Fresh Braaaaaiiiiiiiinnnnssssss...

'Nuff said.

I'm A Mushroom Cloud Layin'

Muthafucka', muthafucka!
Every time my hands touch brain, I'm muthafuckin' Supa'Fly TNT! I'm the Guns of the Navarone!

Save Fannie Mae and Freddie Mac = $269 billion
Prop up Federal Housing Administration = $300 billion
Shotgun wedding Bear Stearns to JP Morgan = $29 billion
Initial loan to AIG = $85 billion
Second loan to AIG = $38 billion
Third loan to AIG = $21 billion
TARP (aka Help The Banks Program) = $700 billion
Potential loan to General Motors = $10 billion
Fed swap line with New Zealand central bank = $15 billion
Fed swap line with Mexico = $30 billion
Fed swap line with Brazil = $30 billion
Fed swap line with South Korea = $30 billion
Fed swap line with Singapore = $30 billion

The list goes on and on and on. A fucking money tsunami. Which is why I turned into a mushroom cloud laying mother fucker when I read this story run by Bloomberg today:

Oct. 30 (Bloomberg) -- The White House and Treasury Secretary Henry Paulson want to scale back a proposal by Federal Deposit Insurance Corp. Chairman Sheila Bair to guarantee mortgages to help stem foreclosures, according to two congressional aides briefed on the matter.

The Bush administration is reluctant to sign off on the plan because of its cost, the two people indicated. Bair's idea to provide guarantees for modified loans could take as much as $50 billion from the $700 billion bailout package approved by Congress this month.

Because fuck everday people who are on the verge of foreclosure.

I am totally, completely, absolutely convinced - we have lost our way.

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U.S. GDP contracted (down 0.3%) in Q3 2008, the most since the 2001.

Details of Q3 real GDP growth from the Bureau of Economic Analysis:

Real personal consumption expenditure: -3.1% (was an increase of 1.2% in the Q2)

Nonresidential fixed investment: -1% (was an increase of 2.5% in Q2)

Exports: +5.9% (was an increase of 12.3% in Q2)

Government expenditures: +13.8% (was an increase of 6.6% in Q2)

Inventories added 0.56% to GDP growth (was a subtraction of 1.5% in Q2)

Disposable personal income: -$102.4 billion (was an increase of $409.3 billion in Q2)

Real final sales of domestic product: -0.8% (was an increase of 4.4% in Q2)

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Dow up 2.11% to 9,180. NASDAQ up 2.49% to 1,698. S&P up 2.58% to 954. Gold currently $736/oz.

Whoopee Cushions For Everyone!

When anyone sits down it emits a REAL Bronx cheer!

The FOMC voted unanimously to cut the federal funds target rate by 50 basis points to 1.0%. Wall Street greeted the second rate cut of the month with a giant fart. The Dow promptly dropped over 220 points. Then in an abrupt 180 degree turn not seen since at least Monday, the market rallied up 373 points. It looked like we'd have the second positive rally in as many days, when all of a sudden some fatass sat on the Whoopee Cushion and popped it with 12 minutes left in the trading day. The Dow dropped by 357 points. In 12 minutes. Which would be a shocking decline if it hadn't happened 130 of the last 131 days.

Farfeg-Yer-Nugen

Who's the biggest, baddest company in all the land? Move over Exxon...

Numerous hedge funds, smart money playas and all varieties of profiteering miscreants were on the wrong side (the very wrong side) of the mother of all Volkswagen short squeezes today.

In what seemed like easy money, being short the common stock of V-dub and either long Porsche or long V-dub preference turned out to be oh-so-painful when Porsche announced "Hey guess what guys, we have options to buy a larger stake in Volkswagen, and we will begin doing so right... about... now."

So they started to buy, like, lots of shares... and buying drives the price up, and then they bought more, and more, and more... and the Volkswagen shorts were heard yelling "Oh shit! We're on the wrong side of this one!" And they had to buy shares too, to cover their failing short positions. And that buying drove the price up some more. So after the mostly non-consensual Volkswagen stock buying orgy ended and the dust settled, Volkswagen was up like a million percent. Okay, not a million percent but 289% in one week.

And that is how you turn an ailing car maker into the company with the largest market cap in the world... almost overnight.

And if you're a hedge fund, this is how you lose $30 billion in a day, which is exactly what they did. (And $30 billion used to be alot of money, until central banks around the world began spraying hundreds of billions all the over the place, like little kids with super-soakers on a hot summer day).

Normally, I'd scratch my head and wonder how a car company, in the middle of a world wide recession could catapult into the #1 biggest company in the world spot... but not anymore. It makes perfect sense.

In other news, General Motors continues to lobby Washington for all kinds of handouts, bailouts, failouts, whatever you want to call them. They need alot of money, like, yesterday. So does Ford.

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Side note: The Consumer Confidence Index showed the worst levels in history, so, obviously, today was the day to buy stocks... because happy days are here again. Anything you can get your hands on, just buy it. The Dow and S&P had their second biggest point gains in history. Also, makes perfect sense.

Now I'm going to go curl up in the fetal position in my Volkswagen Westfalia with a bottle of Thorazine. Good night.

The Yen

If you had bought the Yen two months ago and shorted everything else, all markets and all asset classes people would have called you crazy. Now, you'd be seen as a genius.

Today, however, even the Yen is starting to lose is strength. The NIKKEI index reached a 28 year low yesterday, and those that think the Japanese central bank will intervene are starting to sell the Yen.

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U.S. military helicopters launched an attack Sunday on Syrian territory close to the border with Iraq, killing eight people in a strike the government in Damascus condemned as "serious aggression."

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The economic problems in Pakistan are exacerbating the already troubling battles between militants and the new Pakistani government. Pakistan needs to be foreign policy issue #1. It is more important than Iran, more important than Iraq and more important than Afghanistan. Pakistan is a nuclear country that is teetering on the brink.

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The Dow traded in a 5% range and closed down 203 to 8,175. The NASDAQ and S&P were both down approximately 3%.

Paper gold contract prices on the Comex were relatively stable and are currently trading at $728. The physical gold market is another story entirely. Physical gold in the retail market is selling at a 10 - 15% premium to the paper gold price (if you can find it, which you cannot). In my opinion, we'll see Comex contracts in default in the not too distant future. The paper shorts are going to get crushed.

Rock, Paper, Scissors

Scissors wins.

The Federal Reserve has three options: 1. Use rocks to bludgeon banks into lending again, 2. "Print" more paper money and drop it from helicopters or, 3. Cut rates to make the cost of money as low as possible.

The chances of a quarter or half point rate cut are pretty high; like somewhere around 100%. A fifty basis point rate cut would bring the Fed's key interest rate down to 1%, right where rates were in the beginning of the decade when credit was cheap and Americans were skipping down the road in debt happy oblivion.

Hey, wait a minute. Wasn't that what got us into this mess?

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The IMF has agreed to lend money to Hungary to prevent it from "going Iceland all over the place."

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The Financial Times is reporting that last month Citigroup spurned the advances of the prettiest girl at the ball. Rather than taking over the most highly regarded investment bank on Wall Street (Goldman Sachs, which then became a commercial bank) Citigroups CEO, Vikram Pandit, instead decided to go home alone and dream about Wachovia. Weeks later, Citigroup worked up the nerve to ask Wachovia out on a date and Wachovia accepted. Wachovia then stood Citigroup up and instead, had sex on the first date with Wells Fargo in the backseat of a stagecoach.

Goldman Sachs could not be reached for comment.

Chalk up another FAIL for Citigroup.

Thunderdome

Who runs Bartertown?

Who runs the largest (by landmass) country in the world? Who runs the most natural resource rich country in the world? Who runs the largest, most natural resource rich country in the world that also posseses a nuclear arsenal? Who runs the largest, most natural resource rich country in the world that also posses a nuclear arsenal and is also still upset that the United States called the cops on it's massive empire-party?

Master Blaster? No. Putin. (he may also attempt to run Bartertown...)

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On Citadel's conference call yesterday, CEO Ken Griffin reassured shareholders (and the rest of the world that is counterparty to it's soon-to-be-announced-enormous-FAIL) and reminded them that "We need to do what we've done in 18 years successfully. We need to make good investment decisions."

LOLzzz. Really? You need to make good investment decisions? Ah hahaha. Are you sure? Why in the world would you need to do that? Tell us something else we don't know, genius.

The Citadel news is still breaking...

Alpha Bank Boards FAILboat

Alpha Bank & Trust was seized by federal regulators today, making it the 16th U.S. bank to be closed this year, the largest one year total in 15 years. The cost to the FDIC fund is estimated at approximately $158 million.

National City Bankcorp declined a ticket on the failboat and agreed to be bought by PNC Financial.

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In an emergency meeting today, OPEC ministers agreed to cut oil production by 1.5 million barrels a day. Crude fell 5% to $64.15.

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The U.S. Treasury is contemplating expanding it's liquidity injections to include insurance companies.

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Wild swings in global currency markets set traders on edge today. Kathy Lien, director of currency research at Global Forex Trading in New York, said the moves seen in the last few hours of trading on Friday "are what we typically see in a quarter."

The currency volatility is exacerbating the shakiness of equity markets, especially in emerging markets that have already been bludgeoned by plunging commodity prices. The central banks of Brazil, Mexico, Russia, India and Hungary were forced to sell their dollar reserves and raise interest rates to defend their currencies. The Euro and British Pound fell sharply against the U.S. dollar and Japanese Yen.

Overseas equity markets tumbled on Friday. Great Britian, France and Germany suffered losses of 7% - 8%. Japan, Hong Kong, India and Russia were down roughly 10% each.

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The U.S. equity market futures were stopped limit down this morning, when 'bid wanted' received no such bid. So, time out and everyone just calm the fuck down. When the market opened, the Dow fell instantly over 5% but then recovered a bit. By the end of the day the DOW and S&P were both down 3.5% to 8,378 and 876 respectively. The NASDAQ dropped 3.25% to 1,552.

The U.S. dollar gained against all major currencies except the Yen. In the face of dollar strength, gold climbed higher.

As the central bank intervention increases, so does the volatility.

I'm afraid that we're nowhere near the bottom. Repeated 90% down volume days with no real recovery in between. The market is due for a very sharp rally, still selling pressure is actually increasing. There is no pressure to buy. A 10% down day is coming, and then another. Will the Dow drop to 5,500. I'm afraid it will. If it does, the bargains will impossible to avoid. A monkey will be able to make money.

Will the Dow yield 6%? It has before. In October of 2007 it took 19 ounces of gold to buy the Dow. It currently takes just over 11 ounces. Will an ounce of gold buy the Dow? It did as recently as 1980.

In the ongoing battle of weak hands vs. strong hands, the weak hands are the leveraged funds. They're being forced to liquidate at all costs. This is the mother of all margin calls. The strong hands are unleveraged, without margin and holding cash. The Chinese water torture is excruciating, but the buying opportunity of a lifetime is coming. Could be next week or next month or next year.

We Bring Good Things To Life

General Electric, the bank posing as a light bulb company, announced today that it will use the Federal Reserve's new short term funding facility. GE's official statement sounded earily similar to the Lehman Brothers statement about testing the Fed's discount window in an effort to show that there was no stigma... right before Lehman Brothers filed for bankruptcy in the single largest FAIL in history.

GE spokesman Russell Wilkerson said, “To ensure access and operability and to demonstrate our support for the Fed’s action, we plan to test the facility."

In other words, we are in deep, deep shit and need government assistance in order to prevent bankruptcy of the second largest corporation in the world.

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Today during Congressional testimony, former Federal Reserve Chairman Alan Greenspan said, "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity, myself especially, are in a state of shocked disbelief."

Greenspan was once considered the most accomplished central banker in U.S. history and was affectionately referred to as "The Maestro".

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"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake up homeless."
- Thomas Jefferson, 1802

Rated #1 In Satisfying Customers

Also rated #1 in losing mind-boggling sums of money.

Today, Wachovia reported a Q3 loss of $23.9 billion, or around $266.5 million per day, each day for the months of July, August and September. That’s over $11 million per hour for three months.

Now, to be fair, $19.1 billion of the loss was goodwill writedowns for the acquisition by Wells Fargo, so the net loss was only $4.8 billion. Still, that’s eight times more than the $600 million that analysts were expecting.

In 2000, when Ken Thompson took the helm as CEO of Wachovia, its shares were trading at around $34. Shares of Wachovia now trade $5.70. In June of this year, Ken Thompson was ousted as CEO. It is estimated that Thompson made over $160 million in his tenure at Wachovia.

Congratulations on that staggering achievement.

Wachovia is now using taxpayer money to stay afloat.

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Having already achieved the coveted worlds-largest-ever-sovereign-default in 2001, Argentina's government is now making a run at most-back-asswards in-the-world. What do you do if your country's balance sheet is imploding and your checks are bouncing like superballs and no sane country in the world will lend you money? You steal the hard earned pensions of your citizens, obviously.

Argentinians were just finally getting over Madonna's portrayal of Eva Peron in Evita. Now this.

Note to self: do NOT move to Argentina..

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The FBI is investigating over 30 letters containing death threats and white powder that have been sent to Chase Bank branches throughout the country.

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The Dow dropped 514 points (5.6%). The NASDAQ closed down 80 or 4.8% and the S&P won the daily race to the bottom, finishing down 58 or 6.1%.

"The market always does what it's supposed to, but never when."

Sad, Sad Citigroup

Q: What do you call a bank that's in the hole to the tune of nearly $300 billion?

A: Too big to fail.

Last week Citigroup posted it's fourth straight quarterly loss. It's shitsandwich (writedowns and charge-offs + capital raised + loan loss reserves + level III asset growth) now totals nearly $1,000 for every single man, woman and child in the United States. Citigroup is extending it's lead as the largest financial black hole in the entire world. In fact, Citi's misery index is higher than Merrill Lynch, Morgan Stanley, Bank of America, Wells Fargo, JPMorgan and US Bancorp combined.

In April of 1998 Citibank announced it's $166 billion merger with Travelers Insurance, making it the largest corporate merger to date. The combined company would be called Citigroup, and it would usher in a new era in finance. Citigroup would become a one-stop finance shop. The Walmart of financial services.

The 1998 post-merger price of Citigroup stock was $36.50. Today, Citigroup trades at $14.18.

In hindsight, ex Citigroup CEO John Reed called the merger a mistake. On the tenth anniversary of the merger he said, "The stockholders have not benefited, the employees certainly have not benefited and I don't think the customers have benefited."

You can add taxpayers to the list of those that have not benefited.

Chuck Prince, ousted as CEO of Citigroup at the end of 2007 as a result of the sub-prime mortgage crisis, received an estimated $100 million in total compensation.

Citigroup is now receiving taxpayer money to keep it afloat. All is right in the world.

Fine, Here's Your Money Back

What's the plural of stimulus? Stimulus Part Two?

Stimulus's? Stimuli?

Today, during testimony to the House Budget Committee, Fed Chairman Ben Bernanke endorsed the idea of a second "economic stimulus" package to help strengthen the weakening economy. He said that lawmakers should consider "measures to help improve access to credit by consumers, homebuyers, businesses and other borrowers." Because clearly, what we need now is people spending money on things they can't afford otherwise.

Don't get me wrong, anytime the government sends me my own money back I take it, but when we have to send rebates out to every taxpayer in the hopes that spending the money will prevent an economic cardiac arrest, we're in pretty dire straights. The government is in the business of taking your money; that's what they do. That's about all that they do. And once they taketh, they generally don't like to giveth backeth. They especially don't like to give it back to you twice in the same year, like they're thinking about doing now.

I an attempt to do my part in keeping the economic wheels turning I plan on spending my second "rebate" on this new Gucci wallet that I've had my eye on. Either that or stocking up on generic mac and cheese for when, well, you know.

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4 out of 5 banks agree, the bailout won't work.

Paulson's plan to buy $250 billion worth of bank equity, in the hopes that the banks would use the money to start lending... turns out it's a dump truck full of FAIL.

Merrill Lynch CEO, John Thain said "We will have the opportunity to redeploy that, but at leaast for the next quarter, it's just going to be a cushion."

Barclays analyst Roger Freeman stated, "My expectation is it's quarters off, not months off, before you see that capital being put to work."

For the punch out, JPMorgan CEO Jamie Dimon added, "It’s clear that the government would like us to use the capital. If you are a bank that is filling a hole, you obviously can’t do that."

Strike 3.

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In a bewildering turn of events, Ben Bernanke and Hank Paulson both gave public speeches today and the market didn't crash. On the contrary, the Dow closed up 413 points to 9,265 and the S&P surged almost 5% to 985. Happy days are here again. At least until tomorrow morning.

Fun With Hockey Sticks

The debtor nation.

I think these charts from the Federal Reserve bank of St. Louis speak for themselves.

The first chart shows total borrowings of depositor institutions from the Federal Reserve.

The second chart shows non-borrowed reserves of depository institutions plus TAF credit

Reserves can be negative? Who would have thunk it?

Credit is not liquidity. Liquidity based on credit is not capital, it is debt. Yet central banks continue to pump trillions of dollars, Euros, etc. into illiquid, and in many cases insolvent, commercial banks in an attempt to prop them up. Central banks do this by selling bonds, and bonds = debt.

Money used to be a store of value, but no longer. Money is someone elses debt. With the help of the Federal Reserve, the U.S. Treasury creates money by selling bonds, which are nothing more than liens on the future productivity of taxpayers. This money mirage must be the extraordinary popular delusion of our time.

This crisis will end when banks and other financial institutions stop kneeling at the begging bowl of state intervention, and politicians stop placing taxpayer gifts in the bowl for them to take. I can't imagine it ending any other way, nor can I imagine it ending any time soon. Sadly, we only call for real change when we're truly at the end of the line. I don't think we're there yet. I don't think we're anywhere close.

Prior to the day of real sea change, markets will continue to do what they do best; clean up the leveraged excesses created by the mathematical geek squads on Wall Street. The purge phase of the low interest rate, easy money/credit/debt cycle is unavoidable.

Before this primary bear market turns around we'll most likely retest the 2002 lows, if not torpedo through them on the downside, and based on the changes we'll most likely see in the world of lending and finance, it will probably take a decade or more to get back to some semblance of real world values. Unfortunately, millions of people will continue to watch their 401k's, pensions and portfolios decline in value. We'll wonder what happened to the value of our assets, then come to grips with the scope of our liabilities.

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Today, the Dutch government bought a 10 billion Euro stake in ING Groep. ING has stopped paying a dividend and its management won't get bonuses this year. ING shares fell 27% on Friday.

Dutch Finance Minister Wouter Bos said ING was a "healthy company".

LOLzzz. You can't make this up.

FAIL.

Lahde Di Da

Heady hedge fund brah.

Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, "What I have learned about the hedge fund business is that I hate it." I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.
So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all. Andy Springer and his company will be handling the dissolution of the fund. And don't worry about my employees, they were always employed by Mr. Springer's company and only one (who has been well-rewarded) will lose his job.

I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life -- where I had to compete for spaces in universities and graduate schools, jobs and assets under management -- with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.

On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government. Capitalism worked for two hundred years, but times change, and systems become corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man's interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft's near monopoly. I believe there is an answer, but for now the system is clearly broken.

Lastly, while I still have an audience, I would like to bring attention to an alternative food and energy source. You won't see it included in BP's, "Feel good. We are working on sustainable solutions," television commercials, nor is it mentioned in ADM's similar commercials. But hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The original American flag was made of hemp fiber and our Constitution was printed on paper made of hemp. It was used as recently as World War II by the U.S. Government, and then promptly made illegal after the war was won. At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country? Ah, the female. The evil female plant -- marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers. This policy is ludicrous. It has surely contributed to our dependency on foreign energy sources. Our policies have other countries literally laughing at our stupidity, most notably Canada, as well as several European nations (both Eastern and Western). You would not know this by paying attention to U.S. media sources though, as they tend not to elaborate on who is laughing at the United States this week. Please people, let's stop the rhetoric and start thinking about how we can truly become self-sufficient.

With that I say good-bye and good luck.

All the best, - Andrew Lahde

You've Been Served

After a seven year stint as The Crypt Keeper on HBO's Tales From The Crypt, Richard Fuld moved on to the world of high finance as CEO of Lehman Brothers.

On September 21, just days after Lehman Brothers filed for bankruptcy, a Lehman employee approached Fuld at the company gym and punched him in the face, knocking him out cold.

Today, Dick, along with 11 others, was subpoenaed in conjunction with multiple grand jury investigations into the investment bank's epic how-come-we're-not-to-big-to-fail FAIL.

Times are tough.

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For the week ending October 8, banks borrowed in total, a record average of $420 billion from the Federal Reserve per day. That’s billion with a “b”, per DAY. The data released yesterday for the week ending October 15 showed a new staggering apex of $437 billion per day. That's a lot a cake.

Bretton Woods (Part Deux)

The sequel is never as good as the original.

The ‘New Bretton Woods’ chatter has increased in recent days. Yesterday, ECB President Jean-Claude Trichet said, “Perhaps what we need is to go back to the first Bretton Woods, to go back to discipline. It’s absolutely clear that the financial markets need discipline: macroeconomic discipline, monetary discipline, market discipline.”

In 1933, FDR signed into law Presidential Executive Order 6102, also known as the Gold Confiscation Act, which made illegal the private ownership of gold. Under threat of fine and imprisonment, U.S. citizens were forced to sell their gold to the Federal Reserve at a government set price of $20.67 per ounce. Shortly thereafter, the U.S. Treasury set the price of gold for international settlements at $35 per ounce, thereby devaluing the dollar by 40% overnight (or inflating the value of the gold you were just forced to sell by 75%, depending on how you want to look at it). I’d guess that every single person who gave up their gold at a steep discount was unhappy, but maybe not, maybe it was seen as patriotic.

Eleven years later in 1944, at the Mount Washington Hotel in Bretton Woods, New Hampshire, the WWII Allied leaders met and agreed to a monetary policy that set each country’s currency to a fixed exchange rate +/- 1% in terms of gold.

After WWII the U.S. economy was stronger than any other in the world, and that economic strength translated into currency strength. The U.S. Treasury made a commitment to convert dollars into gold at the set exchange rate of 35 to 1. Hand over $35 and you’d receive one ounce of gold in return. The U.S. dollar was as good as gold. In fact, it was better. It was much easier to transport and it earned interest. What a deal.

The system collapsed in 1971 when, without consulting with foreign leaders or even his own State Department, Richard Nixon suspended the U.S. dollars’ convertibility to gold. In what would later be called the “Nixon Shock”, the gold standard for foreign exchange was gone.
So, the U.S. dollar and the world monetary system as we know it are only 37 years old.

Today, Italian Economic Minister Giulio Tremonti said, “The dollar is the currency of Bretton Woods, but now it could be that there will be other combinations.”

The United States is up to its throat in debt, and I assume that our creditors would like to be paid back in something other than a debased dollar.

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In a wild display of volatility not seen since, er.. yesterday, the Dow swung in a 759 point range, or almost 9%. In less than an hour and a half of trading, the index was down 357 points then came roaring back to close up 401 to 8,979. The volatility was attributed to options expiration, the wanning gibbous moon, donkeys, wildfires in California and Citadel's CEO Ken Griffin.

Um, Now What?

If you had to show the success of the FAILout in video format, this is what you'd end up with (click on full screen mode for maximum effect). A rocket exploding into smithereens, set to Tchaikovky's 1812 Overture. Perfect.



So now that the plan has been officially greeted by a giant Bronx cheer, what next?

Actually, LIBOR has dropped a bit so maybe something is beginning to work. Let's hope so, because the equity markets are having none of it.

Todays 4 week Treasury Bill auction result:
Price = $99.992222, which means if you loaned the U.S. Treasury $99.992222 today, in 4 weeks they'd give you your money back plus 8/1,000ths of a penny for your trouble. Not a great return, but if you'd had that $100 in the stock market today, you lost 8 bucks (which reminds me of another Wall Street adage: In a bear market, the guy that losest the least, wins).

The DOW dropped 733 points, down almost 8%. The S&P flirted with a trading curb halt after dropping over 9%. The NASDAQ fell over 8%.

In Asian markets, the monkeys tried to one-up the U.S. market monkeys and began throwing peanuts and feces at each other in a furious rage. The Hang Seng and Nikkei opened down 10% before bouncing off their lows.

Not to be outdone, the European traders will most likely fling a fair amount of limey poo as well.

Buy Low, Sell High

Or so they say, on Wall Street.

But they say a lot of things on Wall Street. And everyone is trying to sell something. Even those that are buying, are buying with the intent of selling it to some sucker in the future.

They’ll tell you that the trend is your friend, right before they advise you to sell into any rally.

You should buy on dips, but never try to catch a falling knife (however, picking up a knife on the floor never hurt anyone).

I’ve heard that as January goes, so goes the year. Until the summer months approach, then you should sell in May and go away (this one would have worked well in 2008).

Don’t try to time the market, think long term (unless, of course, you’re a short term trader in which case you should buy the dips and sell the rips).

Buy value, unless you should be buying momentum. What’s your timeframe? What’s your pain tolerance?

Buy into weakness, but don’t forget that falling knives cut (and can be painful).

Be fearful when others are greedy, and be greedy when others are fearful (thanks Warren)

Buy when there's blood in the streets (thank YOU Baron Rothschild).

Don’t sell after a crash, it’s too late. If you’re going to panic, panic early.

No one rings a bell at the market bottom (this one’s not true – they ring a bell every time the market opens and closes, so they actually do ring a bell at the bottom, give or take a couple of hours).

Buy the rumor, sell the news.

Don’t fight the tape.

The markets first job is to confound the greatest number of participants.

Markets can remain irrational longer than you can remain solvent (unless you stay out of the market, in which case you can stay solvent indefinitely).

Bulls make money, bears make money, pigs get slaughtered (no one ever went broke taking profits).

Don’t marry your stocks (you should only date them, casually, and be ready to dump them like an annoying girlfriend).

Sell the greed, buy the fear.

Greed is good (especially when you’re selling it). Paging Gordon Gecko…

"Think big, think positive, never show any sign of weakness. Always go for the throat. Buy low, sell high. Fear? That's the other guy's problem. Nothing you have ever experienced will prepare you for the absolute carnage you are about to witness. Super Bowl, World Series - they don't know what pressure is. In this building, it's either kill or be killed. You make no friends in the pits and you take no prisoners. One minute you're up half a million in soybeans and the next, boom, your kids don't go to college and they've repossessed your Bentley. Are you with me?" - Louis Winthorpe III







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After losing 30% of its value in 9 days of trading, the Icelandic stock exchange was closed for a 3 day cooling off period. It opened again yesterday and, not surprisingly, there had been no cooling off. Not unlike locking the doors of a burning building while people are still inside, the exits had become, er, well, crowded. In a mad stampede for the door, when the exchange opened it crashed, down 77% in a single day.

The entire country of Iceland is now being auctioned off on eBay for a 'Buy it now' price of 16 Euros.

Pay No Attention To That

Man behind the curtain.

Soon after the stock market crash of 1987, Ronald Reagan formed the high level Presidents Working Group On Financial Markets. It was formed in an effort to "enhance the integrity, efficiency, orderliness, and competitiveness of U.S. financial markets and maintain investor confidence."

No one disputes that the group exists, but some dispute what it is that the group does. The term Plunge Protection Team was coined by the Washington Post in 1997 and PPT is now used to refer to the Working Group.

In an interview on ABC's Good Morning America in 2001, George Stephanopoulos, a top advisor to President Clinton, described the PPT as "the Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges, and there – they have been meeting informally so far, and they have kind of an informal agreement among major banks to come in and start to buy stock if there appears to be a problem."

Now there's a problem, but the problem is with the banks themselves. They can't afford to buy stocks and futures contracts to stop the plunge, but the U.S. Treasury can. The $700 billion bailout (or TARP or FAILout, whatever you want to call it) has given the Treasury the power to do almost anything it wants.

Today, Treasury Secretary Hank Paulson announced that the first $250 billion will be spent buying equity stake via preferred shares in 9 major banks, which kinda sucks for you if you own common stock in those banks 'cause you just got dilluted by about 10 - 15%. And kinda sucks for you if you believe that markets should be left to function on their own, without intervention. Also kinda sucks since I thought the taxpayer's money was going to be spent buying 'troubled assets' (the TA part of TARP) so banks could clean up their balance sheets and start lending. Suckered again.

I already lacked trust and confidence in Wall Street, and now I have less of both with each new accounting rule change, bailout, receivorship, conservatorship, and nationalisation. Intervention is the order of the day. Where does it end and what are the consequences? Only time will tell.

The invisible hand is now as plain as day, and the wizard doesn't even bother with a curtain.

If You Can't Win, Cheat

If you can't cheat, start a fight... then change the rules.

The Financial Acounting Standards Board, released FASB Staff Position No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.

The Law of Gravity has been repealed.

How do you determine fair value of a financial asset, when the real value ($0.00, give or take a few cents on the dollar) is unacceptable to your current situation? You make it up. The market for CDO's is inactive, making the assets almost worthless? No matter, just guesstimate what the value will be at some later date.

Try the same hocus pocus next time you're at the grocery store. When you get to the register and the cashier tells you that the milk, ground beef, brocolli, cheddar cheese, potatoes and cookies total $18.48 - remind her/him that in a few hours you'll have digested the food and it will leave your body in the form of worthless, stinky poo.

And that's all you're willing to pay.

Apples always fall back to Earth.

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The DOW took off like a bottle rocket and closed up 936 points to 9,387.

Les Banques?

We need to own them too…

Under TARP, the Troubled Asset Relief Program, the U.S. Treasury will now partially nationalize the banking system by buying equity shares. For the first time since the Great Depression, the government will buy an ownership stake in a broad array of U.S. banks. Last night, in the ongoing FAIL parade, Treasury Secretary Hank Paulson declared, “This is a period like none of us has ever seen before.” That should give everyone the warm and fuzzies.

President Bush addressed the nation from the Rose Garden earlier in the day, saying "Our system of credit is frozen, which is keeping American businesses from financing their daily transactions and creating uncertainty throughout our economy. This uncertainty has led to anxiety among our people, and that is understandable. That anxiety can feed anxiety, and that can make it hard to see all that is being done to solve the problem."

Translation: “We have failed miserably. The S.S. FAILboat has capsized, but please stop panicking, you’re making it difficult for us to blow up the little yellow, plastic life rafts and water-wing thingies.”

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"What's good for General Motors is good for the country."

General Motors, having already achieved the all important To Big To Fail status, is backing up its FAILtruck to the doors of the Federal Reserve and will kneel at the begging bowl. Again.

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The auction of Lehman Brothers credit default swaps went off without much of a hitch. With a price of 8.5 cents on the dollar and no one failing to post collateral, this should be seen a positive. Sort of like after getting repeatedly kicked in the balls and punched in the face, having enough of that, walking outside and being happy that a piano didn't fall on your head. Any piano-to-the-head-free day, is a good day.

The Never-ending Rollercoaster

De-leveraging at warp speed.

Today, the Dow swung in a range of almost 900 points, or over 10%, a new one day record for volatility, marking the end of the single worst weekly performance in the 120 year history of the index.

Markets in Russia, Ukraine, Iceland, Indonesia, Austria and Brazil were either temporarily halted or closed altogether in an effort to stop the cascade of selling.

The Group of Seven (G7) finance leaders will meet in Washington over the weekend to discuss plans to prevent further deterioration of the world financial markets.

Earlier in the day, Bloomberg reported that according to Italian Prime Minister Silvio Berlusconi, political leaders are discussing the idea of closing the world's financial markets while they "rewrite the rules of international finance. The idea of suspending the markets for the time it takes to rewrite the rules is being discussed." Berlusconi went on to say that the solution to the financial crisis "can't just be for one country, or even just for Europe, but global."

Later, Bloomberg removed the original article and replaced it with a new one, reporting that the U.S. has no plans to close its financial markets. According to White House spokesman Tony Fratto, "There are absolutely no plans or discussions to interfere with the functioning of markets in the United States."

Fratto was responding to comments today from Italian Prime Minister Silvio Berlusconi, who said that governments may shut financial markets as the credit freeze pummels stocks and threatens a global recession.

Either way, the seeds of a new financial system are being sown. Will the Euro survive? Will new currencies be created? Fixed exchange rates? Will currencies return to a new, revised gold standard? The Bretton Woods Agreements lasted for 64 years.

Apparently, it's time for some new rules.

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Russian President Dmitry Medvedev proposed that European countries work with Russia to form a new transatlantic organization in which the U.S. was no longer the dominant power. At a conference in France he said, "A desire by the United States to consolidate its global domination led to it missing an historical chance after Sept. 11 attacks to build a truly democratic world order."

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Lehman Brothers credit default swaps were auctioned today for 8.5 cents on the dollar. Something is better than nothing.

The Event Horizon

The black hole of OTC derivatives continues to pull anything and everything towards the event horizon.

This is what happens when 40 to 1 leverage is stacked on top of 40 to 1 leverage, on top of 40 to 1 leverage, on top of 40 to 1 leverage. When one counterparty fails, the chain reaction is almost impossible to break.

The Federal Reserve and other central banks around the world have opened up the floodgates and the tidal wave of liquidity is doing little, if anything, to fill the void. Yesterdays coordinated rate cut has not has the desired effect on LIBOR. Three month rates are deteriorating and today, rose to the highest point of the year. Credit markets have grinded to a halt. What do you do when you’ve already used the kitchen sink?

Today, Standard & Poor’s said it was placing General Motors credit rating under review for a possible downgrade. Maybe B- will be downgraded straight to F for Fail. GM shares dropped 30% to their lowest level in 58 years.

The DOW dropped 678 points or over 7%. The NASDAQ sank 5.5%. The S&P plunged almost 8%. An ounce of gold now buys the S&P.

Asian markets are open and crashing. Japan’s Nikkei index is falling off a cliff and is currently down 10%.

President Bush will make a statement tomorrow, in an attempt to assure anxious Americans that he and his crack team are on the case. Proudmonkey sources have leaked the speech. Here’s an excerpt:

“I will go down as the worst President in history…”

In a rare show of support, people will believe him.

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Coming soon; bank holidays.

Wake Me When There's Green

The emergency ban on short selling of financials is over. The ban was certainly foolish and probably ineffective in its goal.

It was foolish because it made the market less liquid and most likely added to volatility. Short sellers are a necessary part of a functioning market. They play an important part in price discovery. In a normal market, when a buyer and seller are combined, an accurate price is reached. When the market is artificially skewed by removing a balancing mechanism like short selling, prices are distorted. In many cases, short sellers are forced to buy in order to cover their short positions. In some cases, short sellers who have to cover their positions are the only buyers.

Short selling is also used as a hedging mechanism. When the rules are changed mid-game, unintended consequences are almost guaranteed. When a position is suddenly unhedged because of a rule change, the entire position can be liquidated or an alternative and less familiar hedging mechanism can be used in haste.

Either way, sudden rule changes make for disorderly markets. The temporary ban on short selling was like locking the doors of a burning building while people were still inside. It clogs the exits and increases panic. Would you announce a sale, lock the doors then keep the customers waiting outside?

If the issue was abusive short selling, there are already laws that make it illegal. Just enforce the laws. If you want to make it more difficult for people to borrow shares before they sell them short, require brokers to have an opt-in program for margin accounts. Shares held in cash accounts cannot be loaned. Make cash accounts the default, and require customers to specifically request a margin account, not the other way around as is currently the norm.

The goal of the ban was to stem to precipitous decline in stock prices of banks. Did it work? As a sector, the financials have plunged 23% in the three weeks since the ban was announced. Another job well done. Golf clap for Chris Cox.

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Today, in the first coordinated rate cut since September 11, 2001, the Federal Reserve, European Central Bank, Bank of England and central banks of Sweden, Canada and Switzerland all lowered rates by 50 basis points.

By the end of the day U.S. Treasury yields rose, a hopeful sign that fear is beginning to abate.

Bonfire Revisited

In his 1987 novel, The Bonfire of the Vanities, Tom Wolfe told a story about a multi-millionaire bond trader on Wall Street named Sherman McCoy. It’s a story of power, greed, race, lust, and manipulation. McCoy’s life, filled with champagne, expensive artwork, million dollar Manhattan apartments, limousines, extramarital affairs and money comes crashing down when on their way home from the airport, he and his mistress accidently run over a young black man. They leave the dying man in the street, agreeing to not call the police.

The story is manipulated by the journalist that reports it, then used for political gain by the D.A. who prosecutes it. Manhattan socialites pick sides. The finger of blame is pointed generously. Almost lost in the mess is the tragedy of the young man’s death.

The Bonfire has been playing out in real life in recent weeks.

Former AIG CEO, Martin Sullivan, and Lehman Brothers CEO, Dick Fuld, have been testifying to Congress for two days. The Wall Street execs have played dumb and ignorant. They refuse to accept responsibility for their gross mismanagement. Lehman Brothers paid three executives bonuses totaling $20 million before the company collapsed. AIG posted a fourth quarter loss in 2007 of $5 billion. For that accomplishment, Martin Sullivan was paid a $5 million bonus. A week after AIG was bailed out by taxpayers, executives at the company blew almost $400,000 on a party in Orange County, CA ($200,000 on rooms, $150,000 on meals, $23,000 on massages and facials, and $7,000 on golf).

The politicians have used the hearings to grandstand, pander, aide their party’s Presidential nominee, and deflect public anger. After all, it was the politicians who enacted legislation that allowed and encouraged the reckless greed that has set Rome ablaze.

They should all be thrown into the bonfire.

We should blame ourselves for not doing so.

One Billion, Gagillion...

Fafillion, shabolubalu million illion…yen.

This morning the Fed announced that it would increase both the 28 day and 84 day Term Auction Facility (TAF) to $150 billion each. I think that brings the total to about $900 billion. Or gagillion, or whatever. The TAF is a short term loan made to anyone with a pulse that shows up at the Fed’s discount window. The discount window collateral requirements have been made, well, more “flexible”. Give us your poor, your tired, your huddled worth less (or worthless) paper (mutual funds, certificates of deposit, foreign bonds, muni bonds, collateralized loan and debt obligations, other asset backed securities including mortgage, auto loans and credit card receivables, etc.). Since banks are not lending to each other, through the TAF the FED is acting as a proxy lender, quite literally the lender of last resort. But that’s not working either.

Also, thanks to The Emergency Economic Stabilization Act of 2008 (EESA for short), the Fed is now paying interest of 75 basis points below the current Fed funds rate of 2%; sort of like a sneaky-little-almost-stealth rate cut.

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Citigroup and Wells Fargo were pursuaded to stop their fighting and decided to tag-team Wachovia.

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Under the Hope for Homeowners program, The Federal Housing Administration (FHA) is now coming off the bench for Fannie and Freddie (who've both been placed on the injured list) and will guarantee up to $300 billion (fafillion) in home loans for struggling buyers. David Olson, former director of market research at Freddie Mac said, "FHA has completely replaced subprime and Alt-A. I hope it's not setting them up for another crackup. There have been so many crackups."

Hmm, crackups. At least it's good to know that we've learned our lesson and are no longer putting people in homes that they can't afford.

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Australia's central bank cut rates a full percentage point in what's sure to be a worldwide race to the bottom.

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The bloodbath continued as markets across the globe plummeted for a second day in a row. In Brazil, trading was halted twice before the Bovespa Index fell 13%, making it the worst year-to-date performing major index in North and South America.

On Monday the Russian Micex Index went into freefall and also had to be halted twice before finishing down 19% for the day. Trading in Russia has had to be halted four times now in one week. The Russian ruble fell to its weakest point in almost 19 months against the dollar. We won the cold war, now we're winning the luke warm war. Suck it Ruskies.

We Threw a (Counter)Party

The financial wizards of the world have created a derivatives market that is so intertwined and so fast moving that it seems almost doomed to failure.

The market of products like interest rate derivatives, forwards, futures, swaps and hybrid securities is so massive it boggles the mind. World GDP is approximately $50 trillion. The total value of the equities market is approximately $100 trillion. The notional value of the OTC (Over-The-Counter) derivatives market is a staggering $500 trillion, or ten times world GDP.

Part of the derivatives market is built on top of mortgaged back securities, in sort of an inverted pyramid. The mortgage debt is securitized and sold, then in an effort to hedge against risk a credit default swap is sold, and then a contingent credit default swap. Layer upon layer of derivatives stacked on top of a single loan origination (a small percentage of loans never even existing in the first place).

In his book, A Demon Of Our Own Design, Richard Bookstaber explains how the efforts of financial institutions to create safeguards and manage risk through the use of complex computer modeling, actually increases market instability. The tight coupling of transactions and counterparty risk almost guarantees an inevitable cascading meltdown. Bookstaber should know. He received his Ph.D in economics from MIT, spent 10 years as a quant at Morgan Stanley, and was director of risk management at Moore Capital Management, which at the time was one of the largest hedge funds in the world.

In the mortgaged backed securities world, there were some basic assumptions put into the models: 1. On a macro basis, the year over year rate of change in real estate prices wouldn’t be negative (or hadn’t been negative since the Great Depression) 2. Markets will always be liquid 3. Counterparties will always be solvent. All three assumptions have proven to be false.

We should ask the folks in AIG’s financial products division how everything has worked out. AIG’s website explains that “Founded in 1987 as one of the first companies in the United States focused principally on OTC derivatives markets, AIG Financial Products Corp. (AIGFP) has built a unique, client-oriented platform that today is truly global in scope.” Yippie! Fucking geniuses. What the website should say is “In an effort to create “value” out of thin air, AIGFP helped create a highly leveraged, totally unregulated, counterparty rich Chernobyl.” The largest insurance company in the world is now in receivership.

The party was a blast. Whether you attended or not, you're cordially invited to the hangover. It's likely to be horrific.

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Thanks to the Financial Services Regulatory Relief Act of 2006 and The Emergency Economic Stabilization Act of 2008 (aka The $850 Billion Bailout), the fractional reserve requirement of banks has been suspended.

The Financial Services Regulatory Relief Act of 2006 gave us this:

"SEC. 202. INCREASED FLEXIBILITY FOR THE FEDERAL RESERVE BOARD TO ESTABLISH RESERVE REQUIREMENTS.
Section 19(b)(2)(A) of the Federal Reserve Act (12 U.S.C. 461(b)(2)(A)) is amended - (1) in clause (i), by striking "the ratio of 3 per centum" and inserting "a ratio of not greater than 3 percent (and which may be zero)"; and (2) in clause (ii), by striking "and not less than 8 per centum," and inserting "(and which may be zero),".
SEC. 203. EFFECTIVE DATE.
The amendments made by this title shall take effect October 1, 2011.

The Emergency Economic Stabilization Act of 2008 gave us this:

SEC.128 ACCELERATION OF EFFECTIVE DATE.
Section 203 of the Financial Services Regulatory Relief Act of 2006 (12 U.S.C. 461 note) is amended by striking "October 1, 2011" and inserting "October 1, 2008".

So as of Wednesday of last week, banks are no longer required to hold anything in reserves to back your deposits. Zero. However, the FDIC limit has been increased from $100,000 to $250,000 so please stay calm and please withdraw as little cash as possible. Thank you in advance.

Signed,

Everyone

P.S. Our fractional reserve banking system is dead. Banking is now 100% shell game. Based on this change, we shouldn't see any new bank failures since it's now impossible to fall below reserve requirements. There are none.

I Drink Your Milkshake!

I drink it up!

Mexico’s largest oil field, Cantarell, was discovered in 1976 and reached peak production in 2005 at approximately 2 million barrels per day. Its production has been in a steady decline ever since. According to state-owned Petroleos Mexicanos (Pemex), Cantarell (the third largest in the world) is now producing less than one million barrels per day. Mexico get’s over 40% of its revenue from Pemex. In terms of quantity, Mexico is the third largest supplier of crude to the United States, behind Saudi Arabia and Canada.

Saudi Aramco, Saudia Arabia’s state-run oil company, controls Ghawar, the largest oil field in the world. Ghawar, discovered in 1948, along with four other super-giant oil fields (Safaniya-Khafji, Shaybah, Abqaiq, and Berri) produce 90% of the kingdom’s oil. According to oil industry experts, the northern section of Ghawar is in decline and within the next couple of years production from the entire field will fall. Saudi Arabia is the second largest supplier of crude to the United States.

Since 1980, only three oilfields have been discovered that still produce over 200,000 barrels per day – (Brazil’s Marlim field, Columbia’s Cusiana/Cupiagua, and the Draugen field in Norway).

The U.S. imports just over 1,800,000 barrels of crude from Canada daily.

In total, we consume almost 22,000,000 barrels per day, almost 60% of it imported. Approximately 70% of our daily consumptions goes to transportation.

This week the U.S. Department of Energy approved the release of 900,000 barrels of oil from the Strategic Petroleum Reserve, or just over 4% of our daily consumption. Enough oil for less than one hour.

It's time to rethink our strategy, but in the meantime, we'll drink it up.

Is Snoopy On The Ropes?

MetLife Hindenburg? Oh the humanity!

Harry Reid shit the bed yesterday with this gem, “One of the individuals in the caucus today talked about a major insurance company. A major insurance company -- one with a name that everyone knows that's on the verge of going bankrupt. That's what this is all about." Loose lips sink ships.

Everybody stay calm, there’s nothing to see here.

Later, Jim Manley, spokesman for Reid said, "Senator Reid is not personally aware of any particular company being on the verge of bankruptcy. He has no special knowledge about [a bankruptcy] nor has he talked to any insurance company officials."

Fail.

Maybe he was talking about Prudential, or Hartford, or Principal Financial. Who the hell knows? Well, apparently, Harry Reid does. The counterparty risk of these behemoths is staggering. At this point, all bets are off. The odds are probably in favor of several more big names either declaring bankruptcy or going into receivership. It wouldn’t surprise me if MetLife was next. Why? No valid reason, really. I don’t know much about them but I used to be a customer, until they fired me. On August 6, in regards to my house, MetLife sent me a letter saying that they were “unable to continue to insure you”. I thought this was more than a little strange since nothing has changed on my end. The house is only four years old. I’ve never missed or made a late payment. Maybe something has changed on their end? I don’t know, but I’m going to be mighty pissed if they soil Snoopy’s image.

Clearly, lots of things have changed in the credit markets. And in other news, water is wet.

I’m going to add American Express to my watch-list. On September 25, I received a letter from Amex saying “we are temporarily suspending the payment flexibility feature of your American Express Platinum Card”. I didn’t even know that my card had a payment flexibility feature. If I’d known, I would have been much more flexible with my payments, but I’ve (ignorantly) always paid my bill in full each month. So what has changed?

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Today, according to Dow Theory, the Transports confirmed a primary bear market by closing at 4,134 just 6 points below the critical 4,140 level. The Dow was plus 250 when the House passed the bailout bill, then promptly sold off about 400 points to close down 157 to 10,325. All arrows are now pointing down, some of them wooden.

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The Pakistani military is now engaged in full-scale battles with militants in the Peshawar province. The New York Times is reporting that an estimated 250,000 have fled the fighting and many are crossing the border into Afghanistan. It’s comforting to know that Pakistan’s nuclear weapons are in safe hands…

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Citigroup is threatening legal action after getting cock-blocked by Wells Fargo.

Sound The Alarm Bells

…and look out below.

On October 9, 2007 the Dow set an all time high of 14,164. On that same day the S&P reached its Mount Everest of 1,565.

The Dow, S&P and other broad market averages have been on a gut wrenching decline for a year now. As of today, the Dow is 26% off of the high mark it set a just year ago. The S&P has dropped by almost 29%. The Nasdaq is down 31%.

The fourth quarter of 2007 was hardly a party. Problems in the credit and housing markets could be seen by anyone with their eyes open, but it’s been surprising to see how quickly things can go from not good to really, really awful.

Looking back, it’s easy to see that the market has been in a bearish trend for a year. But according to Dow Theory, a primary bear market can only be identified when both the Industrials and the Transports confirm it. Charles Dow, co-founder of Dow Jones & Company and The Wall Street Journal, noted that equity prices of the manufacturing sector would reflect an economic downturn and then the downturn would be reflected in the equity prices of the transportation sector. A company that manufactures less, ships less.

On July 2 of this year the Dow entered bear market territory when it closed at 11,215, down 20% from its all time high. However, the Dow Jones Transportation Index has refused to confirm the bear market. In fact, before today the DJT had been moving along nicely all year and reached its all time high of 5,492 on June 5.

The 50% Principle...

Today the Dow closed below 10725, which is the midpoint between the 2002 low of 7286 and the 2007 high of 14,164.

The Dow Jones Railroad Index crashed, down almost 11%. The broader Transportation Index closed down 399 points or almost 9% to just 37 points above its January low of 4140. According to Dow Theory if the Transportation Index closes below 4140, that will be a confirmation of a primary bear market. I’ll be watching that closely. It’s an ominous sign. If a primary bear market is confirmed, next stop for the Dow is probably in the 9,600 range. The balance scale will have tipped to the downside and the Dow will most likely approach the 7,200 level, where the 2002-2007 advance started.

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The Vice Presidential Debates were not nearly as fun to watch as I was expecting. Palin was only a 7 on a scale of 1 to 10 in the trainwreck category. Although I think he won, I was underwhelmed by Biden.

The thing that was most troubling was the energy portion of the debate. Lots of talk about "foreign oil", "drill baby, drill", alaskan pipelines, offshore drilling, alternative energy... but not one mention of the real problem - consumption. The problem is not where the oil is coming from, and how to get more of it. The problem is getting off of it as quickly as possible. If we don't figure that out soon, the financial problems we're currently facing will look like the salad days in hindsight.

"Everything I Learned About Politics..."

"...I learned in a liquor store."

Thanks to C-SPAN, the rusted undercarriage of our legislative branch is televised in all of its crumbling glory.

Tonight I watched some of our Senators drone on about the Federal Intervention In Financial Markets. Apparently they’ve called for a mulligan after Monday’s debacle, and will be voting on a new and improved bill before they pass it to the House for round two. What started as three pages then morphed into one hundred and ten, has now ballooned to four hundred and fifty pages. From $700 billion to $850 billion in two days. Growth very similar to that of the leveraged derivatives which partly created the mess we're in. How fitting.

The rescue bill will be attached to the Renewable Energy and Job Creation Act of 2008. How can you say no to renewable energy and jobs?

Sen. Pete Domenici (R-New Mexico) attempted to explain MBS’s, CDO’s, SIV’s and CDS’s. I felt braincells dying as I listened. I’m not confident that he could explain how to open a can of alphabet soup. There is no way that this man has any understanding of basic economics, let alone this complex mess. I'm 95% sure that he drooled just before stepping away from the podium. Judging by his speech, he will vote Yea on bill. He will also vote in favor of wooden arrows.

Sen. Bob Menendez (D-New Jersey) said that the new plan is an “economic stabilization plan” that “puts the taxpayers first”. “Taxpayers will be treated like shareholders”. The plan will “reward taxpayers with profits while protecting them from losses” and “prevent home values from dropping in our neighborhoods”. Good god, man. The only way to do that is to either artificially support the still inflated home prices, or worse, reflate the housing bubble. The taxpayer is either overpaying or underpaying for these "troubled assets". If we overpay it's a bailout, plain and simple. If we underpay it forces the banks to recapitalize and therefore does not achieve the goal of loosening lending. You can't have it both ways. Senator Menendez went on to say that a vote against this plan “will be punishing the hundreds of thousands of Americans that will lose their jobs”. Newsflash, fucktard: millions of jobs will be lost before we're out of this mess and there's nothing this bill can do to stop that. Senator Menendez will vote in favor of throwing taxpayer dollars at Alaskan fisherman.

Sen. Richard Shelby (R-Alabama) provided a surprisingly concise explanation of the credit crisis. In plain english he described how well-meaning but faulty housing legislation opened the doors for foolish, opportunistic, abusive lending. He said that action needed to be taken but that a rush to act would most likely aggravate the problem. Agreed. "The free market didn't fail," he said, "the false market did." Chalk Shelby up for a Nay vote.

And then there was Sen. Lindsey Graham (R-South Carolina). What little hope I had left was quickly dashed by his display of less-than-mediocrity.

“To those who say that $700 billion of taxpayers money will be spent, and it’s gone, you don’t know what you’re talking about. You’re scaring people. That is absolutely not true. I am convinced we’re goin’ to get most of the money back if not all of it back by the way we’ve crafted this proposal.

And I’m equally convinced that if we do nothing we’re headed to a recession, maybe a depression. If you think it costs a lot now, just do nothing and see what it costs…. At the end of the day I’ve got to rely on the good sense that God’s given me, and sometimes I doubt how much sense I have, and a lot of people obviously doubt it ‘cause they call me a lot.

But I’m convinced that a lot of smart people are telling me things that I can visualize and see with my own eyes. That it’s no longer about academia. I’ve been home. I’ve seen people not be able to get loans to make payroll. I know what’s going to happen if I, uh, don’t act, if I don’t take a risk. If I’m not willing to take a political risk I know what happens to the people that I represent, in large numbers. They’re going to lose a lot more than I’ll lose..."

He added, "...this is about the availability of credit that’s going to be so high that no average working person is going to be able to borrow a dime. This is about Main Street. This is about the people I grew up with, and I didn’t grow up on Wall Street. The people I grew up with, and I’m the first person to go to college in my family, my dad owned a liquor store, and everything I learned about politics I learned in a liquor store. A pretty good place to learn it from.

We borrowed money to make inventory. We owned a restaurant right next door, and my mom worked 18 hours a day. I know what it’s like to see my parents work hard and can’t afford to get sick because there’s no money comin’ in. (a voice interrupted: "The Senators time has expired")

I’d like to just end with this thought: I know this is not a perfect bill and I know this is a bad choice, but I also know from my common sense and my life experiences that I need to act and I need to act now, and I will.”

F- for leadership. A+ for comedy. You can't make this shit up.

Update: Now it's a done deal in the Senate. It looks like about 75% voted yes. If the House passes this bill (I assume they will) and the 850 billion dollar wheels are set in motion, we’ll wait a few days or weeks until the “assets” are actually bought and sold. Then they'll have 48 hours to disclose exactly what they're buying and from whom. At that point I expect market volatility to shift into hyper-drive.

If you're keeping track like me, here's the workflow: The Senate constructs a bill and sends it to the House -> The House says no -> The House constructs its own bill and then says no to itself -> The Senate staples together both failed bills, says yes and sends it back to the House, where they will say yes because we are goverened by monkeys who vote by flinging feces at each other.

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Through his website, I tried sending an email to my congressman but when I clicked on submit I got a message saying "please try back at a later time". I appreciated the "please"; it was nicer than saying "we're not interested in your opinion".

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Tomorrow night’s Vice Presidential Debates should be good for some laughs. Fire up the grill. Moose burgers for everyone.

Gotta go. There's a double header of Flip This House and My House Is Worth What? on HGTV.