Financial topics

[wtf]

SAN FRANCISCO (MarketWatch) -- Bank of America Chief Executive Kenneth Lewis warned that 2008 results will fall short of expectations and said executives at the giant lender, including himself, shouldn't get bonuses for last year.

http://www.marketwatch.com/news/story/B ... 033BB3BC93}

[The Grey Badger]

Anyone can manipulate a total contrarian!

[freddyv]

I think your position on contrarians is right on, Gordo. Right now there are a lot of false contrarians and false bears and whatnot out there simply because they're covering their ass and really don't get that the world as they know it has ended but they do know that they can't continue to be so polyanish. I keep reminding myself to keep an eye on these people and when they start finally to be truly bearish or just disappear altogether is the time to turn bullish. I think that will take years.

As for your prediction that the market will turn up for the next six months it certainly seems to fit a common scenario but I have serious doubts for the very reasons that you have stated: it seems that every other analyst on CNBC is calling for a bear market rally and/or a recovery in the second half of next year (boy, does that sound familiar) and so I have to wonder who is left to jump on that bandwagon.

I won't be surprised to see the market higher in a few months but I won't be a big participant because we are in a long term down trend, IMO.

Here's my perspective and I think it needs to be addressed because it will fit most people better than your more speculative position: I have 2 main sources of wealth; one is my business (a job for most people) and the other is my investments. If the economy should continue to deteriorate rapidly and my business income should fall off greatly it is also likely that my investments, if long the market, would do so also. Therefore I hedge my income with my investments because I, like most people, would be in dire straights should I lose both my income and my investments, or a significant portion of both. I see the potential at this time for a truly cataclysmic drop in the markets and this could cause me to lose my house and my business and if long the market, my investments. By keeping either a cash position or a short position I assure myself (to the extent that anything is sure these days) that I will not lose everything I have. Should I lose much of my investments and the economy recover I will be reasonable happy. In fact, by cautiously playing the short game I have so far been able to substabtially increase my investment portfolio. The farther the markets drop the less bearish I will become and will slowly build long positions; I think that this is a realistic investment strategy for the average person which will provide safety and would have worked reasonably well in any bear market in the past.

In the past I have criticized you rather sharply and this is the basis of that criticism, Gordo. You are obviously a sharp guy and you are paying attention but even if other people are as sharp as you they are probably not as on top of this as you. If someone listens to you and you are wrong you may have the same affect as so many of the market shills have had over the past years. You may get out fast enough but that person who listens to you may end up losing their house and life savings so I feel it is vital that any type of speculation that is offered here is put into a very clear context and that the dangers of such speculation are pointed out.

--Fred

U.S. Treasuries continued their recent sharp plunge, perhaps encouraged by
this week's Barron's cover story. Below is another analyst who reached the
same conclusion yesterday, too late to benefit from the strong collapse just
since Wednesday morning:

http://www.dailywealth.com/archive/2009 ... jan_05.asp

It would not be surprising to see a market dip in anticipation of a supposedly
poor earnings season which will "officially" begin next Monday (January 12, 2009).
The actual earnings should produce positive surprises no matter how bad they are;
it will be a classic case of sell on the rumor, buy on the news.

There are many people out there who call themselves contrarians.
However, their reasoning is generally far from sound-and most certainly far
from contrarian.

A true contrarian looks to see what the most knowledgeable people in the
financial markets are doing, and contrasts that with what the least informed
participants are doing. If there is a sharp divergence between the two,
then that is where opportunity lies.

As a simple example, the popular media and amateurs were dumping coal-mining
shares in the summer and autumn. KOL, a fund of such shares, slumped from
more than 60 dollars per share to less than 10. One analyst after another
talked about how President Obama would enact tough environmental controls on
various extraction industries.

Amateurs dumped coal shares in the third quarter and early fourth quarter of
2008 out of disappointment over their sharp collapse, and from media
brainwashing. Hedge funds unloaded since they had bought these shares at or
near all-time highs using borrowed money, and had forced redemptions at the
same time they were forced to repay their loans. Others sold because they
believed that hedge funds would continue to depress the market-monkey see,
monkey do.

However, top executives of coal-mining companies were buying at a rapid
clip. They had been equally heavy sellers near their June peaks, so they
were trading cleverly on both sides to capitalize on these extremes.

Identifying this situation is a typical case of being a true contrarian.

One example of a phony contrarian is a certain person who ranks newsletter
writers. He concludes that if, say, 65% of such writers are bearish on a
particular sector, then it must be correct to be bullish. Or if the
bullishness of gold analysts rises from 30% to 60%, then he concludes that
it is time to turn bearish on gold.

This is a travesty of proper contrarian logic. When the public is becoming
increasingly excited about a particular sector, it is normal for bullishness
to increase significantly. However, this most certainly does NOT mean that
it is correct to turn bearish!

If you sell something short because an increasing percentage of the public
is turning bullish, then you deserve to get badly burned and you probably
will suffer that fate. When public bullishness increases from 30% to 60%,
then it will almost always extend to 80% or 90%, or even higher. Remember
that the final phase of any major rally is often vertical in nature.

Only when the bullish percentage becomes its highest in several years-or
ideally in several decades--does it make sense to take a contrary stance.
Even then, you should only do so if corporate insiders are doing the same;
if there has been a sharp vertical move in either direction to confirm that
amateurs and hedge funds have exhausted their resources; and if other
reliable indicators are confirming this action.

I always distrust sentiment indicators and similar forms of analysis-since
they tell you only what people are saying, not what they are doing. If
people are saying one thing and doing another, then actions always speak
louder than words.

As a simple example, a few years ago there was very heavy insider selling by
the top executives of Countrywide Financial (CFC) and Toll Brothers (TOL).
Meanwhile, these executives appeared frequently in the media to say how
confident they were about the prospects for their company and their
industry.

We know what happened with housing in general and these companies' share
prices in particular. What these corporate insiders were doing meant
everything-what they said meant nothing.

During the Great Depression, dictators were emerging all over the world, as
often happens during a severe economic contraction. Middle-class Americans
were routinely asked during this time by pollsters if they were bullish or
bearish on the stock market. Wanting to appear as patriotic as possible
when these despots were a real threat, they almost always stated that they
were strongly bullish.

However, most of the same people were afraid to actually buy stocks with
their own money, due to equities' extreme volatility during this period.
Many talked a bullish talk-but very few could bring themselves to walk the
bullish walk.

In early 2000, numerous analysts went on record as stating they were bearish
on equities due to the Nasdaq bubble-but as fund managers, they continued to
heavily weight equities in their portfolios! They acted bearish on TV, but
they didn't have the guts to actually invest bearishly. Almost none of
these allegedly bearish analysts actually sold short. Some false
contrarians incorrectly concluded that the pervasive bearishness meant that
stocks would continue higher, and of course they paid dearly for their
misguided deductions.

In this week's Barron's and in other recent publications, there has been
close to a consensus that U.S. Treasuries are a very bad investment at this
time. However, most of these same analysts are keeping a significant
percentage of their clients' money in U.S. Treasuries "for the sake of
diversity", or for some other fatuous reason. That is why an apparently
consensus viewpoint can often come to pass-since people are not putting
their money where their mouths are.

While I follow various sentiment indicators, I only use them when they are
at multi-year extremes-and only then as confirming rather than primary
indicators.

VXO and VIX are truly valuable because they show you what people are
actually DOING, not what they are SAYING. If people are actually willing to
pay five times as much to insure their portfolios against a continued
decline, and if this price represents a 21-year high, then people really are
incredibly bearish, no matter what they say. This translates to VXO near
100 and a powerful buying opportunity as we experienced in October and
November 2008.

Similarly, when VXO and VIX had barely budged from October 2007 through
August 2008, then you knew that even though the media and the public had
allegedly turned more bearish, it was only for show. People weren't acting
more bearishly. They weren't willing to pay a penny more for portfolio
insurance-and so they were really bullish and eager to buy on dips. This
translated to a great short-selling opportunity and so it proved to be.

With an indicator like TRIN which shows actual buying and selling pressure,
it is only useful when it is at a rare extreme. I often see commentary on
the internet saying that since TRIN has been rising for such-and-such a
period of time, or it has crossed above or below some kind of moving
average, that it supposedly has some implication regarding future price
behavior. This is complete nonsense.

Even with TRIN is twice or three times as high or low as its historic
average of 1, it means nothing. Only when TRIN exceeded 10 on December 1,
2008, which was its most extreme close in several years, did it have any
real bullish contrarian implications. Similarly, only an incredibly low
extreme reading would be bearish.

Sometimes the most important contrarian indications occur not in the
financial markets, but in daily life that at first glance may not appear to
be closely correlated with finance.

For example, women's fashion has one of the most reliable correlations with
future stock market behavior. For decades, major market peaks have reliably
correlated with bright-colored, skimpy dress and clearly visible knees,
while major bear-market bottoms have inevitably been accompanied by
floor-length clothing and predominantly dark colors.

Outrageous public behavior is a very reliable signal of a long-term
bear-market bottom. People climbed light poles in 1932 and sat there for
hours; it was all the rage to eat raw goldfish in 1949; while streaking was
amazingly popular in 1974. I have no idea what bizarre activity will occur
in 2010 or 2011, but until it becomes widespread, it's too early to buy
stocks! If we don't get this kind of weird activity in 2011, then don't
conclude that it won't happen-conclude instead that the stock market is
still far from its ultimate nadir. Remember that those who believed a year
ago that we would not have a Presidential cycle low were severely punished.
The world changes, but the financial markets remain the same.

The fact that we had no widespread bizarre behavior in 2008 means also that
the 2010-2011 bottoms will have to be significantly lower than their
respective 2008 nadirs for nearly all general global equity indices. This
does not imply that 2009 will be a bad year for the stock market-we will get
a powerful rebound over the next half year or more, precisely because it
will make the next bear market that much more severe in percentage terms.

[Higgenbotham]

Part 1 of this saga took place in September. The Fed stepped in with a $105 billion infusion at the last minute to avert a panic out of money market funds. The end result of that looks to be this $334 billion Commercial Paper Funding Facility mentioned on item 6 of the Fed's balance sheet (again, FRB Release H.4.1).


6. Information on Principal Accounts of Commercial Paper Funding Facility LLC
Millions of dollars

Commercial paper holdings, net (1) 332,826
Other investments, net 1,276
Net portfolio holdings of Commercial Paper Funding Facility LLC 334,102

Memorandum: Commercial paper holdings, face value 334,415


Note: On October 27, 2008, the Federal Reserve Bank of New York began extending loans under the authority of section 13(3) of the Federal Reserve Act to Commercial Paper Funding Facility LLC. This LLC is a limited liability company formed to purchase three-month U.S. dollar-denominated commercial paper from eligible issuers and thereby foster liquidity in short-term funding markets and increase the availability of credit for businesses and households.


This story gives some details about what happened that September morning.

http://www.nypost.com/seven/09212008/bu ... 130110.htm

As of November, the Reserve Fund (the money market fund that "broke the buck" or dropped below parity in September, precipitating the panic) still hadn't paid out their redemption requests.

Next question is what happens if (or maybe when is the better word given today's news) job losses mount beyond expectations and consumer loans become suspect. Brokerage money markets are a $4 trillion dollar market (edit--$1.2 trillion of that is treasury only though). How much more of this can or will the Fed backstop and then absorb onto their balance sheet if there is a second panic out of money market funds? There is the potential for a somewhat orderly unwinding as the banks withdraw credit by clamping down on credit cards as has been reported, but that doesn't apply to longer duration loans like auto loans and student loans.

[Higgenbotham]

Meredith Whitney on the banks. We all know of Meredith's prescient calls from reading John's blog.

January 07, 2009 3:29 PM

Analyst warns of more trouble brewing for banks

Kira Bindrim

Oppenheimer & Co. analyst Meredith Whitney says the federal efforts to bailout banks will not be enough to float the companies through the year.

http://www.crainsnewyork.com/apps/pbcs. ... /901079966

Hey, you gotta love a girl who has the nads to tell it like it is. What's wrong with these wimpy male analysts?

[StilesBC]

I look forward to your comments.

Matt Stiles

Hi Matt,

Very interesting blog. Please let us know when you post stuff like this. Like you said, it's like watching history in the making these days. I was thinking the same thing when I first became glued to economic news after AIG bailout.

I like many of your predictions for this year. I have four different scenarios that currently I'm thinking about. One of them happens to include massive nationalization of not only the financial industry, but also other major and important ones including the utilities. Your post, and I think a post by Nouriel Noubini also predicts more nationalization of the financial industry this year. Good job Matt. Keep it up.

"May you live in interesting times". -unknown

Joe

Yes, utilities are one thing I blanked out on when mentioning potential nationalizations. Protectionist governments like the US now has are renowned for taking over energy, water and telecom transmissions in the name of "national security." It would not surprise me to see this.

I won't be posting heads-ups on here every time I have a new article. I don't want to spam John's board. Instead, feel free to add me to your bookmarks and drop in every few days. I generally update 3-4 times per week.

Thanks for the comments
Matt

[StilesBC]

Government stupidity and overregulation was the cause of all this fraud. The sickening scandals we have uncovered lately are an effect of the former.

I disagree with the root cause. If you understand Generational Dynamics then you see that it is the loss of those who had the needed experience that allowed all of this to happen. ALL OF THIS: Madoof; derivatives; Calpers; an average P/E of 20 for over a decade; sub-prime and alt-a loans; the belief that the stock market would never go down for any length of time; a lack of savings by Americans; the debt build up by Americans; the belief that government can bail us out; house flipping; CNBC [haha]; etc.

Any of those things could happen but they would not all happen without the generational dynamic. I don't mean to belittle what you say but that is what this site is about and there are lots of other sites that discuss economics while this is the only one I know of that discusses it with the focus on the generational factor and correct me if I am wrong, John, but the theisis is that Generational Dynamics is the underlying factor in causing all these outcomes; the outcomes are all but predestined; the specifics are what we can't be sure of until they happen.

If you know the real root cause then you know the cause and also know what will stop it: true capitulation. The kind that comes when nobody wants to own stocks anymore and people are only worried about how to pay the power bill and could care less about becoming a millionaire by flipping houses and even though the housing market has bottomed nobody is willing to speculate in it anymore because houses are for living in not for making money off of.

--Fred

Well, I think we can ruminate on causes and causes of causes ad infinitum. From my perspective, the overall crisis is what was inevitable. Or more accurately, "economic revolution" was inevitable based on generational trends. The exact ingredients for that revolution were never pre-ordained themselves. They made themselves into monsters through gradual mistakes made on ideological grounds over decades (starting in the last crisis).

I do give a lot of credence to Generational Theory, as can be seen in my December 6th article, "On the Cusp of a Deflationary Depression" (http://futronomics.blogspot.com/2008/12 ... ssion.html).

I must confess that my blog does have a libertarian political agenda of sorts - which I disclose on the "About Me" page. I believe that we can avoid the same type of thing from happening again by drastically reducing the size of government and it's ability to intervene in the economy. By no means does that assume that we can avoid all "economic revolutions" in general or even war. But I think their impact can be more fairly limited to those who are directly responsible. Ultimately, there is no way to completely eliminate greed and the manias it can lead to. But an intrinsic systemic threat of being held responsible for one's own actions would naturally eliminate the possibility of fraud being perpetrated on the same scale as we have seen the last few decades.

In a way, I think America's founders had a type of generational theory in mind when creating their Constitutional Republic. They had known that the urge to push aside or stretch the law was great if "benefit for all" could be seen in the short term. Hence, the 10th Amendment. Basically, they created their nation such, that even in an "unravelling" it would be difficult for government or individuals to have favourable laws passed that would undermine the long term health of the economy. In a way this worked, as the following generational crisis (civil war) was far shorter and less destructive than most (also because it happened "too soon"). But since then, their ideas have been increasingly trampled on.

Regards,
Matt

[aedens]

The cool aid drinkers of risk management aversion. And you payed as such Taxpayer as they riased another mirror to deflect avarice "merge" at your expense.
Justice will never meet the the legal system.
http://www.nytimes.com/2008/11/09/busin ... =sce&scp=2

[freddyv]

>>> And why would you accuse Thomson/Reuters of fraud for reporting
>>>analyst estimates? They can report on anything they want, even
>>> indicators that are notoriously horrible at turning points in the
>>> economy (analysts as a group always remain wildly bullish long
>>> into downturns, well they are normally bullish at all times
>>> anyway).

I had agreed with that statement at the time because it seems that Thomson Reuters is just reporting the news but not so as evidenced by Ashwani Kaul on CNBC (Jan 8 2009) when he suggested that earnings will only drop "4 or 5 percent" "when all is said and done". That is his estimate for earnings for Q4 of 2008.

AHAHAHAHAHAHA!!!!

Even Eric Burnett and the crusty old guy who's name escapes me are clued in enough to know this guy is a hack, at best and criminal at worst. The crusty old guy, btw, has been earning my respect as he treats many of his polyanish guests with disbelief when they try to shill the market even as it crashes all around them.

Ashwani Kaul then went on to defend analyst's previous estimates which had been off about 70% (+50% estimate vs -20% actual) because "things happened that they could not forsee"...WOW! I must be a genius because I forsaw them and so did many other people, some of whom appeared on CNBC and Bloomberg; most of whom are just average people with functioning brains.

This fool then went on to say that he now sees a return to more normal misses of 3-4% one way or the other...I'm sorry but this IS criminal and I have to believe at some point these people will quit appearing in public out of shame, if not for their personal sefety given how much money they have cost the investing public.

I'd like to point out that he said these things on the same day that even Wal-Mart downgraded their earnings estimates based on slower than expected Christmas sales and the day after Intel drastically lower revenue guidance, by 20%, if I'm not mistaken.

Thomson Reuters is as culpable as S&P, Fitch and Moody's if they're not including the info of how bad these anyalysts have done in the recent past when they report their data, and if they send out hacks like Ashwani Kaul to support these terrible estimates.

--Fred

[Higgenbotham]

The cool aid drinkers of risk management aversion. And you payed as such Taxpayer as they riased another mirror to deflect avarice "merge" at your expense.
Justice will never meet the the legal system.
http://www.nytimes.com/2008/11/09/busin ... =sce&scp=2

From the article,

A pivotal figure in the mortgage push was Mr. Semerci, a details-oriented manager whom some former employees described as intimidating. He joined Merrill in 1992 as a financial consultant in Geneva.

After that, he became a fixed-income sales representative for the firm’s London unit. He later rose quickly through Merrill’s ranks, ultimately overseeing a broad division: fixed income, currencies and commodities.

Always carrying a notebook with his operations’ daily profit-and-loss statements, Mr. Semerci would chastise traders and other moneymakers who told risk management officials exactly what they were doing, a former senior Merrill executive said.

“There was no dissent,” said the former executive, who requested anonymity to maintain relationships on Wall Street. “So information never really traveled.”

This is precisely the type of thing I am talking about when I said on page 61 of this thread that, "Dissidents and whistleblowers were/are treated with extreme cruelty as the SU and US government agencies and corporations are really advanced tribal and fascist systems where no dissent whatsoever is tolerated, and loyalty to the members within the tribe (and not to the public) is the overriding concern."

In my opinion, our entire government and corporate structure is in an extreme state of moral decay similar to Rome, 14th Century Florence, or the Soviet Union. I do not believe there is any precedent in modern Western civilization for the scale of decay that we are seeing, except perhaps France in 1789 but I haven't studied that enough to really know.