March 2008

After Collapse, Back to Widgets

– Posted in: Current Touts

This is no mere recession we are entering; rather, it is a darkening prelude to hard times whose eventual depths may lie beyond imagining. Since August, the U.S. has thrown more than a trillion dollars of rescue money at the banking system in a desperate attempt to restore confidence. This effort, while unprecedented in scope, if not to say in recklessness, has failed miserably. Lenders and borrowers alike have completely lost their appetite for credit, with the result that yield spreads between government and corporate paper have ballooned to twice their pre-bailout size. Lenders have turned niggardly, consumers have begun to save as though there actually were going to be a tomorrow, and debt deflation is about to wring from the economy the final gasp of speculation-induced commodity inflation. Although the U.S. and global economies are headed into a perilous void, it is nonetheless possible to see the broad shape of things to come. For one, Americans can put aside any notions about emerging from the downturn as a financial powerhouse. There won't be much need for financial titans during the next boom, since the very idea of sophisticated financial products will be dead for at least a generation. A back-to-basics simplicity will prevail in the banking business, and lenders will find ways to profit by doing things the old-fashioned way ' i.e., by making loans to purveyors of goods and services that consumers actually want and use. Shunning reverse floaters, eurodollar swaps, synthetic put options and other arcane types of financial derivatives, we will be forced to become, once again, formidable producers of widgets and better mousetraps. Only Three Possibilities Of course, this implies that U.S. workers will have to become competitive with the most efficient widget producers around the world. Only three things can bring this about: 1) a big pay cut for

Try This Quote For a Laugh…

– Posted in: Current Touts

We've taken Larry Kudlow, Abbey Cohen, and a few other self-aggrandizing liars to task in the past for trying to spin pretty much everything as bullish, but that was before we'd heard from Barr Segal, a managing director at Los Angeles-based TCW Group Inc. On a 1 to 100 bozo scale, this guy is off-the-charts. When you read the quote attributed to him, you'll understand why the firm that employs Segal has put him in charge of managing $80 billion in fixed assets. Keep in mind that even though the Fed has thrown a trillion dollars at the 'subprime mess' since August and cut rates by 3 percentage points, things have only gotten worse for the banking industry. In fact, since these desperate efforts began, the difference between what banks and the government pay to borrow money for three months has doubled to 1.92 percentage points. An RTC-type structure has been suggested by Pimco's Bill Gross to help lenders push trillions of dollars worth of dubious mortgage paper onto taxpayers, a plan that would be just peachy as far as Barr Segal is concerned. Here's the quote from him, and let's hope he's out of town when the torch mob comes calling: 'An RTC-type structure is interesting, and it may not be that much of a burden on taxpayers in the long run,'' said Segal. The government should purchase the mortgages and reissue 'debt that's backed by the U.S. government -- and there you go, you've unclogged the drain.'' *** You Can Take the Seminar at Night There's good news if you've wanted to take the Hidden Pivot course but have been unable to attend on weekend mornings, when the class has typically been held. In mid-April, I'll be conducting the six-hour class over two consecutive evenings ' Wednesday and

Sunshine State’s Kamikaze Dive

– Posted in: Current Touts

Captured in a headline in yesterday's San Francisco Chronicle, here's a snapshot of California barreling down the road to ruin: 'Gas Tax Revenue Windfall for State.' And here's the sub-head: 'Lawmakers eager for help balancing budget'. Talk about man's inhumanity to man! With the state looking at an $8 billion deficit, the pols evidently think that recouping a big chunk of it through higher gas prices is a great way to go ' their idea of a victimless tax. Supposedly, if gasoline, now averaging $3.63 in the Sunshine State, hits $4 a gallon, it will add $1.2 billion to the $3.8 billion that state and local governments are already extorting from motorists at the pump. The reporter who wrote this story, one Matthew Yi, of the Chronicle's Sacramento bureau, seems as tone deaf to its implications as the politicians who evidently have been drooling over the prospect of all those 'windfall' dollars finding their way into the state's coffers. Here's a little more from Mr. Yii ' a transition paragraph that he undoubtedly believes is editorially neutral: '[The extra revenues] would bring some welcome relief to the state's revenue picture, which has been bleak in recent months as the meltdown in the housing market became a drag on the Golden State's economy.' Now, you may have to read that sentences a couple of times before you fully understand what it says ' that taxing fuel until motorists cry 'Uncle!' is somehow going to help California's 'revenue picture.' If that were true, then why not levy a $500 tax on each and every patient admitted to a hospital emergency room? That's a tax that would be especially hard to avoid ' plus, wouldn't the lion's share be paid by greedy insurance companies that are swimming in unconscionable profits anyway? The Last

Street ‘Cheered’ — Or Just Nuts?

– Posted in: Current Touts

Most news outlets reported that investors were 'cheered' by the Fed's most recent rate-cut, but we know better. For it was nothing even remotely resembling cheer that pushed the Dow Industrials into a spectacular, 420-point surge last week, and into 200- and 300-point rallies since then; rather, it was the unmitigated panic of bears who had bet that stocks would fall. This dynamic is called short-covering, and we would be very surprised if those two words combined have ever been uttered by a network news anchor. Despite this, we have always maintained that short-covering is the basic fuel not only of bull markets, but of breathtaking bear rallies such as have been occurring almost weekly of late. Mere optimists are incapable of such buying stampedes, even when the business pages are filled with the kind of news that brightens investors' spirits. No, it is only bears who get caught in the ringer who can muster the kind of urgency it requires to push the broad averages past heavy supply and above prior peaks. Pack Journalism Are the news reports that describe this action as 'bullish' therefore wrong? Yes, we would argue. Moreover, the inability of mainstream commentators to tell it like it is represents a key difference between major news outlets and the not-yet-ready-for-prime-time world of newsletters such as this one. Having been a newspaper reporter myself for seven years, I can empathize with the tendency of journalists to report the obvious at the expense of the truth. As a fledgling reporter, I learned this the hard way covering a campaign 'coffee klatch' for a powerful New Jersey politician at the home of a black ward-heeler in Atlantic City. She had baked a cake because it was his birthday, but he was so eager to move on to the next

Save The Donald!

– Posted in: Current Touts

Before discussing the imploding condo market and how it could ultimately bring down the nation's regional banks, let me digress for a moment to a kinder, gentler story that began this evening with the hankering I had for a corned beef sandwich. My wife, Marilyn, had prepared the corned beef Irish-style on St. Paddy's Day, with the traditional side of cabbage, but I wanted the leftovers Jewish-style ' i.e., on rye bread with cole slaw and Russian dressing. Having none of these ingredients in the house, I drove to the Safeway, only to find the deli counter closed. There was a guy mopping the floor behind the cold cuts display, but he looked too busy to be bothered. With just minutes remaining before the evening shift ended, he was probably eager to finish his work and go home for the holiday weekend. At that point, the last thing in the world he wanted to hear was a request for some deli item that had been put in storage for the night. As I started toward the exit, resigned to having my sandwich on white bread with mustard, he called out, 'Sir, is there anything I can do to help you?' 'Sure,' I replied. 'Do you have any packaged cole slaw?' 'Yes, I'm sure we do,' he said helpfully. 'I'll show you where it is.' Mitch ' that was the name on his badge -- walked me over to a refrigerated display, where he searched high and low for the cole slaw. 'Must be sold out,' he said. 'But that's no problem.' He walked back behind the deli counter, opened the cold storage locker and returned with a vat of cole slaw. From this vessel he scooped a small amount into a half-pint container, then asked if there was anything else

Dollar’s Upside Appears Limited

– Posted in: Current Touts

Although we wrote up Tuesday's ballistic rally as little more than a meaningless gusher of mass hysteria, most of it short-covering, we were still surprised at how quickly it receded back into near-nothingness. Nearly two-thirds of the Dow Industrials' gains vanished with yesterday's 293-point decline, providing fresh evidence that investors are not nearly so ebullient as the nightly news commentators would have us believe. However, it was not the cascade in stocks that deserves comment, but rather the across-the-board selloff in commodity markets. Gold was down $58, ending a six-day winning streak that took quotes above $1000 for the first time, and the price of a barrel of crude fell by nearly 5%, to $104.48. Some of the agricultural contracts were limit-down, retracing parabolic spikes at the same steep pitch as the rallies that had created them. Some saw the collapse in commodities as signaling a reversal of the dollar's long slide. If so, we lack the imagination to see how this trend could persist for more than a few days. Someone in the Rick's Picks chat room mentioned that he'd never seen sentiment swing so heavily against any investable as it has against the dollar. We wouldn't argue otherwise, since it is true that the dollar has few friends in the world right now, and almost no one expects it to turn around any time soon. But there are good reasons for its pariah status, and they seem likely to persist for the foreseeable future. We note that 'Helicopter Ben' Bernanke has lived up to his nickname, and nothing he has said or done in the last six months would suggest that the value of the dollar is much of a concern to officialdom. Treasury's Paulson mentioned the need for a strong dollar in a speech he gave the

Monster Rally Fools No One

– Posted in: Current Touts

The second epic short-squeeze in a little more than a week has sent bears a clear message: If you want to get rich betting on the sure thing, you had better be prepared to die trying. The Dow Industrials popped for a 420-point gain yesterday, driven as always by hysterical short-covering. Compounding the bears' shock and awe was the fact that the catalyst for this latest rally was a news announcement that should have disappointed investors. A 100-basis-point easing had been all but ordained by the bond markets, but the actual cut came in at 75 basis points. Rather than plunging in despair, however, stocks sold off only moderately in the gratuitous gyrations that followed. Bears need only have looked in a mirror to see what was holding stocks up. So why is shorting this market a 'sure thing'? We've cited a growing list of reasons and now note that even the relative optimists have conceded that the most important of those reasons, the ongoing real estate collapse, is looking more and more like a 1930s-style dreadnought. Adding to the gloom is that no seems able to imagine a decisive end to it, only the suspiciously vague prospect of an economic rebound 'in the second half.' There is also abundant statistical evidence of deepening recession, plus a string of would-be bank failures that have been growing more colossal by the week. As for that vast army of bozos who have always believed that the Fed 'would never let it happen,' evidence grows that the crisis is bigger not only than the Federal Reserve, but much bigger, even, than all of the central banks acting in concert to try and stop it. Uncle Sam alone has thrown a trillion dollars at the problem so far, manifestly failing to restore confidence in

‘Sunday Effect’ Propped Stocks’

– Posted in: Current Touts

It would have taken some imagination to foresee that just about every asset class save stocks would get hit yesterday. Although the Dow Industrials, for one, began the day 200 points in the hole, the blue chip average went no lower intraday, and it ultimately settled 21 points above Friday's close. In retrospect, no one should have been too surprised that U.S. stocks bucked a global fire sale, since they'd already been sold to the point of exhaustion Sunday night in futures markets around the world. That might not sound very auspicious, but we cannot recall a single instance when punitive selling begun on a Sunday night carried into the NYSE opening on Monday. Some may recall that the 1987 Crash occurred on a Monday, but that was before index futures were traded around-the-clock. Had that been the case back then, we have little doubt that the worst of the selling would have been over before dawn on Monday, and that the short-squeeze that brought the stock market roaring back the next day would have occurred a day earlier, sparing investor's the agony of Black Monday. (Click on image to enlarge, if you dare) On Monday, commodities in particularly got knocked for a loop, presumably because they were so very overbought. Crude plummeted more than $8 from its highs, palladium was off nearly 10 percent, and the softs -- wheat, corn and soybeans leading the way  ' got pummeled. Gold was a notable exception, ending the day about even with Friday's settlement price after being up more than $30 overnight. Treasurys rose moderately, with future contracts on the Ten-Year Note and 30-Year Bond up about � of a point ' hardly enough to suggest that a flight to safety was on many investors' minds. It felt more like liquidations by financial players who may

Not to Sound Alarmist, but…

– Posted in: Current Touts

Would you have preferred to go home long at the close on Friday, or short? That's a question we frequently ask in the Rick's Picks chat room toward the end of the trading day ' a little game we play to position ourselves for the next day, in true contrarian fashion, against whatever strategy feels most comfortable. If we have succeeded, we will have placed ourselves, psychologically speaking, squarely in harm's way. We do so knowing that the only possible buyers of shares these days -- other than Kudlow and friends, of course -- are bears covering short positions suddenly turned painful. It therefore follows that if bears seemed mellow and complacent at Friday's close, we should have wanted to load up on stocks, since any news over the weekend that might cheer investors even slightly would be likely to touch off a short-covering tizzy come Monday morning. However, if bears seemed fearful, running up share price in the final minutes, then we should have wanted to go home short up the wazoo. (Click on chart to enlarge) Truth to tell, we had trouble discerning a psychological 'comfort zone' to trade against Friday afternoon. Although the Dow finished down nearly 200 points, that was 120 points off the lows, and there were no clear signs of panic by either bulls or bears as their respective opportunities to freak out dwindled in the final hour. If it had been a game of chicken, both drivers probably would have been content to go over the cliff. Hell Week With no signs of craziness to guide us, we found ourselves weighing the facts, dismal as they are, and concluding that stocks are far more likely to go plummeting into the bowels of Hell next week than to continue acting as though we'll somehow get through this mess together. Although Optimism is

Our Bullishness Goes Only So Far

– Posted in: Current Touts

Overly bearish sentiment has put us temporarily in the bulls' camp, but we part company with the those who evidently are gearing for a powerful rally that lasts into summer or longer. You can't blame stock brokers, and analysts and CNBC shills for trying to spin things that way, since they can point to Tuesday's monster rally in the Dow as evidence that the worst is behind us. They may be right, but so might people who believe in alien abductions, Tinkerbell, and OJ's search for the real killers. Frankly, we've always thought the stock market's vaunted prescience was over-rated and that nascent bull markets do not so much predict economic recoveries as engender them by turning psychology bullish at cyclically ordained intervals. (Click on chart to enlarge) But if a new bull market has indeed begun, it has gotten off to a weak start. Notice in the chart above that the 400-point rally earlier this week, powerful as it may have seemed, did not surpass even a single important prior peak on the hourly chart. Although that modest feat would have required only a further 46 points' worth of jubilation, in our Hidden Pivot playbook book a miss is as good as a mile. In this case the shortfall was more than slight, however, since we require rallies to pass not one, but two prior peaks to create the kind of impulse legs that typically precede extended bull moves. It would have taken 92 points more upside to achieve that on Tuesday, but the fact that not even one important high was surpassed is reason enough to infer that this bull lacks real guts. That said, in the coming weeks the broad averages will need to act at least moderately buoyant to turn sentiment back to bullish. We'll be watching