Monday Market Mayhem

by Phil - March 30th, 2009 7:04 am

It does not take much to turn this market.

In Friday morning’s post I said: "a 5% correction would be good and healthy and we’ll be looking to hold the same levels we set on the way up on this pullback – those would be: Dow 7,636, S&P 805, Nas 1,525, NYSE 5,075 and Russell 420, roughly 15% off the bottoms with 5% rule adjustments." and we got 1/2 of that move on Friday (the 2.5% rule) and I reminded members over the weekend: "Don’t forget I was looking for something like a 5% pullback and "all" we got was 2.5% so far."

So let’s not be all "shocked" that there’s a pullback today. It’s the same pullback as we had on Friday, following through to where it belongs. Timing-wise, it was to be expected as we run-up to the G20 and my catch-phrase prediction for this week was: "While Obama’s away, the bears may play" and it looks like the bears are bringing their "A" game this week, pressing hard before Obama is even airborne for his European tour.

The newsflow turned sharply negative this weekend as well but not much of it matters other than Rick Wagoner being forced to resign after the Administration rejects the automaker’s latest plan (Chrysler’s too). While much is being made of this – it’s actually a very positive thing as the government is playing hardball with GM debt-holders and the unions to wring concessions from them that will bring the turnaround plan in line. Although they are tossing out the "B" word, the administration said it would provide the company sufficient working capital for 60 more days, during which a revamped GM board and top management has to put forward a much more rigorous restructuring plan than it submitted last month.

A GM bankruptcy is, unfortunately, one of the three things I have long said that could each knock 20% off our 8,650 midrange. Even more unfortunately, our other two market killers - the bankruptcy of a major financial institution or the default of a less-than minor country – are both still firmly on the table as possibilities. Speaking of countries that may default – Russia’s economy is forecast to shrink another 4.5% this year. “As the crisis continues to spread to the real economy around the world, initial expectations that Russia and other countries will recover fast are no longer likely,” the World…

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G-20 Targets Hedge Funds, Ignoring Everything Worth Discussing

by ilene - March 30th, 2009 12:57 am

Mish comments on the G-20 plan to target hedge funds in the meeting next week.

G-20 Targets Hedge Funds, Ignoring Everything Worth Discussing

Courtesy of Mish

Ignoring global trade, monetary issues, the role of the Fed and Central bankers in the crisis, US dollar hegemony, and nearly everything else that makes sense to discuss, the G-20 Targets Hedge Funds as Leaders Near Consensus.

Leaders of advanced and emerging economies are closing ranks behind plans for tougher rules on financial markets to prevent another collapse like the one that wiped out much of Wall Street.

A global approach to regulation has been gaining momentum ahead of the Group of 20 summit April 2 in London. U.S. President Barack Obama, U.K. Prime Minister Gordon Brown and their G-20 counterparts aim to merge their national blueprints for strengthened regulation into a united front to rein in hedge funds, derivatives trading, executive pay and excessive risk-taking by financial firms.

Agreement on a shared regulatory agenda would provide the G-20 summit with a measure of success even as leaders remain at odds over trade policy, fiscal stimulus and the status of the dollar. A joint regulatory approach is crucial to prevent investors from seeking out markets with the most permissive rules, setting off a race to the bottom as countries vie to attract capital.

“Having the U.S. and Chinese on board makes it a whole lot more likely” that an international framework will eventually emerge, says Harvard University’s Kenneth Rogoff, former chief economist of the International Monetary Fund.

Rogoff says that “it seems virtually certain that four to five years from now, the world will have either a global financial regulator or, more likely, a treaty on global financial regulation with a secretariat, akin to the World Trade Organization.” Still, he adds, “nothing is going to happen quickly.”

G-20 Meetings a Complete Waste of Time, Money, Energy

Given that the World Trade Organization is essentially useless, it makes little difference if we get something "akin to the WTO", now, five years from now, or never.

As I said on March 15, the G-20 Summit is a Complete Waste of Money.

Going back further to November 15, 2008 I see the G-20 Summit Blames Buyers of Poison Apples (as opposed to those who made the poison

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Blame it on the Gipper?

by ilene - March 29th, 2009 11:36 pm

Was Reagan’s free-market zealotry an early cause of the current financial crisis?

Blame it on the Gipper?

Courtesy of Leo Kolivakis at Pension Pulse

Before getting into this weekend’s food for thought topic, I think you should all watch Secretary of the Treasury Tim Geithner’s interview on ABC’s This Week and the roundtable discussion where Paul Krugman expressed his concerns with the plan.

Interestingly, Krugman thinks the U.S. government is not doing enough to combat the crisis and that the plan will lead to another Japanese-style lost decade. I agree and I also agree that deficits do not matter in times of crisis because if you don’t get the economy working again, the deficits will only get worse in the future.

But I want to take a step back this weekend and look at the historical events that laid the foundation to this global crisis. On Friday morning, I listened to an excellent interview on CBC Radio’s The Current with Bill Kleinknecht, author of the new book, The Man Who Sold The World: Ronald Reagan and the Betrayal of Main Street America.

Ever since the global economic crisis took hold, people have been looking for a place to park the blame for it. Over-extended homeowners. Greedy bankers. Lackluster regulators. Inept elected officials.

Mr. Kleinknecht has another idea. He says the roots of this crisis go all the way back to the early 1980s and land at the feet of U.S. President Ronald Reagan. Click here to listen to the interview (scroll down to part 3).

Here is a review from Joe Conason published in BuzzFlash Reviews:

From the Nation:

The myth of Ronald Reagan’s greatness has reached epic proportions. The public rates him as one of the most popular presidents, and Republicans everywhere seek to cast themselves in his image. But award-winning journalist William Kleinknecht shows in this penetrating analysis of his presidency that the Reagan legacy has been devastating for the country—especially for the ordinary Americans he claimed to represent.

So much that has gone wrong in America—including the subprime mortgage crisis and the meltdown of the financial sector—can be traced directly to Reagan’s policies. The financial deregulation launched in the 1980s freed banks and securities firms to

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Madoff’s World

by ilene - March 29th, 2009 11:21 pm

Here’s a captivating behind-the-scenes look at Bernie Madoff’s life of betrayal and deceit. With friends like that, who needs enemies? - Ilene The lit-up duplex penthouse apartment of Bernie and Ruth Madoff, on East 64th Street, foreground, where he is under house arrest. Photograph by Stephen Wilkes, Vanity Fair

Madoff’s World

By Mark Seal in Vanity Fair

Among Bernard Madoff’s many dupes were his closest friends, including two tycoons he loved as surrogate fathers: the late Norman F. Levy—whose girlfriend, supermodel Carmen Dell’Orefice, would lose her life savings—and the prominent philanthropist Carl J. Shapiro. Amid the sobs, screams, and curses in Aspen, Palm Beach, and New York, with victims sharing their stories, the author gets behind Madoff’s affable façade, to reveal his most intimate betrayals.

Over dinner in New York one night in January, I was airing my frustration concerning Bernard Madoff. Everybody had read about the losses he had inflicted on foundations associated with Steven Spielberg, Elie Wiesel, and Mort Zuckerman, I told my dinner companions, but after having interviewed nearly 40 of his other financial victims, I still couldn’t get a picture of what the man was like. “If you want to know about Bernie Madoff,” said Mary T. Browne, the renowned psychic and author, who counsels many heavy hitters on Wall Street, “you need to talk to my friend Carmen Dell’Orefice.” She was referring to one of the original supermodels, the platinum-blonde beauty who had posed for Richard Avedon, Irving Penn, Francesco Scavullo, and Norman Parkinson, and who had been a muse to Salvador Dalí. She had first appeared on the cover of Vogue in 1946, when she was 15. “Nobody can give you better insights into the Madoffs than Carmen,” Browne told me. “I’ll see if she’ll talk to you.”

Read on ->

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GM CEO Wagoner, a Visionless Dinosaur, Forced Out

by ilene - March 29th, 2009 9:51 pm

End of the line for GM’s CEO Rick Wagoner…

GM CEO Wagoner, a Visionless Dinosaur, Forced Out

Courtesy of Mish

Far too late to matter for GM’s viability, CEO Rick Wagoner Said to Step Down.

General Motors Corp. Chief Executive Officer Rick Wagoner will step down after more than eight years running the largest U.S. automaker, people familiar with the situation said.

The Obama administration asked Wagoner, 56, to leave the company and he agreed, an administration official said. Wagoner said March 19 that he didn’t plan to resign. The likely replacement, unless the government hires from outside the company, would be Chief Operating Officer Fritz Henderson, said John Casesa, managing partner at New York-based consulting firm Casesa Shapiro Group.

“If they go to someone inside, Fritz is the obvious choice,” Casesa said. “He’s run every region, he’s been number two and he knows where all the bodies are buried.”

The departure of Wagoner comes as President Barack Obama prepares an address tomorrow morning on his plans for the future of the U.S. auto industry. GM is surviving on $13.4 billion in U.S. loans and is asking for as much as $16.6 billion in additional aid to survive. Wagoner was asked to step down as part of the company’s restructuring, the official said.

“It’s very hard for the government to write a big check without giving some evidence of change,” Casesa said. “This will also give the government moral authority with the other stakeholders to make them sacrifice.”

Wagoner has repeatedly argued he knows the company better than most who could take his job. He joined GM in 1977, as U.S. automakers were fending off Japanese competitors who recognized the need a decade earlier to build fuel-efficient vehicles.

As CEO, the former Duke University freshman basketball player and Harvard University MBA early on bet against gasoline-electric hybrid vehicles, focusing research on hydrogen technology. GM offered its first full-scale hybrids in 2007, a decade after Toyota introduced the Prius.

Wagoner kept GM focused on trucks and sport-utility vehicles, only to press for development of the Volt plug-in electric car when gasoline prices soared.

Wagoner a Visionless Dinosaur

Wagoner is an aging dinosaur with no vision. He made bad bets on the wrong technology. He bet on Hummer,

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Dave’s Daily

by David Fry - March 29th, 2009 9:22 pm

MARKET COMMENT

Dave Fry at ETF Digest, March 29, 2009

Dave and Greg Newton discuss last week’s market activity and various controversial hedge fund issues.

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G20 Summit Our Last Chance, says Soros

by ilene - March 29th, 2009 6:11 pm

George Soros sees the upcoming G20 summit as a "make-or-break occasion."

G20 Summit Our Last Chance, says Soros

Courtesy of StockJockey at 1440 Wall Street

George Soros is famous for lower back pain…and while his son like to tease him about it, his back seem to be a better trading tool than anything developed by rocket scientists on Wall Street. And he is finally explaining why his back tends to ache at inflection points in the market:

…he has psycho-somatic illnesses – backaches and pains – that tip him off to changes in the market. “It’s as if you’re a jungle animal, and you see another animal facing you. You have to make a decision: fight or flight? Your hair stands up and you growl and you decide, ‘Am I going to attack because I’m stronger or am I going to run away because otherwise he’s going to eat me?’ You are very tense. And that’s the tension that gives you the backache.” Times Online

George thinks next week’s G20 summit in London is the last chance for policy makers to pull a rabbit our of their hat and pull us out of this spiral…but he is not holding his breath:

“The odds would favour that it fails because there are such differences of opinion. It’s difficult enough to get it right in your own country let alone with 20 governments coming together, but if it’s a failure I think then the global financial and trading system falls apart.”

If the G20 is nothing but a talking shop then he thinks we are heading for meltdown. “That could push the world into depression. It’s really a make-or-break occasion. That’s why it’s so important.” The chances of a depression are, he says, “quite high” – even if that is averted, the recession will last a long time. “Look, we are not going back to where we came from. In that sense it’s going to last for ever.”

Food for thought for those you you who have been chasing stocks – a big crowd, given that we just posted a two week stretch that was the fiercest rally in 78 years, at least in the U.S.

George Soros, the man who broke the Bank, sees a global meltdown
TimeOnline

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Vast Computer Spy System Tracked Back to China

by ilene - March 29th, 2009 2:42 am

Big Brother sent from China?

Vast Computer Spy System Tracked Back to China

Courtesy of Dan Colarusso at ClusterStock

Researchers are the University of Toronto have tracked back to China a computer spying operation that’s infiltrated machines in more than 100 countries, according to The New York Times.

The investigation, which doesn’t point at the Chinese government specifically, said the so-called GhostNet system had stolen documens from almost 1,300 computers, including those in offices of the Dalai Lama. It has also monitored a NATO computer system and the Indian Embassy in Washington, D.C.

The article says the sytem was the most-ranging one ever discovered and had Big Brother-type capabilities:

"It can, for example, turn on the camera and audio-recording functions of an infected computer, enabling monitors to see and hear what goes on in a room. The investigators say they do not know if this facet has been employed."

Money creation and the Fed

by ilene - March 28th, 2009 9:31 pm

Using a variety of colorful charts, James D. Hamilton examines whether the explosive growth of the monetary base implies uncontrollable inflationary pressures.

Money creation and the Fed

Courtesy of James D. Hamilton at Econbrowser

A lot of people have seen this picture of the recent behavior of the monetary base and wondered what it means.

**Figure 1. Adjusted monetary base.** Source: FRED.

To understand the explosion in the monetary base since September, let’s begin with a little background. The Federal Reserve has the ability to purchase assets or make loans with funds (money) that are created by the Fed itself. To buy a billion dollars worth of assets, the Fed doesn’t show up with new cash in a wheelbarrow. Instead the Fed pays for any assets it purchases or loans it extends by crediting the funds that the recipient bank has in an account with the Fed, known as reserve deposits. A bank can later withdraw those deposits in the form of green currency, if it chooses, and that’s the point at which an armored truck from the Fed would be involved with physical delivery of cash.

The monetary base is essentially the sum of (1) the currency that’s been withdrawn from private banks and is being held by the public, (2) the currency that’s sitting in the vaults of private banks that could potentially be withdrawn by the banks’ customers if they wanted, and (3) banks’ reserve deposits, which you could think of as electronic credits for currency that the banks could ask for from the Fed any time the banks choose. Historically, newly created reserve deposits have usually shown up pretty quickly as currency withdrawn by banks and then by the public. Choosing a pace at which to allow that supply of currency to grow so as to accommodate the increased currency demands from a growing economy without cultivating excessive inflation is one of the main responsibilities of the Fed.

Figure 2 below plots the assorted "factors absorbing reserve funds" from the Fed’s H41 release during the halcyon period from 2003 to the middle of 2007. At that time, currency held by the public was by far the biggest component in the liabilities side

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What Goes Around, Comes Around

by ilene - March 28th, 2009 7:16 pm

A Lesson in Karma?

What Goes Around, Comes Around

Courtesy of Michael Panzner at When Giants Fall

It’s a source of secret (and not so secret) pleasure and the plotline of many books and movies: seeing the tables turned — and the abuser getting abused.

While Americans might not see it that way, no small number of countries have long resented the haughty and overbearing approach that the U.S. and other instruments of American hegemony, including the International Monetary Fund, have taken when they (and other nations) have gotten into financial difficulties.

Under the circumstances, it’s likely that some of them are looking at how things are unraveling in the United States and muttering to themselves: "What goes around, comes around."

In a Washington Post commentary, "Re-emerging As an Emerging Market," Desmond Lachman, a fellow at the American Enterprise Institute and former deputy director of the International Monetary Fund’s Policy and Review Department, helps put those sentiments into context.

Back in the spring of 1998, when Boris Yeltsin was still at Russia’s helm, I led a group of global investors to Moscow to find out firsthand where the Russian economy was headed. My long career with the International Monetary Fund and on Wall Street had taken me to "emerging markets" throughout Asia, Eastern Europe and Latin America, and I thought I’d seen it all. Yet I still recall the shock I felt at a meeting in Russia’s dingy Ministry of Finance, where I finally realized how a handful of young oligarchs were bringing Russia’s economy to ruin in the pursuit of their own selfish interests, despite the supposed brilliance of Anatoly Chubais, Russia’s economic czar at the time.

At the time, I could not imagine that anything remotely similar could happen in the United States. Indeed, I shared the American conceit that most emerging-market nations had poorly developed institutions and would do well to emulate Washington and Wall Street. These days, though, I’m hardly so confident. Many economists and analysts are worrying that the United States might go the way of Japan, which suffered a "lost decade" after its own real estate market fell apart in the early 1990s. But I’m more concerned that the United States is coming to resemble Argentina, Russia and other so-called emerging markets, both in

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Figure 1. Adjusted monetary base. Source: FRED.

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