Archive for 2008

Weekend Update

"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 on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." – Thomas Jefferson, 1802

The Federal Government is seizing private companies – Hurrah!

Really, I don't know whether to laugh or cry.  Anyone who owns a business should be shaking in their boots if we're setting a precident that anyone can take a snapshot of your business during a rough patch and determine that it's time to shut it down or kick out management, screw over shareholders and restructure debt.  Gosh it seems like only last quarter when I warned that Paulson's push for more Treasury power that was rammed through Congress while they hyenas destroyed Bear Stearns (who, it turns out were never insolvent) would only be used to grab more banks and more land by Paulson, GS et al.  Actually, it was last quarter and here we are, with the MSM celebrating the fact that the US government just took over the deeds on almost every home in America and now has absolute control of the money flow that allows people to get mortgages.

The Washington Post said at the time: "Any new formal regulatory powers for the Fed would have to be passed by Congress. Paulson's recommendations go beyond those contained in a blueprint for financial regulation that he unveiled shortly after the Bear Stearns rescue. That document, which had been in the works for more than a year, proposed an enhanced role for the Fed in preempting financial crises but offered few details. Today's speech will elaborate, calling for the Fed to be given explicit power to step in whenever a firm poses risks to the system and the authority to demand information from financial institutions so it can better anticipate emerging threats.  Paulson's argument, which is shared by leaders of the Fed, is that even when the emergency Fed lending program for investment banks goes away — it is scheduled to expire
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Political Post of the Week

Well, I've been planning for quite some time to make a post about taxes and  the problem is I have so much supporting material that the final post keeps getting farther and farther away as under each rock I uncover is yet another rock.

I have a couple of video selections like George Carlin ranting about who controls this country, which leads to a video on where the wealth is distributed in this country made more obvious by this follow-up video illustrating how ridiculous the disparity is leading me to the conclusion shared here that the Bush/McSame tax cuts are bad for the economy.

I think it would be a great topic of discussion this week as it's probably one of the key issues that really define the two parties.  The following are my comments from a post on Aug 4th that got me started on this topic.  Hopefully over the course of the week I can get around to fleshing it out, hopefully with your input:

 

Taxes – Well I would think that seeing the top 1%, who the article fails to mention makes 60% of all money (80% for the top 10%) pay 1/2 the taxes of even the top 10%, who’s level is skewed by the inclusion of the top 1%. 

Seriously, this is what I do not get about Republicans.  You are being reamed by the guys in the top 1%, you more so than the poor, who are screwed no matter what happens…  If you are in the top 10%, but not the top 5% (well over $1M per year in income) then you are paying more than 44% of your income in taxes while people who make 100 times more than you, perhaps 1,000 times more than you, pay just 19% of their income.  Clearly if they paid 44% of their income in taxes, you wouldn’t have to pay any (nor would the poor), yet you scream and curse and fight for the right of people who would have you arrested if you crashed their party to screw you over 6 ways to Sunday.

By creating the opulant wealth of the 400 richest, you drive up the price of the things you want.  You like a home in Apsen – they have 3 and money was no object…
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Paulson Rolls the Dice

Mish’s take on the GSE takeover. 

Paulson Rolls The Dice At Taxpayer Expense

The GSE deal has been announced. Here is the Statement by Secretary Paulson on Treasury and FHFA Action to Protect Financial Markets and Taxpayers.

The title of the statement suggests two things.

1. This agreement will not reduce risk on the financial markets
2. This agreement will not protect the taxpayer

Let’s take a look at excerpts to see how long it takes to verify that cynicism.

To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size.

My Comment: That statement clearly spells out that increasing systemic risk will be ignored at a "modest rate" through the end of 2009. Then, assuming one believes the second statement (I don’t) the portfolios will be reduced at a rate of 10% a year starting in 2010. This implies banks will be in condition to start taking over where GSEs left off in 2010. I doubt it.

Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities. Under these agreements, Treasury will ensure that each company maintains a positive net worth.

My Comment: In theory this is a bottomless sinkhole, especially in light of the fact that systemic risk will be increasing over the next 16 months (and probably beyond that).

This commitment will eliminate any mandatory triggering of receivership and will ensure that the conserved entities have the ability to fulfill their financial obligations. It is more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set. With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers.

These Preferred Stock Purchase Agreements were made necessary by the ambiguities in the GSE Congressional charters, which have been perceived to indicate government support for agency debt and guaranteed MBS. Our nation has tolerated these ambiguities for too long, and as a result GSE debt and MBS


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Take A Load

TAKE A LOAD OFF FANNIE:
BAILOUT OR NATIONALIZATION FOR THE MORTGAGE GIANTS?

“Take a load off Fanny, take a load for free;
“Take a load off Fanny, and (and) (and)
“You put the load right on me.”

 – The Band, “The Weight,” 1968

Fannie Mae and Freddie Mac own or guarantee nearly half the $12 trillion U.S. mortgage market. Not long ago, they were the darlings of Wall Street, ranking next to U.S. bonds as among the safest and most conservative investments in the world. They are called “government-sponsored enterprises” (GSEs), although they are entirely privately owned and specifically disclaim government backing on their prospectuses. The market has taken these disclaimers with a wink and a nod and has assumed that the GSEs are “too big to fail,” forcing the government to save them from their reckless investment schemes. Fannie and Freddie’s preferred shares have been considered so safe that banking regulators let banks count them in the capital required as a cushion against loan losses. This is now proving to be a serious problem, because both the common and preferred shares of the distressed duo are suddenly plunging. Between May 15 and August 25, Fannie’s common shares lost 77% of their value, while its preferred shares lost 58.8% in that short time. Freddie Mac’s preferred shares plunged even more, down 65.5%.1 That could be a disaster for many banks, which are loaded to the gills with these preferred shares. Banks already reeling from losses on mortgages and mortgage-backed securities are now being hit at the core, shrinking their capital base. Loss of bank capital works as leverage in reverse: at a capital requirement of 10%, $1 lost in capital wipes out $10 in loans.

Ironically, the recent plunge in Fannie and Freddie shares has been blamed on the bailout plan that was supposed to save them.  In July, Treasury Secretary Hank Paulson sought and was granted the authority to extend an unlimited credit line to the GSEs, which now have liabilities totaling about $5 trillion; and to capitalize them by buying their stock, effectively nationalizing them.  At a July 15 hearing in Washington, Paulson assured a group of Senators that Congress probably would not have to go through with the plan.
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Money Flow & Divergences

At TraderFeed this weekend, Brett Steenbarger notes that money is still flowing out of the market, but he also points out divergences which could prompt him to buy stocks aggressively if they continue. 

Money Continues to Flow Out of the Stock Market

Excerpt:  "Here we can see that dollars are still not flowing into stocks, as the Dow Jones Industrial Average (blue line) is on its way toward testing its mid-July lows… Even when the Dow has bounced from intermediate-term lows, positive money flows have only been sustained for a short period of time--and have represented excellent selling opportunities."

More here.

Divergences Appearing in the Indicator Data

Excerpt:  "Credit to the Decision Point site, which tracks the common stocks only for the NYSE Composite Index. As the NYSE Composite has moved to 52-week lows (top chart), we see that the number of NYSE common issues registering fresh 52-week lows (middle pane, top chart) has shriveled to only 124 on Friday, compared with around 450 at the mid-July lows… If these divergences continue, I will be looking to be an aggressive buyer of stocks"

More here.

 

 





GSEs and Others

Here’s an article by Mish discussing Freddie and Fannie and the latest developments:  1) Freddie’s overstated capital cushion, and 2) proposal to place the companies into a gov’t-run conservatorship. 

[Background article at Bloomberg's, Paulson to Take Over and Restructure Fannie, Freddie.]

GSEs and Other Financial Institutions Overstate Capital Base

In an easily believable story the New York Times is reporting Loan Giant Overstated the Size of Its Capital Base.

The government’s planned takeover of Fannie Mae and Freddie Mac, expected to be announced on Sunday, came together after advisers pouring over the companies’ books for the Treasury Department concluded that Freddie’s accounting methods had overstated its capital cushion, according to regulatory officials briefed on the matter.

The proposal to place both companies, which own or back $5.3 trillion in mortgages, into a government-run conservatorship also grew out of deep concern among foreign investors that the companies’ debt might not be repaid.

My Comment: It’s called "investing" for a reason. If there was no risk of loss it would not be called investing but rather "winning" or something similar.

Investors who own the companies’ common and preferred stock will suffer. Holders of debt, including many foreign central banks, are expected to receive government backing. Top executives of both companies will be pushed out, according to those briefed on the plan.

The cost of the government’s intervention could rise into tens of billions of dollars and will probably be among the most expensive rescues ever financed by taxpayers.

My Comment: This is just a guess and I could be wildly off base but my range of taxpayer losses is $50 billion to $250 billion. The vast majority of Fannie and Freddie loans are not at risk.

The takeover comes on the heels of a rescue of the investment bank Bear Stearns, which was sold to JPMorgan Chase in a deal backed by taxpayers. Already, the housing crisis has cost investors and consumers hundreds of billions of dollars.

The big question now is whether the federal government’s move to take over Fannie and Freddie will restore investor confidence in the nation’s credit markets, help stabilize the stock market and keep loans flowing to creditworthy borrowers.

My Comment: The only


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September

September isn’t a great month for stocks.  Infact, statistically, it’s the worst.  Courtesy of  Prieur du Plessis at Minyanville.  

Note:  I was curious as to how far the markets have already dropped during the first trading week of Sept.  Looking at the Qs ($QQQQ), the opening price was $46.87 on Monday 9-2 and the closing price was $43.45 on Friday 9-5.  This is already a loss of about 7%, which is more than the average Sept. loss.  – Ilene

Is September the Cruelest Month?

Many reports have been published over the past few days about stock market seasonality and, specifically, about September typically being the worst month of the year.

In a recent post, I included the following paragraph: “Seasonality indicates that ‘September has firmly secured the rank as the worst month of the year’ (Stock Trader’s Almanac), but that a year-end rally typically starts in late September / early October.”

September has certainly got off to a rough start, with both the MSCI World Index and the MSCI Emerging Markets Index having declined every single trading day since September 1.
I realize numerous studies have been done on the historical pattern of monthly returns, but, in order to gain a first-hand feel for the data, I have researched monthly returns of the Dow Jones Industrial Index from January 1958 to August 2008. Some interesting statistics are summarized in the table below.

The following 2 tables show the percentage positive months (top graph) and the average monthly return (bottom graph) respectively.

It’s clear from the above that September, on average, has historically been the worst month. But stock markets recovered after that and October, November, December and January have traditionally been good months.

Time will tell whether the current panic mode will make way for a better period in the weeks to come.

September Music Selection: September and Wake Me Up When September Ends   





Intriguing plays as Freeport McMoRan, RIM volatilities urge higher

Today’s tickers: FCX, SNDK, VMED, UST, SKS, RIMM, EWW, ALU, EWH, WLP

 

FCX- Shares in global miner Freeport McMoRan continued their slump today amid the ongoing unwind in commodities. With shares reading 2.2% lower at $73.25, composite implied volatility on its options continues its uphill slant – now at 74%, this measure of anticipated share price fluctuation has risen 42% in the past week. Options volume has been brisk throughout the session, with more than 142,000 options trading by late session, and with calls outmoving puts by a factor of 1.7 it looks like some option traders may be seizing the opportunity to take contrarian bids through call positions, possibly mitigating some of their risk by using spreads. In one unusual play, we saw a trader use a 3,000-lot short collar in the November contract using a long position in November 100 puts and a short position in November 130 calls to sell volatility, possibly hedge an existing short position in the underlying stock, and certainly prepare for a possible bounce in share price. Using this configuration, the trader was able to take in an immediate $30 premium – 41% of the current share price – more of which this trader will be able to keep if Freeport McMoRan shares reverse recent course and trade higher, eroding the value of the puts.

SNDK - Early reports that Samsung is mulling a bid for Sandisk sent shares 28.5% higher to $17.29 and elicited a 23% spike in implied volatility to 81.3% (versus 54.5% historic). With options trading at 14.5 times the normal level, earlier today we noted some ambivalence among option traders as to the likelihood of a trade – while twice as many calls are trading as puts, there’s a healthy 2-way traffic of buyers and sellers of these contracts in the September, October and January contracts at strikes 17.50 and 20.

UST - Yesterday’s options market was atwitter with deal speculation involving US Tobacco, which sent implied volatility and call volume in the snuff maker sky-high. Today, a New York Times story offered affirmation that a deal between US Tobacco and Altria could be imminent, sparking another 24% upside in UST’s share price to $66.85 and keeping interest in its options brisk at nearly 85 times the normal level. Call and put volume has equalized this afternoon, with sellers drawn to September and October 60 calls –…
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Not Out Of Control

Housing Inventories: Not Out Of Control

Courtesy of Thomas Brown at Bankstocks.com

In at least one key market, they’re actually down from a year ago.

Home sales have been in the tank for months, while new foreclosures come on to the market at a record rate. That’s not good! It means home inventories are up, up, up, and, with few buyers in sight, are set to move higher. And everyone knows the housing market can’t come back until that mountain of inventories gets cleared away. Right?

If you say so. The only problem with the above—which is Item A on bears’ checklist of conventional wisdom—is that (not to put too fine a point on it) it’s not true.

Oh there’s no doubt about the surge in foreclosures. But the surprising news is, if you look at the actual data, the market seems to be working through them in a fairly orderly way. Sure, unsold inventories are higher than normal, but they’re nowhere near the levels the doomsayers might have you believe. And they’re nothing like the mountain of supply that’s commonly supposed.

Look, for instance, at what’s going on in Orange County, Calif. Over the past two years, the housing market there has been a disaster. Prices are running 30% below their peak a year ago. Worse, at the start of the year the inventory of unsold homes were running 20 months or more—meaning sellers could expect to wait nearly two years, on average, to dispose of their properties. And that’s before taking into account the flood of new foreclosures hitting the market every day. Which is why the bears predict the O.C. housing market, and markets like it, will recover much more slowly than they did in prior downturns.

But, as I say, those inventory figures were misleading. First off, if you measure inventory in months rather than units, it’s easy to get distorted figures should sales rates decline—which of course is exactly what happened in Orange County last year and early this year. This past winter, home sales in the O.C. were off by 45% or more. So even if inventories didn’t rise by a single house, inventories measured in months nearly doubled.

You’ll get a more informative picture
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Making Sense

Brett Steenbarger "Making Sense of the Current Market Weakness"

Excerpt:  "I’m going to postpone my first "Introduction to Trading" [mentioned yesterday] post to offer a bit of perspective on the current market weakness. The indicator reviews of late have indicated a stalling out of the market bounce since mid-July, with negative dollar flows into stocks and more evidence of sector rotation than actual sector trending. With Monday’s reversal, we’ve seen a steady selling sentiment hit the stock market, taking us to multi-week price lows. Here are a few thoughts on the market action:

* Fear Goes Up – I mentioned a little while ago that the VIX had broken to the upside and that readership of this blog, which seems to swell during periods of market weakness, was more consistent with levels we see at market tops than bottoms. Well, on Thursday, the number of visits to the blog swelled by 40%…

* This is a Global Affair – The striking feature of the recent weakness is that it is associated with a strong U.S. dollar (the dollar index is up about 10% from its July low) and weak commodities…

* Keep An Eye on Participation to the Downside..."

Full article here.






 
 
 

Phil's Favorites

Brexit identities: how Leave versus Remain replaced Conservative versus Labour affiliations of British voters

 

Brexit identities: how Leave versus Remain replaced Conservative versus Labour affiliations of British voters

Courtesy of Geoffrey Evans, University of Oxford and Florian Schaffner, University of Oxford

British politics was relatively stable in the post-war decades, and voters’ strong party loyalties were influenced by their place in society. More recently, there has been a marked decline in the number of people identifying with a political party, and in the strength of that attachment.

Now, our new research for a repor...



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Zero Hedge

Stocks Jump On Kudlow Denial: "There Is No Cancellation. None. Zero."

Courtesy of ZeroHedge. View original post here.

"There are no cancellations. None. Zero. Let's put that to rest."

Hours after a headline from the FT about the US cancelling a round of trade talks with two senior Chinese ministers send stocks reeling to their lows of the day, the administration has dispatched Larry Kudlow (who apparently had to wait until 20 mins before the close thanks to CNBC's wall-to-wall Davos coverage) to jawbone the markets back into the green by...



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Kimble Charting Solutions

S&P and Crude both testing key breakout levels!

Courtesy of Chris Kimble.

The correlation between Crude Oil and the S&P 500 has been rather high over the last 100-days, as each looks to have peaked at the same time around the 1st of October at (1).

After peaking together in October, Crude fell over 40% and the S&P nearly declined 20%, with both bottoming on Christmas Eve at each (2).

Both have experienced counter-trend rallies since the lows, as Crude is up 23% and the S&P 13%.

These rallies have both testing dual resist...



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Insider Scoop

Cowen Suits Up With Nike, Looks To Outperform

Courtesy of Benzinga.

Related NKE Consumer Discretionary Q4 Earnings: U.S. Consumer Appears Strong Amid Heightened Global Uncertainty Golf Equipmen...

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Chart School

Weekly Market Recap Jan 20, 2019

Courtesy of Blain.

After entering the week quite overbought, indexes took a small retreat Monday before hurling back upwards.  This is typical of the “V” shaped moves up after any significant selloff, we’ve seen most of the past decade and watching them unfurl is quite amazing actually.  Thought maybe this time would be “different” but not so much.  So two week’s ago we asked “Has the Fed solved all the market’s problem in 1 speech?” – and thus far the market has answered resoundingly yes.  The word of the year thus far in 2019 is “patience” as that simple insert into a speech change the whole complexion of everything.

China has also been busy stimulating; on Tuesday:

An announcement from the People’s Bank of China that ...



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ValueWalk

Everyone Else Is Selling Stocks, So Is It Time To Buy?

By Michelle Jones. Originally published at ValueWalk.

After a difficult few trading days in the beginning of the year, U.S. stocks are bouncing back with meaningful gains on Monday following Friday’s strong rally. The S&P 500, Dow Jones Industrial Average and Nasdaq 100 were all up by more than half a percent by midday. It looks like investors could be taking advantage of the end-of-the-year declines, but is this a wise time to be buying?

Trying to time the bottom of the market will almost always be a fool’s errand, but one firm suggests equities could have much farther to fall before they hit bottom in 2019.

...



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Digital Currencies

Transparency and privacy: Empowering people through blockchain

 

Transparency and privacy: Empowering people through blockchain

Blockchain technologies can empower people by allowing them more control over their user data. Shutterstock

Courtesy of Ajay Kumar Shrestha, University of Saskatchewan

Blockchain has already proven its huge influence on the financial world with its first application in the form of cryptocurrencies such as Bitcoin. It might not be long before its impact is felt everywhere.

Blockchain is a secure chain of digital records that exist on multiple computers simultaneously so no record can be erased or falsified. The...



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Members' Corner

Why Trump Can't Learn

 

Bill Eddy (lawyer, therapist, author) predicted Trump's chaotic presidency based on his high-conflict personality, which was evident years ago. This post, written in 2017, references a prescient article Bill wrote before Trump even became president, 5 Reasons Trump Can’t Learn. ~ Ilene 

Why Trump Can’t Learn

Donald Trump by Gage Skidmore (...



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Biotech

Opening Pandora's Box: Gene editing and its consequences

Reminder: We are available to chat with Members, comments are found below each post.

 

Opening Pandora's Box: Gene editing and its consequences

Bacteriophage viruses infecting bacterial cells , Bacterial viruses. from www.shutterstock.com

Courtesy of John Bergeron, McGill University

Today, the scientific community is aghast at the prospect of gene editing to create “designer” humans. Gene editing may be of greater consequence than climate change, or even the consequences of unleashing the energy of the atom.

...

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Mapping The Market

Trump: "I Won't Be Here" When It Blows Up

By Jean-Luc

Maybe we should simply try him for treason right now:

Trump on Coming Debt Crisis: ‘I Won’t Be Here’ When It Blows Up

The president thinks the balancing of the nation’s books is going to, ultimately, be a future president’s problem.

By Asawin Suebsaeng and Lachlan Markay, Daily Beast

The friction came to a head in early 2017 when senior officials offered Trump charts and graphics laying out the numbers and showing a “hockey stick” spike in the nationa...



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OpTrader

Swing trading portfolio - week of September 11th, 2017

Reminder: OpTrader is available to chat with Members, comments are found below each post.

 

This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...



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Promotions

Free eBook - "My Top Strategies for 2017"

 

 

Here's a free ebook for you to check out! 

Phil has a chapter in a newly-released eBook that we think you’ll enjoy.

In My Top Strategies for 2017, Phil's chapter is Secret Santa’s Inflation Hedges for 2017.

This chapter isn’t about risk or leverage. Phil present a few smart, practical ideas you can use as a hedge against inflation as well as hedging strategies designed to assist you in staying ahead of the markets.

Some other great content in this free eBook includes:

 

·       How 2017 Will Affect Oil, the US Dollar and the European Union

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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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About Ilene:

Ilene is editor and affiliate program coordinator for PSW. She manages the site market shadows, archives, more. Contact Ilene to learn about our affiliate and content sharing programs.

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