Market Reflections

Thoughts, ideas and musings on current state and evolution of financial markets
  • .: Banyantree for small investors & traders :.

    Like anything, living and evolving, markets are always in perpetual change. Whoever is looking for all the “right answers” in the past will be wrong for the future. Change with the markets and you will prosper.

    “Bull markets are born in on pessimism, grow on skepticism, mature on optimism and die on euphoria.” – Sir John Templeton (Templeton Funds founder and philanthropist)
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    Is Housing Recovering or is the Slide Continuing?

    Posted By Raymond on August 2, 2009

    Latter part of last month gave us a string of good economic reports from the housing industry; leading many to think that perhaps this sector is turning around. Looking “under the cover” unfortunately does not confirm this cheerleader view. It reveals that there is nothing to cheer about in the home building sector, and that our nations “too big to fail” banks are continuing their risky behavior.

    To understand this lets look at the news:

    July 17, 2009. The good news you heard and watched on TV:

    Housing starts in June came in unexpectedly strong of 0.582 million units annualized. This continues a robust gain the month before and indicating that we may have passed the bottom in housing. Starts increased 3.6 percent, following a huge 17.3 percent spike in May. The boost in June was led by the single-family component which advanced 14.4 percent after rising 5.9 percent the month before.

    The “not so good side of the coin” you may not have heard about:

    The June pace was down 46.0 percent year-on-year. The multifamily component gave back some of May’s surge, falling 25.8 percent. The June gain in starts was led by a 33.3 percent jump in the Midwest, followed by a 28.6 percent boost in the Northeast. The West and South declined 14.8 percent and 1.4 percent, respectively.

    What is this news actually telling us?

    • In colder climate it makes sense to build when its warmer. At least until global warming reaches Northeast and Midwest this is Summer time. In warmer regions the housing starts actually declined.
    • The builders are betting the demand for the new houses to pick up substantially later this year and early next, and are afraid to lose the opportunity.

    • The banks must go along with the optimistic outlook and extend them loans.

    • Home construction industry is still only about half what it was a year ago and has a long way to recover before making an impact on the economy as whole.

    A day before the builders reported the housing market index rising 2 points to 17 in July with gains centered in current sales and traffic. Demand may now be getting a visible boost from falling home prices, though the report, issued by the nation’s home builders, warns that credit flow is still tight.

    The Mortgage Broker’s Association (MBA) purchase index reported July 15 was fleeting, falling back in the July 10 week by a heavy 9.4 percent to 258.8. Difficult job conditions and difficult credit conditions continue to limit home buying despite falling prices and low rates. A week later it stood practically unchanged at depressed levels where it has been most of the year.

    Here’s a quarterly view of mortgage lending activity compiled from MBA’s reports. Do you notice a turn-around?

    Is Housing Recovering_html_m5bdeb4cc

    The US Department of Housing and Urban Development reported July 27 that the sales of new one-family houses in June 2009 were at a seasonally adjusted annual rate of 384,000. Seasonally adjusted estimate of new houses for sale at the end of June was 281,000. This represents a supply of 8.8 months at the current sales rate. Median sales price was $206,200 down 6% from May 2009, down 11.1% from a year ago and 17% from same time 2007.

    This new house sale report explains the cause of the jump in sales from May. The drop in price for a whole 6% were behind the increase in sales. Putting the news in prospective the builders are still building at very low levels in comparison to just a year ago. Buyers only come when confronted with steep discounts. Builders are building at a rate of 582,000 units a year. The existing inventory is 281,000 and sales are 384,000 units a year. However, without the discounts the sales would probably be closer to the May sale rate of 346,000 units. Do the math. A year from now the builders will be sitting on an inventory of 517,000 units, if they don’t give large discounts, or 479,000 units if they do. This amounts to about a 15 month supply of houses even with heavy discounts and the current rate of sales.

    The builders and their banks must be betting for a significant pick-up in sales, otherwise they would not be able to justify this, right? Is that realistic to expect?

    At July 28 the Conference Board’s Consumer Confidence index report came in below expectations at only 46.6. Right when investors are gaining confidence, consumer confidence is eroding. The index fell a sizable 2.7 points. The assessment of the current jobs market is the central weakness, with 48.1 percent of consumers saying jobs are hard to get, up from 44.8 percent in June and 43.9 percent in May. The outlook for jobs isn’t any better with fewer, 15.0 percent vs. June’s 17.5 percent, seeing more jobs six months out. This is spilling over into expectations for income where only 9.5 percent see an improvement six months from now, down from June’s 10.1 percent. More also see a decrease in their income, at 18.8 percent for a 6 tenth increase. Housing readings of this report don’t point to any further improvement as only 2.1 percent say they plan to buy a house, down 5 tenths from June.

    Together with the Reuters/University of Michigan consumer sentiment report, these reports are pointing to a double-dip recession. While job losses may be easing, the workers are having a hard time finding jobs. Many of them are running out of benefits, and have learned that buying a house with unemployment income is not a responsible behavior.

    July 27 Wall Street Journal reports that lending continues to slow as bankers and borrowers refrain from taking risks. The total amount of loans held by 15 large U.S. banks shrank by 2.8% in the second quarter, and more than half of the loan volume in April and May came from refinancing mortgages and renewing credit to businesses, not new loans. These numbers underscore two related trends weighing on the economy. Financial institutions are clamping down on lending to conserve capital as a cushion against mounting loan losses while loan demand is shrinking.

    Are the banks preparing another housing bubble here?

    According to Bloomberg’s study from July 24, bankers are betting their jobs on rapid V-shaped recovery the administration promoted earlier this year. Th banks went easy on increasing loan-loss reserves in the past quarter. Such moves help bolster bank profits, but risks them having to go after another tax-payer bailout soon if the situation does not improve rapidly and soon. The reserves to non-performing assets ratio of all the banks except Citigroup declined last quarter. The ratio fell to 116 at Bank of America, 114 at US Bancorp, 128 at Wells Fargo, 47 percent at SunTrust Banks, but increased to 128 at Citigroup.

    Commercial real-estate loans are a growing threat to US banks. The property prices have declined 35% from their peak (Moody’s) and Ben Bernanke expressed his concern on growing defaults in this sector in his testimony to Congress July 21 and 22. Fed now also predicts a heightened joblessness and that the economy may not return to full health for at least five years.

    Even a cursory look “under the hood” reveals:

    • It is way too early to talk about recovery in the home building sector. As long as the “consumer is damaged” (Ben Bernanke), extending loans and building more homes is wishful thinking that is not supported by the current, nor by the forecasted conditions.
    • Banks have apparently learned the lesson from the consumer loan bubble that they are still reeling from, but commercial and building loans seem to be coming from another division that is unaware of “easy credit” risks.
    • One can only wonder how many other divisions there are in these banks that still have to learn from their own mistakes. Not only are these banks “too big to fail” they also seem to be “too big to be manageable”.

    Where’s the Market Top

    Posted By Raymond on June 29, 2009

    This is a follow-up triggered from the comments/questions to “PUTTING IN A TOP”
    For a trader it is imperative to understand the strengths and weaknesses of any tool one uses. After all, it I ones money out in risk. Refined Elliott Trader (RET) is a technical forecasting tool. It relies on the recent past market price action to forecast the future. Its strength lies in substantial statistical database of past market price pattern measurements. Recent past market price action reflects the market’s expectation of what’s ahead.
    To be successful in trading one must accept that the market is always right. We all (folks survived decades of trading) know and understand that the market expectation changes constantly as the target nears and more actual measurements are under the belt. The recent market price action reflects this change of expectations and so does the RET forecast. It changes as the market price action does. Sorry for the long, drawn out intro, but I hoped to avoid the need for fruitless searches what’s the value of this forecast. Folks unfamiliar with Elliott wave theory or RET charts will find brief explanation right here (under Links).
    Now, all readers on the same page, what does the RET show after June 26 (about a month since the first post)?

    Wheres the Market Top_html_m202dd467* Click on chart to view larger image and print.

    The D3 from 2008 Nov low has changed to a Flat pattern (FL). FL is very similar to D3 except its third wave is an impulse (IM) rather than a zig-zag (ZZ). For uninitiated ZZ is a 3 wave pattern, while IM is a 5 wave pattern. Otherwise they are similar. What does this chart tell us?

    1. The likely time frame of FL last wave’s completion (that’s the top) is overdue by close to 2 months now, but it has time to complete for another 149 trading days. The market has been “in box” (green box) for long time already. In other words it is about to complete any time now.
    2. Once the FL completes, the market will move down definitely way below Mar 2009 lows, but how low depends on the height of the FL third wave and its length. So, sorry, RET does not tell us yet where the next down wave will likely stop. It will do this after the FL completes.

    The pattern from the low of Mar 2009 looks like this.

    Wheres the Market Top_html_m123ee4bd* Click on chart to view larger image and print.

    It’s a very highly rated pattern (very similar to most) completing in 2 – 9 days probably in 1000 – 1030 range. It could be complete tomorrow, June 30, but most likely will go on for few more days. It will most likely be complete after the market crosses below of June 23.

    Let’s put that in prospective of known future events:

    1. If July 2 employment report disappoints, then that is probably the turning point
    2. The banks are most likely starting to report losses for Q2 (after holidays) after counted in fake profits in Q1 – another possible turning point turns attention to credit card and commercial real-estate losses. There is a reason why small banks a lining up for TARP funds – better than being closed by feds.
    3. so on .. one gets the picture how to interpret this forecast correctly

    It is very important to understand that the scenarios picked for this post are just the “most likely”. There are hundreds of other scenarios possible and presented by RET. I don’t know which of these will actually play out, but applying the fundamental knowledge in parallel with technical keeps “ones head above the waterline” while making trading decisions.

    Successful trading requires preserving your trading capital. One will not be around to win without that!

    Think about it and assign appropriate priority.

    Global Imbalances. The Real Problem

    Posted By Raymond on June 16, 2009

    Global imbalances are generally referred to as countries with chronic large current account deficits (US, GB for decades) versus other countries with chronic and large current account surplus (China, Japan).

    Current account balance is calculated as difference between the inflow and outflow of money from a country. Some argue that these imbalances are the real reason for current financial crisis and it will not resolve until these imbalances are resolved. Others argue that the current calculation method misses substantial components of money flow (e.g. investment return rates). If the missed components would be counted in then the imbalances would not exist.
    Our failed lawyers (aka senators, congressmen and the president) fault China for manipulating its currency and causing them trouble in deficit spending.

    Why “failed lawyers”? Vast majority of our politicians have a law degree. Most of them have never had a successful law business even though it does not take an MBA to run one and income from any remotely successful law business beats a senator’s salary hands down (that is if the senator is not corrupt, of course). Large numbers of these lawyers have become “career politicians” – they have no clue about real world outside of what they hear from lobbyists. Only business they know is how to get re-elected. They are failed as lawyers … or failed in any other productive profession for that matter.

    There is some truth in all of these opinions, but this is only part of the truth, only scratching the surface.

    Looking into the underlying reasons for account deficits makes yours truly to believe that so called global imbalances (whichever way calculated) are only the symptom, not the cause. The global economic imbalances do exist and they are the cause of current and ongoing economic trouble in the world. They must and will be eliminated over time. Current account imbalances are mere reflection of the beginning of a long and painful adjustment process in the world economy. This process will take much longer time than any of the world politicians want to believe. Traditional weapons of politicians: taxing more, regulating more, nationalizing and subsidizing failed industries and printing more money are the real reason for the imbalances. More of the same will essentially only increase them. Whichever country does it more will lose at the end of this process.

    Why do we actually have the problem?
    No matter how dumb a politician or a “leader” he/she is very unlikely to attempt to kill someone who produces stuff he/she lives on or produces. Peace is the reason for the world moving to global economy and the reason a country can no longer flourish in isolation. Today’s military arsenals are loaded with weaponry that can kill everyone and everything on this planet many times over. In that environment there is no alternative to peace on Earth. The only ongoing war, the Islamic extremists against the world, is because the Islamists are not engaged in the global economy. They produce only illegal drugs and they cannot legally trade this product. The process of moving to the global economy prevents World War III. It also brings out the fundamental imbalances in the business conditions of different countries. Intertwined with cultural and social aspects of each nation, they will take time to work out in process of integration.

    The Terms
    Before being able to analyze the problem we’d need to agree on some basic terms. In any economic system capitalism, socialism, communism or half this and half the other the basic building block is a business. The fundamental objective of a business (independent of economic system) is to produce a product or provide a service for its customers as efficiently as possible. The efficiency is measured simply by the difference between the cost of production and the value to the customer (sales revenue). The cost includes all costs of operating the business not only the direct production cost of the product or service. The difference is the profit to the owners (in form of shareholders or any other). In principle, no business can exist without customers and owners, but it can exist without employees. Employees can be eliminated simply by full automation of the production process – if such makes economic sense. Please note that the option of total elimination of employees from a business was not even dreamed of at the time the foundation of modern socialism/communism was laid. Its founders’ Engels, Marx and Lenin did not have foresight to see this possible.
    I am pretty sure that everyone can agree to the basic terms without much thinking. Including the folks who adamantly oppose NAFTA, CAFTA and any other trade agreements ever made. While they realize that directly or indirectly (via their pension funds, for example) they are the owners of a business demanding maximum profits, they may also be the customers of the very same business shopping for the best price. The fact that they might also be the employees at the same time may cloud the judgment for a moment, but being an owner or a customer is certainly more important. It is also critical to realize that while the owner/employee/customer roles may converge in one person. This is an exception rather than norm.

    The Problem in Terms
    To fulfill its purpose in the society a business must find the least cost way to produce and best way to service the customer. To produce at least cost a business needs a beneficial and stable legal, tax, environmental and labor conditions. To service its customer best the business needs to understand its needs – be close to the customer. In global economic environment these components of any business process do not have to be implemented in the same country. In other words a product can be produced in one country with beneficial environment for production, but sold in others where there is market for it. That by itself opens the door for the global imbalances which if not resolved, will continue to undermine the same concept of global economy we cannot abandon either.

    For the imbalances to disappear the business conditions in different countries will eventually have to even out. More specifically, hourly earnings of employees (including the cost of benefits), taxation, environmental restrictions, legal restrictions, etc must even out. In broader brush, the living standards in developed countries and emerging countries must balance out. This can be achieved in two fundamentally different economic systems the human society knows: capitalism or socialism.

    The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery. Winston Churchill

    If the answer is socialism then the standard of living in the United States and Europe would have to reduce to the level of China, Brazil, India, Russia, … If the answer is capitalism then the living standard in emerging world must catch up with that of the United States and Europe. We will probably end up somewhere in between the capitalism and socialism. In any case we all have to make adjustments and many of these will be painful. Suffice to bring up the hailed achievement of Democrats – the minimum hourly pay – is out of the window as long as Chinese, Indians and … are not getting equal!

    What’s next
    In following posts in this category we’ll look into details of each of the imbalances. Discuss what must be done to make the adjustment least painful and fastest for all parties involved. Suggest what the politicians must do instead of what they are doing to serve their customers (the voters) the best. Discuss the best ways for the people to adjust to the new economic environment and look into consequences of not doing it. Bring up the social and cultural obstacles of achieving the balance in business conditions.
    Next post coming up soon, stay tuned.


    Posted By Raymond on May 31, 2009

    People keep asking me and others they trust if the stock market is topping out. A trading guru and educator I respect Joe Ross, answered “All I can say is that it sure looks like it to me.” In his post he went on to tell a story about an Elliott Wave trader he sold his crystal ball years ago with instructions to turn it upside down to read it correctly. Apparently, this trader has been wrong last 25 years, so Mr. Ross is wondering he may have forgotten the instructions.
    Well’ I am an Elliott Wave trader for past 6 years now. I have been right about markets many more times than Mr. Ross … and I don’t have a crystal ball. So, perhaps the problem is not in Elliott Waves, but in the ball Mr. Ross got rid of many years ago (probably for a reason ;-) )

    So, what are Elliott Waves telling us about the top at this time?
    The pattern from the top of ES Summer 2007 is completing its second counter wave probably close to completion by time, but is more likely to make another move up to 950 – 1100 range before the second wave completes and the third wave downward resumes.

    The last incomplete wave up from March 2009 is about to get done probably in next 6 days between 950 and 1000. It is possible, but unlikely that Fri up move completed the pattern.
    A drop below 876 will confirm the completion of this pattern.

    We’ll see who is right or wrong (possibly both!) this time. The real Elliott Wave traders do not use crystal balls at least not since I joined this group. Rather, they use an exclusive software program that unambiguously categorizes the market price movements based on millions of chart patterns in its statistical database. That adds a degree of certainty to your trading decisions whether you have been watching the charts past 40 years (like Mr. Ross) or started just yesterday. The certainty comes in form of quantitative probabilities rather than a “… it sure look like it to me …”

    You chose which you’d rather ask whether the top or bottom is in or not.

    OPEC Increasing Production Even as Demand Remains Weak

    Posted By Raymond on May 30, 2009

    May 28: As expected, OPEC members, who account for 40% of global oil production decided to leave production targets unchanged from those agreed to in December 2008 and upheld in March 2009. The next meeting will be held on September 9, 2009. Compliance with set targets has fallen from 80% in Feb to below 70% in April.
    OPEC: Production decisions, aimed at redressing the supply/demand balance, have reduced the overhang to some degree, but crude volumes entering the market are still in excess of actual demand and crude stocks remain high (April-end 2009 OECD commercial oil inventories are close to the record high witnessed in February 1998). Despite recent positive economic indicators pointing towards the possibility of the recession bottoming-out before year-end, the world is nevertheless still faced with weak industrial production, shrinking world trade and high unemployment which will keep oil demand low for many months to come.
    Last trading day in May crude oil for July delivery ended up $1.23 at $66.31 a barrel on the New York Mercantile Exchange. It’s the highest settlement price for a front-month contract since Nov. 4 2008. In May, oil futures soared 30%, the biggest monthly gain since March 1999. Here’s how the current supply/demand situation looks like.
    There is no indication on any consumable energy categories that the demand would be picking up, is there?
    Why would the crude oil price jump like that?
    Only rational explanation is the same as it was a year ago. The world largest investment banks JP Morgan and Goldman Sachs also happen to be the world largest oil companies (by trading volume on New York Mercantile Exchange). One of them has a subsidiary of an oil pipeline and the other owns an oil storage tank. Strangely enough, laws enacted by Congress give these investment banks and all their brokerage clients the capability to circumvent speculative position limits on the energy commodity markets. With the trillions of dollars of their pension, index fund, endowment clients these “oil companies” can corner any energy market of their choice.
    Golden rule for trading oil is to know what Goldman and JP Morgan are up to. If you don’t you are screwed, if you do you will be a filthy rich and this is not illegal insider trading either. Only alternative is … a very short term trading.
    If you don’t want to pay $4 plus at the pump again soon call your senators and representatives. Ask why he/she hasn’t done anything about it for a year now. From the feverous hearings conducted last May and June they know exactly who pushed up energy prices last summer, yet they did nothing about it. As it seems Goldman and Morgan are at it again and are bound to do same again.

    Dumb or Dumber. Current State of the Economy

    Posted By Raymond on May 18, 2009

    They do pull out all stops to make us believe the worst is over. Latest from Peter Orszag Obama’s budget director “Economy almost bottomed out”
    Does this chart look to you as the economy has bottomed out?
    Orzag’s, Bernanke’s, Geithner’s, … etc recent statements raise a different question: are they really dumb … or they think we are? They sure have access to the same data we do most likely some time before us. To make certain we have our “ducks lined up” let’s look some other charts, preferable compiled by other institutions. Alright, in our consumption heavy economy retail sales should give heads up on what to expect the companies to produce, right?
    Does it look like it has almost bottomed out?

    How about consumer sentiment?
    Looks pretty much where it was 1980. If you are old enough to remember the miserable state of US economy then you’d probably know where we actually are.

    So, take your pick and vote:

    Dumb or dumber?

    View Results

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    Social Security and Medicare Need Money to Replace Government IOU’s

    Posted By Raymond on May 14, 2009

    The recession dented the financial health of Social Security and Medicare in the past year. According to trustees of these programs Social Security will start paying out more in benefits than it collects in taxes in 2016, one year sooner than projected last year, and the giant trust fund will be depleted completely by 2037, four years sooner.

    The Medicare was in even worse shape. The trust fund for hospital expenses will pay out more in benefits than it collects this year and will be insolvent by 2017.

    The problem
    The trustees report is based on 2008 year-end status. Since then additional 2.7 million payroll jobs have been lost. Unemployment rate is at 25-year high of 8.9% and rising. Long-term unemployment rate, which includes marginally attached, discouraged, part-time for economic reasons workers, is already at 15.8%

    Fewer people working means less being paid into the trust funds for Social Security and Medicare. For years, the Social Security trust fund has taken in more than it spent on benefits, resulting in a cushion of billions of dollars that the government could spend on other programs while giving the trust fund an IOU. Since Social Security and Medicare recipients are entitled to money, not IOU’s, the government will need to borrow more at a time when the federal deficit has already exploded to $1.8 trillion for this year, even by White House’s very conservative estimates. This is four times last year’s record deficit.

    Medicare’s condition is much more precarious, reflecting the soaring health care costs while the tax collections shrink. This is all happening before the 78 million baby boomers will retire next few years. With recession the retirement is likely to occur earlier rather than later. Obama on Monday praised a pledge by the health care industry to achieve $2 trillion in savings on health care costs over the next decade. It is important to understand that this pledge was not to reduce the health care costs that have been soaring average 7% a year, but only to slow the further inflation to only 5.5%. Please note that all this has nothing to do with Obama’s promise to provide affordable health insurance at least to additional 50 million Americans currently without. Obamacare cost is extra.

    Magnitude of the problem
    By April 2009 government report there was 141 million people employed; 13.7 million unemployed and 80.5million “not in labor force”. The last category is not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. At the end of April 2009 there were 51.6 million Social Security recipients. With additional 78 million of baby boomers joining next few years these programs will have about 130 million beneficiaries. For rough, back of the envelope calculation, we’ll assume that the unemployment rate will revert back to about where it is now as “new normal” in the future, when the economy will start chugging along again. That means only 141 million people will be paying into the Social Security program. Average benefit amount is currently about $1100 per month. This means Social Security outlays of $142,560,000,000 ($142 billion) each month in the future when all baby boomers are off the work force. It also means $1,710,720,000,000 ($1.8 trillion) burn-rate a year. To break even, each of the employed in average, has to pay into the fund $1010 per month just in Social Security taxes. Clearly, this is not sustainable unless we can assume average hourly earnings in private sector to increase from current $18.51 almost triple to $42.08 per hour during this recession. It probably is more realistic to assume that the average salary will stay stagnant for few years. That means $80 billion deficit in Social Security program burn rate each month and $1 trillion deficit yearly.

    It is important to realize that both Social Security and Medicare are plain and simple Ponzi schemes predicated to perpetual increase of the number of employed workers. With substantial increase of productivity over past decades, erosion of goods producing economic activity and employment (only 19 million left as opposed to 23 million government employees at April 2009), heaviest tax burden of the world, decrease of birth rate in US and severe restrictions on immigration, it is unrealistic to expect increase of employed workers.

    Means to fix it
    Among other world renowned experts, Paul Krugman, Princeton University’s Nobel Prize-winning economist is of opinion that “Some of the measures that have been taken to deal with the crisis seem to be predicated on the belief that this is going to be a short, short recession,” Krugman said May 12. “Everything says that’s wrong, that this is going to be a sustained period of weakness. The market seems to be looking as if this is going to be an average recession, but it’s not.” Experts, not politicians are of suggesting that we may see some expansion last quarters of 2010 at best. Middle of the road estimates range from 3- 5 years of no growth before we will start seeing real “green shoots”, instead of “yellow weeds”. Conservative outlook sees same in 10 – 15 years instead.

    The recession is will probably be long because the economy is down across the world, not only in US, because the foundation of the whole Anglo-Saxon economic system – the banking has failed rather than some isolated component of it. IMF recently revised down their estimate of world economic growth to 1.3% contraction. To spur recovery governments are funding economic stimulus and government spending by more debt. The twelve most industrialized of the world’s G20 countries will have to issue about $10 trillion worth of new bonds to cover the cost of the current crisis. However, Reinhart and Rogoff estimate the true cost at $15 trillion in the best case scenario and a whopping $33 trillion – 1/3 of total global savings – in the worst case. Issuing governments may have to inflate away their debt or pay drastically higher yields if deflation does not materialize. Note, that $33 trillion does not count the US benefit program funding needs. How much more low interest rate government debt can the market absorb? Put the other way, what interest rates will it take for the government to pay back the IOU’s in the Social Security and Medicare systems … with taxpayer’s money, of course.

    Political solutions
    There are no innovative solutions currently discussed on Capitol Hill. Substantially raising payroll taxes while unemployment is soaring, imposing the infamous carbon tax (about $3100 per family), etc. will only further suppress the business activity and consumer spending. More failed businesses, more bail-outs.
    Probably the largest and longest run Ponzi schemes ever, but their fall is inevitable under the weight of 78 million new retirees.

    It sure takes enormous courage from a politician to say to current and future retirees – too bad you paid into these programs, but that is what happens if you trust your money with crooks and swindlers running Ponzi schemes; unfortunately, there is no way to recover it. There is no politician on horizon courageous enough to say that, possibly has not born yet. Instead they will try everything to fix it. Earliest, they have to replace the IOU’s with real money. That means more borrowing, further increase in deficits and much larger public debt.

    What does it mean to us?
    A radical change is required to convert these Ponzi schemes into sustainable programs. There is no political will apparent to embark on that path at this time. The limited arsenal of methods to patch it up and leave the problem for the next one elected will lead to ever growing deficit, ever growing debt, higher borrowing cost, suppression of growth and recovery, less money in your pocket. On that background economics 101 tells us to expect fall of dollar value, much higher energy costs, steep inflation, subdued economic activity and stagnant markets for a long time. It is not going to be “business as usual” for long time, but it is not the end of the world yet if that scenario plays out. Could get much worse if the public sector becomes a controlling shareholder of industry after industry and the totalitarian aspects of socialist environment will creep in. Let’s hope that will not happen.

    Few things are obvious. Any means you have get most out of these programs as soon as you can while they still have something to distribute. Find and use all legal means to avoid paying more of your money into these programs. In case you cannot, don’t expect these programs to be there in the form they are today when you need them. Develop alternatives for yourself and your loved ones. Employment in goods producing sectors will erode further until the employment costs equalize with emerging countries. As an example, GM is moving its production to China as part of its reorganization effort. GM is also considering moving its headquarters out of Detroit to a less expensive location in effort to cut costs. Due to imminent Medicare insolvency inefficiencies in health care industry will be in government short-term focus. Adjustments, potentially painful and dumb to the folks employed there are likely. I have yet to discover at least one occasion where the government meddling in any business has produced positive results. I have a prize for you should you bring one to my attention. Yet, health care providers, be aware, government will be interfering.

    Bank Stress Tests

    Posted By Raymond on May 11, 2009

    Some knowledgeable folks had differing opinions on the value and meaning of bank stress tests. People who have worked for large banks and know their business inside-out are of the opinion that the only real goal for the tests was to fool the public to believe that the banks are fine.

    Should the government succeed in this effort then the investors will beef up the banks buying their stock. The consumer will start spending again pulling the economy moving by multiplication effect and we will appear to be out of trouble fast in a “V” shape recession. If that happens then the unfortunate side-effects will be steep drop in dollar value, skyrocketing energy and commodity prices with gasoline at the pump making driving prohibitive, rampant inflation and very high market based interest rates (e.g. mortgage rates).

    Should the consumer refuse to believe the president’s Easter Bunny fairytale and remain in the sidelines for few more quarters then we will probably be in for a long drawn out “U” shape recession with recovery nowhere in sight. The market loses patience fast and will sell. “Cracks” in bank balance sheets will become obvious again, but there will be no more bail-out money available. Government’s renewed efforts to “talk us out of recession” will become futile and efforts to borrow us out of debt will become more and more expensive. This government will probably remain for one term only. On a positive note, food and gasoline prices will fall, interest rates remain low, high end retailers will fail and people in America will re-learn to live by their means.

    House already admitted that the budget deficit will topple $1.8 Trillion in first of the coming series of upward revisions of budget deficit. That means borrowing will have to bring in half of the budget. This far they have only managed to talk the stock market deep into irrational exuberance. Rest of the economy continues down with long term unemployment rate (marginally attached, discouraged, part-time for economic reasons workers) up from 15.6% to 15.8%. Our rubberstamping congress will give the administration everything they want, except one thing they cannot give – the time. Read Napoleons’ advice to Obama here.

    Remains to be seen which of the scenarios will play out. Whichever does, very volatile markets are likely in short term. Use short term strategies to trade.

    The material
    Stress-test results ignore bad bank assets

    The real objective and meaning of stress testing “private banks” from WSJ Online:
    How the Stress Tests Stopped the Market Bleeding

    This is not new. Same was done by Goebbels in Germany before and during WWII and projected by Ayn Rand “Atlas Shrugged” to happen in America. Read history to understand better what is actually going on.

    The process
    Banks Won Concessions on Tests. Fed Cut Billions off Some Initial Capital-Shortfall Estimates.

    End result
    The Stress Test Result: Banks Scramble to Issue Common Stock. They have 6 months to accomplish that.
    Official stress test results have following assumptions:
    1) The total loss rate for loans calculated by the regulators is 9.1%, a level that exceeded that seen in the 1930s.
    2) Tier 1 capital ratio of 6% and Tier 1 Common capital ratio of 4%.
    3) Estimated losses of $600 billion over 2009-2010.
    4) Estimated revenues and reserves build over next 2 years $415 billion–> estimated need for additional capital buffer of $185 billion by the end of Q4 2008. Note, the cut-off time for the data used in stress test and the regulatory environment (e.g .FASB rules in force at that time)

    By Q1 2009 higher revenues (most because of FASB accounting rule modifications) changed so that the additional total capital requirement amounts to $75 billion, of which: BofA: $34 billion; Wells Fargo: $13.7 billion; GMAC: $11.5 billion; Citigroup: $5.5 billion (after signaling already that it will request to convert the government’s $45 billion preferred equity stake into common equity); Morgan Stanley: $1.8 billion. Treasury’s injected preferred equity stake is $218 billion. Remaining TARP funds available are $110 billion. Treasury expects $25 billion in TARP repayments soon.

    How can you predict future from the past

    Posted By Raymond on March 22, 2009

    How can one develop a trading strategy based on past behavior of a market if the market changes? Good question. You can do it like the credit rating companies, fed, president’s office, IMF, … etc. by measuring arbitrary external characteristics (depth of downturn, job loss, factory utilization), comparing to the past recessions and arriving at a “rosy” forecast. Because this approach ignores the underlying reasons for good times or bad it carries little or no real value and requires constant revision. Of course, credit rating companies don’t do that unless they get paid for it and president’s office does it only if politically beneficial. On the other hand Fed buying trillion dollar worth of commercial paper based on these ratings may not be as risky as some think. Credit rating companies have been beaten up recently for their inadequate job during bull times and their ratings are right now adjusted much more toward negative than realistic. Not much to do with reality and useless for trading this way or other.

    Despite the profound changes (plummeting volume – many lost their money and others are scared to step in, loss of credibility and increasing amount of misinformation …) the market has also characteristics that have not changed. It is still traded by people even much more so than recently. People’s trading decisions are guided by emotions like before on choppy markets. They still believe somewhat the advice from “big investment banks” even though these have lost much more money than they have. They still trust their money to money managers hoping its safe now that Madoff is locked up.
    In short, use the market aspects that have not changed from the past to develop the forward looking signals for today’s trading strategy. Use these signals for trading until the market aspects signals are derived from change.
    Happy trading, and watch out for change.

    Side note:

    “This credit crunch started off as a structured-finance crisis, when the market lost confidence in credit ratings and realized that risk had been massively under priced,” says Ed Grebeck, chief executive of debt strategy firm Tempus Advisors. “Now the government is relying on rating models for structured-finance asset purchases even though some of those have demonstrably failed.”

    “Until the rating firms bite the bullet and develop forward-looking signals and methods, it’s going to be same old, same old, and their models can be gamed”

    A Moody’s spokesman says the firm’s structured-finance credit committee “isn’t the final arbiter” on ratings.

    Watch out for your “friends”

    Posted By admin on March 9, 2009

    “God help me with my friends, I can deal with my enemies myself.” Sounds familiar? While Americans generally have not considered government their friend, for most so far, it has not been an enemy either. Well’ perhaps this is the “change” we voted for! A journalist of a generally liberal newspaper has it much more succinctly that I can – he plain and simple does not care about us, only cares about his socialist agenda and now in position of power uses the current crisis just to “shove it down our throat”.

    We can not do much more than express our opposition to our elected senators and members of congress regarding all the enormous spending initiatives coming rapidly down the pipe. In addition there are also proposed bills that directly destroy our life. Not all of them come from the president’s office. There are likeminded members of congress as well. Here’s is just one of the first ones If you haven’t, act on it and spread the word. There aren’t many of us, so we need to get all voices in. Watch out for the next and spread the word.

    From 42 of my life years under socialism I have pretty good understanding what this “change” is going to mean to us some years from now. If you want to know, look south. There are plenty going on in Venezuela, Ecuador, Nicaragua and you get a preview of changes coming to your backyard. If you think that this is so un-American, it will never happen here, think again. There are many people in America who like to be “taken care of”. Guaranteed employment, health care and education – what’s not to like. People without ambitions will support this change. Probe around, you’ll see.

    Happy trading and always watch out!