I’m way behind so I’ll keep this short and not-so-sweet.

Today’s "rally" was stupid, I said so all day.  Even though we closed a full 16 points above my morning target of 12,850, I got very bearish during the day as oil looked poised to test $125 with CNBC running a day-long pump-fest, trotting out every oil bull on the planet to tell us how $200 oil would somehow be great for investors.

Are these guys on crack?  I’m not sure, but I will say it again and again:  There is not enough money on the planet earth to pay for $200 oil without taking that extra $3Tn OUT of the revenues of other industries.  If you couple that with a conservative $2Tn worth of food inflation (caused by oil), then you are talking about a global depression where the only companies that survive are the oil companies. 

Of course that’s ridiculous as one would thing that wiping out every disposable penny on the planet would hurt the demand for oil and drive down prices - but that’s not what energy traders believe!  They are buying July $150 futures contracts in bulk!!!  Forget the fact that we need a war with Iran to justify $150 crude (word is Bush is working very hard on this as we speak) - I am telling you the market cannot handle $125.

I see no justification for this rally and I said to members yesterday as CNBC had a discussion that $120 oil was a good thing for the economy: "Yet another BS justification.  Come on guys - the last time we got this much "good news" about an investment from the media was housing…  Oil $124.33 and a Rebel Attack in the morning should punch us through $125."

I was bearish much earlier than that though, at 11:16 I said, regarding whether it was a good time to enter Apple: "I don’t think anything is ready for an entry right now."  We decided to roll our oil puts up (to higher strikes) and out (to longer months) and sell front-month puts against them as it was obvious crude was going nowhere but up, despite a good build in natural gas at 10:30.  At 11:25 I warned: "Don’t forget that until we bounce more than 50% of yesterday’s drop this "rally" is nothing so we need 12,900 at least ."

At 2:32, into the NYMEX close I said: "Wow they jacked oil up to just under $124!  Bye bye markets…" and 1 minute later I posted: "Homework assignment for tomorrow is to look at all your spreads and think whether or not you have sold as much premium as you can stand to cover with for the next 5 days."  My 3:25 prediction for tomorrow was: "Oil $124.33 and a Rebel Attack in the morning should punch us through $125" and my final word at the close was: " I am just blown away that we’re not down another 200 points on this (the BKX is at the 5% rule though, they’re not as stupid as the rest of the market)." 

I hate to go all bearish but our bullish premise was that there would be intervention that strengthens the dollar and that something would be done to stem the tide of foreclosures (910,000 since Jan 1st) and that oil would back down and put some money back into consumers’ pockets.  With Bush vetoing the FHA package Congress has spent months putting together and the dollar still at its lows (remember any time McCain goes up in the polls, foreign investors dump dollars) and oil now up $20 in a month, this is simply no time to be bullish.

Hopefully we’ll find a reason tomorrow…

One more from Mish, and yes, all’s working!

Fannie Mae Cumulative Defaults (and other disasters)

Inquiring minds are checking out the Fannie Mae 2008 Q1 10-Q Investor Summary. There are plenty of charts, graphs and other data to consider.

Fannie Mae Executives Only Ones Surprised by $2.19 Billion Quarterly Loss

Fannie Mae (FNM) this morning reported a wider loss than many analysts estimated, cut its dividend to 25 cents a share and said it will raise $6 billion in capital before it eventually burns to the ground while the Office of Federal Housing Enterprise Oversight plays a fiddle. We’re paraphrasing… but only slightly.

Even as Fannie Mae reported a wider-than-expected (for Fannie Mae executives at least, the rest of us seemed to know better) $2.19 billion first quarter loss, the Office of Federal Housing Enterprise Oversight (OFHEO), the regulator that oversees the government-sponsored mortgage giant actually lowered… yes, lowered… the amount of capital Fannie must hold.

The OFHEO said it will lower requirements for surplus capital to 15% from 20% once the $6 billion in capital is raised, and may reduce it even further to just 10% by September. The move by OFHEO to relax capital surplus requirements for Fannie Mae essentially enables the mortgage-finance company to buy more mortgages and take on even more risk.

"The lowering of the prudential cushion was appropriate in line with the company’s progress and with the need to maintain safe and sound operations," OFHEO Director James Lockhart said in a statement, presumably to guard against not being able to maintain a straight face. For if there is one thing we know with absolute certainty, it is this: Fannie Mae is the antithesis of any operation that one could consider "safe and sound."

Fannie Mae ignores the effects of foreclosures

Fannie Mae Seems to be bragging about a capital "surplus" of $5.1 billion and $42.7 billion in core capital. Here is another way of looking at things.

• Fannie Mae has $2.7 trillion in loans and only $42.7 billion in capital backing that up.
• Home prices are declining and expected to decline more.
• The US is in a recession and jobs have been lost four consecutive months.

Where did that capital surplus come from?

Mike "Mish" Shedlock

We’re back up on this site again, so here’s my testing-to-see article, courtesy of Mish (always good formating from his site :-),  plus I agree with his conclusion)

Hardball In Vallejo, No Balls In D.C.

Cities and municipalities have been promising government workers more in salaries and pension benefits than can possibly be met. Unfunded liabilities are mounting and the ticking time bomb finally went off. What had to happen, did. Vallejo California Declared Bankruptcy.

The North Bay city of 117,000 now heads into largely uncharted territory, as no California city of this size has ever opted for this route. "This has been a long frustrating process for everyone," said City Manager Joseph Tanner. "There are no winners here tonight."

My Comment: I disagree. Taxpayers of Vallejo are winners, perhaps more so than if a deal was struck.

After about four hours of discussion and public comment from the standing-room-only crowd, the council voted 7-0 to approve Tanner’s recommendation to declare Chapter 9 bankruptcy protection as a means to reorganize its finances, which have been shattered by spiraling public employee salaries and the plummeting housing market.

The move allows the city to freeze its debts while maintaining city services. Police, fire and other unions and many in the audience were outraged at the move, accusing the council of poor leadership.

My Comment: There was indeed poor leadership in Vallejo. Failed leadership is decades old. Year after year Vallejo has agreed to contracts the city could not afford. This move attempts to correct the error.

The city and its police and fire unions held a final contract negotiating session Sunday but failed to reach an agreement before Tuesday’s City Council meeting.

The city and its public safety unions have been at the bargaining table for about two years. The city is asking for its police and firefighters to take salary, benefit and staff cuts, while the unions say any further cuts would endanger public safety as well as the safety of the police and firefighters.

My Comment: Exactly how does a cut in pay or benefits endanger public safety or the safety of the workers? Clearly it doesn’t. This was all or nothing hardball by the unions and it could be a fatal mistake. Pension benefits will now be under court review. Anything goes.

Vallejo spends 74 percent of its $80 million general fund budget on public safety salaries, significantly higher than the state average. The generous contracts are the result of deals struck in the 1970s, following a police strike that left the city in turmoil.

My Comment: If I was a Vallejo taxpayer, this is what I would be asking: What special talents does the firefighter and police force in Vallejo have that merit "significantly higher than the state average" wages and benefits?

The City Council had been split on whether to declare bankruptcy. Some, including Mayor Osby Davis, said the stigma would threaten the city’s long-term economic development and discourage investors, while others said it would give the city time to restructure its budget and offer protection from creditors.

What’s unknown is whether bankruptcy will dissolve the city’s labor contracts, which most City Hall staffers say is the primary reason for the city’s financial mess. A judge will have to decide whether to dissolve the contracts.

My Comment: Taxpayers everywhere should be rooting for those contracts to be dissolved. And if that happens, it will set a nice precedent for renegotiating all unaffordable government contracts, which is to say thousands of city and municipal contracts across the nation.

Please consider this Pentagon Threat: If Congress doesn’t act, soldiers will go unpaid.

Pentagon Press Secretary Geoff Morrell briefed the press, starting with a statement about the Global War on Terror budget supplemental request, which is slated to go before the House this week. He said that currently the military is borrowing form Army payroll accounts in order to fund the wars in Iraq and Afghanistan and that if the Congress does not act the Defense Department will not be able to pay soldier, including those in Iraq and Afghanistan after June 15, 2008. He said the only options available if Congress does not pass $108 billion in war supplementals would be for the Defense Department to petition Congress to allow certain “re-programming” of other funds so that soldiers don’t’ go without pay.

This is not about paying soldiers, this is about inappropriate spending. And Congress does not have the balls to do what needs to be done: Balance The Budget.

This is what I want Congress to do.

• Keep paying the soldiers.
• Stop paying themselves until they pass a balanced budget that includes future liabilities.

If Congress wants a war or war funding then fine. At least have the balls to raise taxes to pay for it. If we want to station troops in Europe and Japan, same thing. If taxpayers were given a choice to invade Iraq, station troops in Europe, and raise taxes, or not station troops in Europe and exit Iraq, it is perfectly clear how everyone but the neonuts would vote.

Mike "Mish" Shedlock

Tough call today…

The pre-markets (8am) look good but that would be good when compared to our horrible finish yesterday, not good at all compared to Tuesday’s top.  Oil is still at $123 as both the ECB and BOE decided to hold rates steady, not the best outcome for the dollar.  There seems to be a consensus that AIG is going to take down the markets this evening but I don’t see it happening and we may even pick up some AIG calls if they get any cheaper.

TM took down the markets in Asia with a 28% drop in profits as the weak dollar and weak US auto consumer took their toll on the World’s top auto company.  Raw materials are, of course, also up leading Toyota to post their first decline in profits in 7 years.  TM says they expect to earn just 1,250,000,000,000 Yen ($12Bn) for the year or about 100Tn times more than GM.  Small cars are still flying off the lot with Prius sales up 23% and Yaris sales up 58% in the US, mainly the company miscalculated on their truck roll-out (last year’s Superbowl).  We’re going to be happy to take out our callers and stick with this one.

Myanmar continues to be a concern in Asia and rice went limit up in morning trading as the death toll rose to over 100,000.  The Nikkei dropped 1% and the Hang Seng gave up 0.6% despite a bounce on the mainland exchange (2%) on the rumor that the government would step in and help the markets (doubtful). 

Europe opened low but is coming back to flat ahead of the US open now that they have gotten past the rate decisions.  The Euro is falling against the dollar and the Yen as EU economic data is indeed more sucky than ours: "The euro-zone retail sales result overnight was a shock to us," said Jun Kato, a senior dealer at Shinkin Central Bank. "The result suggests the region’s economy may also be slowing down. Some players have started to price in a change of the bank’s view on the economy in the near term."  Euro-zone retail sales fell 0.4% in March instead of rising 0.2% as expected.

Italy’s Finmeccania is buying DRS, a major military supplier with about $3Bn in sales so expect a lot of protectionist screaming on this one.  Speaking of which, here’s a great article about outsourcing the Presidency (if only!).  At least we don’t have to worry about Vladimir Putin’s continued employment as Russian legislators confirmed him as Prime Minister the day after he stepped down from the Presidency.  There were 56 dissenting votes out of 448 and memorial services will be held after their untimely deaths next week.

We’re getting a string of better than expected (low expectations) retail sales reports with our ANFs doing very well (up 6%) and our WMTs up 3.2%, leading the pack.  Neiman Marcus has a 1.9% dip and LTD got hit with a 5% dip in same-store sales.  Victoria’s Secret was down 4% as $50 bras went up in smoke with each tank of gas.  Art Cashin had this take on sales: "People are buying milk, bread and gasoline on their credit cards and it’s their last lifeline to reality."

Eduardo Castro-Wright of WMT, where discount Sam’s Club sales were up 6.6%, noted, "The economy continues to get tougher and the ‘paycheck cycle’ is more pronounced for customers than in past months. As money gets tighter for them toward the end of the month, sales drop more than we have seen in the past."  Yeah, that’s not actually a good sign folks!  And oil was "only" $109 on average in April…

In addition to our fun with CROX today, ENER posted some amazing results but guided Q4 in-line so the exuberance pre-market may be a bit irrational and I’m considering a naked sell of the $45s at the open as they seem more than fairly valued up there.

I don’t see any really great reasons to go up or down today and that takes us into the Friday before a big data week so it’s very possible we stay flat through the weekend around 12,850 which means we’re going to want to be well covered with May callers to burn off those premiums.

We’re already well covered but let’s see which way the wind blows today.