up and not a whole lot left to crash it back down.

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#15) On June 07, 2009 at 10:47 PM, TigerPack1 (99.09) wrote:

Free Reserves in the banking system remained sky-high last week at +$350 billion, and the banks are RAISING tons of new money issuing common shares of late!

The cumulative, daily Advance-Decline line is now back to the August lows, where the equivalent Dow reading was 11,000!

The Russell 2000, small capitalization companies that must bottom before the market can stabilize are now beating the Dow Industrial return by an eye-popping 18% the last 3 months (a modern record)!

The banking system reflation carry-trade spread between short-term overnight lending rates from the FED to banks, and Treasury bond yields, is the highest since the early 1990s!

This situation is the exact opposite of the inverted yield curve of 2006-2007, when pundits and newbies stated there was nothing to worry about, yield curves meant nothing to the economy or markets and everything was just fine with the world, as investors stayed fully-invested in stocks and real estate.  Today everyone is scared, confused and in cash or gold, after a monster 2-year bear market and recession, despite incredible and overwhelming evidence that things are about to make a major turn for the better in 2009-2011.  The more things change, the more they stay the same!!!

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#16) On June 08, 2009 at 8:09 AM, cthomas1017 (69.02) wrote:

A few of Nouriel Roubini's friends check in...

Charting Too Big to Fail

Random musings on the market direction

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#17) On June 08, 2009 at 10:14 AM, dexion10 (27.77) wrote:

GMX  -  I finally closed out my WNR short (red thumb) as a WIN... it took a lot longer than I thought and I missed out on tons of points that WNR made for the bulls over the prior 3 months... but it is sweet vindication none the less to see WNR fall about 45%!

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