Financial mayhem

[Michael Stuart Kelly]

You're going to hold a donut until June 09 !!! in what, nitrogen?

Wolf,

June 09 is my birthday. I normally don't eat white sugar, but I'll take donuts...

Michael

[Wolf DeVoon]

Yet another meltdown angle: the credit default swap (CDS) market

http://ftalphaville.ft.com/blog/2008/01/14...ncial-meltdown/

On IBM 'preannouncement' the stock market will get a big pop today. Keep in mind that nothing has changed on Main Street. Anecdotal evidence pouring in that credit card companies are unilaterally bumping interest rates on unpaid balances and chopping spending limits. 50/50 chance that IBM is another Enron story in the making. In any case, 2/3 of the reported IBM growth came from dollar weakness. Gold is over $900 and climbing.

W.

Edited January 14, 2008 by Wolf DeVoon

[Wolf DeVoon]

Another inflation call:

http://seekingalpha.com/article/60261-all-...-more-inflation

[Wolf DeVoon]

Five things you need to know... and the threat of deflation

http://www.minyanville.com/articles/C-jpm-...c/index/a/15570

[Brant Gaede]

Five things you need to know... and the threat of deflation

http://www.minyanville.com/articles/C-jpm-...c/index/a/15570

Wolf, if you're afraid of deflation you should not be in gold. Recession or depression this will be one for inflation, unlike the 1903s.

--Brant

[Wolf DeVoon]

Five things you need to know... and the threat of deflation

http://www.minyanville.com/articles/C-jpm-...c/index/a/15570

Wolf, if you're afraid of deflation you should not be in gold. Recession or depression this will be one for inflation, unlike the 1903s.

--Brant

Yeah, I know.

Honestly I can't figure it out. Cost of living is rising, real estate value dropping.

[Brant Gaede]

Five things you need to know... and the threat of deflation

http://www.minyanville.com/articles/C-jpm-...c/index/a/15570

Wolf, if you're afraid of deflation you should not be in gold. Recession or depression this will be one for inflation, unlike the 1903s.

--Brant

Yeah, I know.

Honestly I can't figure it out. Cost of living is rising, real estate value dropping.

Look at the aggregate, esp. the dollar relative to other (inflating) currencies. This is world-wide. Hence, gold up. Also out of fear. BUT, diversify! Buy stocks like Altria or beaten down infrastructure. When the gov'ments try to get things going infrastructure gets the money. Caveat: gold'll go down short-time as speculators bale to get cash to cover their ass. Buy on any weakness, right like now.

--Brant

[Wolf DeVoon]

Look at the aggregate, esp. the dollar relative to other (inflating) currencies. This is world-wide. Hence, gold up. Also out of fear. BUT, diversify! Buy stocks like Altria or beaten down infrastructure. When the gov'ments try to get things going infrastructure gets the money. Caveat: gold'll go down short-time as speculators bale to get cash to cover their ass. Buy on any weakness, right like now.

--Brant

I spent some time at the bank today, bought Treasuries to balance an Oppenheimer intl bond fund. I know what you're saying about MO, and you're probably right. But what I told the broker was Lockheed and Raytheon, anyone who makes bullets, bombs, and rockets. Pretty sad commentary about where I think government is going to spend money.

The price of bread rose 7.4 percent last year, almost twice the rate of inflation. The price of eggs rose 29.2 percent in 2007, while the price of fresh whole milk was up 13.1 percent. Since July, when milk prices first soared, the price of fresh whole milk has risen by almost 23 percent. "The kinds of things you purchase every day are going up (in price)," said Gus Faucher, the director of macroeconomics at forecaster Moody's Economy.com in West Chester, Pa. "People who are at the lower end of the income scale are going to feel that more."

It's not just rising food prices that are pinching the budget of working Americans. The price of health insurance, another major political campaign theme, rose by 10.1 percent last year. Medical inflation also continued to outpace the broader consumer inflation rate. The price of medical care nationally rose by 5.8 percent in 2007 and the price of medical care services rose by 5.3 percent. But consumers perhaps most felt the energy-price squeeze. Gasoline prices rose 8.2 percent on average last year, the slowest rate of growth since 2002. But pump prices began climbing anew in October and for the last quarter of 2007 average prices rose by just more than 30 percent. Similarly, the price of fuel oil used for winter home heating rose 7.4 percent for all of 2007, but in the last three months of the year rose by more than 27 percent. (Atlanta Journal Constitution, today)

W.

Edited January 18, 2008 by Wolf DeVoon

[galtgulch]

Vote for Ron Paul~its our only real hope.

www.ronpaul2008.com

www.whoisronpaul.name

I signed up to be a precinct leader in my home town. Thousands of volunteers are doing the same all across the country now. The goal is to enable Ron Paul to receive the Republican nomination for president.

Join us!

galt

[Wolf DeVoon]

Vote for Ron Paul~its our only real hope.

Go away. We have more important ideas to discuss here.

FT Alphaville today on credit default swaps:

http://ftalphaville.ft.com/blog/2008/01/18...ith-armageddon/

Edited January 18, 2008 by Wolf DeVoon

[Brant Gaede]

Because of globalization, trade and monetary, what is happening in the US--the re-assertion of the business cycle--will seriously wash out world-wide.

--Brant

[Brant Gaede]

Wolf, you are obviously more sophisticated than I am financially, but I hope you are having a little investment fun too with a small portion of your money.

The last time I brought treasuries, many years ago, I dealt directly with the government and saved a little money. This is probably the most efficient area of government the public is ever likely to have any business with.

--Brant

[Wolf DeVoon]

Wolf, you are obviously more sophisticated than I am financially, but I hope you are having a little investment fun too with a small portion of your money.

The last time I brought treasuries, many years ago, I dealt directly with the government and saved a little money. This is probably the most efficient area of government the public is ever likely to have any business with.

--Brant

This is getting really weird. You were right, Brant, that emerging markets are in trouble too.

http://ftalphaville.ft.com/blog/2008/01/18...xposed-in-2008/

Cash, government bonds. Not much of a strategy, but that's my plan for Q1.

[Wolf DeVoon]

James Saft at Reuters sees gold and oil as lagging indicators; we should brace for deflation.

http://www.reuters.com/article/reutersEdge...l=0&sp=true

[Brant Gaede]

James Saft at Reuters sees gold and oil as lagging indicators; we should brace for deflation.

http://www.reuters.com/article/reutersEdge...l=0&sp=true

Well, falling inflation, if that's what we are facing, is not deflation. However, we are concerned with prices as such. The unravelling of the yen carry trade is the only thing Ken (not-as-smart-as-he-thinks) Fisher worries about re equity prices. Personally, I see no floor under equity prices. And where is their up with the financials still an unfathomable black hole? James Cramer got it right when he scorned the 150 billion dollar bailout. The heart of the problem is the mortgage insurers. Deal with them or you aren't dealing with it.

--Brant

long, Altria. Short, too dangerous to mention. 80% cash.

[Wolf DeVoon]

Good post at Minyanville, comparing US deflation vs Japan's experience in the 90s (and continuing)

http://www.minyanville.com/articles/index.php?a=15597

Differences Between Japan and the US

Look for steeply rising unemployment in the US. One of the consequences of those debt writedowns in the US is that US corporations will be forced to cut expenses. The biggest expense for many companies is employees. Japan had far more loyalty to its employees than US corporations ever will.

Enormous consumer debt makes the problem the US faces far more severe than the problem Japan faced. Consumer debt that that cannot be repaid will be defaulted on. Rising unemployment will further exacerbate mortgage-related problems and credit card-related problems.

Consumption continued in Japan because of savings. The US will be forced to cut back on consumption and increase savings.

Global wage arbitrage is a far bigger economic force now than during the bulk of Japan's deflationary years.

Japan had the benefit of a global Internet boom followed by a global housing boom to help the economy. The US is facing a global contraction of the housing boom.

Most people in the US "own" their own home. The skew of those deep in debt is huge. 1/3 of Americans owe nothing on their homes. The debt is carried by those who can least afford to carry that debt in an economic downturn.

Japan had a huge valuation problem in real estate. The US not only has a huge valuation problem, commercial real estate is also woefully overbuilt.

Edited January 20, 2008 by Wolf DeVoon

[Brant Gaede]

Good post at Minyanville, comparing US deflation vs Japan's experience in the 90s (and continuing)

http://www.minyanville.com/articles/index.php?a=15597

Differences Between Japan and the US

Look for steeply rising unemployment in the US. One of the consequences of those debt writedowns in the US is that US corporations will be forced to cut expenses. The biggest expense for many companies is employees. Japan had far more loyalty to its employees than US corporations ever will.

Enormous consumer debt makes the problem the US faces far more severe than the problem Japan faced. Consumer debt that that cannot be repaid will be defaulted on. Rising unemployment will further exacerbate mortgage-related problems and credit card-related problems.

Consumption continued in Japan because of savings. The US will be forced to cut back on consumption and increase savings.

Global wage arbitrage is a far bigger economic force now than during the bulk of Japan's deflationary years.

Japan had the benefit of a global Internet boom followed by a global housing boom to help the economy. The US is facing a global contraction of the housing boom.

Most people in the US "own" their own home. The skew of those deep in debt is huge. 1/3 of Americans owe nothing on their homes. The debt is carried by those who can least afford to carry that debt in an economic downturn.

Japan had a huge valuation problem in real estate. The US not only has a huge valuation problem, commercial real estate is also woefully overbuilt.

Okay. Deflation will mean lower interest rates which means the value of intermediate and long term bonds will go up. In such a situation the best bond would be the 20 year treasury as it outperformed the 30 last time.

--Brant

[Brant Gaede]

Wow, Wolf, the shit is hitting the fan. Tomorrow is going to be dramatic. The problem is downgrade of mortgage insurer, collapsing yen carry trade, etc. What happened overseas is mild compared to what's going to happen after they see the US sell off. The policy of weakening the dollar weakens the viability of the yen carry trade. The collapse of equity markets can only be stopped, maybe, if the US government immediately steps in to buy up the four major mortgage insurers and their obligations, the Bank of Japan cheapens the yen immediately, too, and the Fed. raises interest rates 50 basis points. (Lowering them won't do any good anymore. It was too little too late for positive effect. Now if it cuts it will magnify the panic after very little relief.) Investors world-wide are also sophisticated enough to know that the proposed 150 bil. give-away stimulus is ineffectual government BS and that the powers that be haven't a clue.

I doubt if tomorrow will be a buying opportunity in anything. Too dangerous. I may sell my Altria on the opening if it's above my cost, even though it's too strong to crumble it's not too strong not to be also hurt somewhat. If I do I hope to buy it back with a 5% yield.

--Brant

Caveat (edit): There is a danger here for traders: chasing the market down with puts and shorts. Unless you are completely expert it would just be gambling. This primary bear market cannot be turned into a bull market again for many months if not several years but snap-back rallies can happen anytime. One may happen in the middle of the day tomorrow.

Wolf, I hope I had something to do with your big cash position. I know you did with mine. Thanks.

Edited January 21, 2008 by Brant Gaede

[Wolf DeVoon]

Folks, please read Brant's post above.

My two cents is a transcript from FT Alphaville "Markets Live." The upshot is that futures contracts caused the big global sell-off as hedge funds dumped speculative positions. There's an enormous amount of money at risk in derivatives. $45 trillion in two-party credit default swaps, for instance. Maybe an equally gigantic sum in option contracts. Here's what happened in London:

PM: 6%???

NH: actually we lost 20 points while u have just typed that in

PM: And what are we?

NH: 243 points down at 5,657.9

PM: So what have you been picking up in the market place — body parts?

NH: well a number of things since we last talked

NH: first volume is not that heavy

NH: most of the trading desks are not frantic

PM: trade never heavy when prices fall v sharply — cos no one buys

NH: in fact most of the business at the big banks today has been from hedge funds on their DMA machines

NH: just cutting positions and getting out

PM: DMA — direct market access — (smarty pants Neil)

NH: not real selling by the long only funds

NH: most of this seems to have been futures driven

PM: Quickest way to trade when market overall moving fast

PM: For those who were not on earlier we should perhaps run through the underlying reasons for the weakness of the indices

PM: The big prop which has been removed here in London is the mining sector

PM: Falls here are absolutely horrible

PM: Santa — there are a good number of short-specialist funds out there

PM: And yes, some people will be making a killing

NH: futures driven - means that it is selling of futures contracts that has pulled the market lower

PM: tail wagging dog

Important point indicated above: Big long-only funds (pensions, insurance) were not selling, really couldn't act fast enough, and besides they are covenanted to remain fully invested. Normally, these big institutional investors are a "put" or floor under market prices. What we need to watch for tomorrow is any hint that Calpers is reallocating faster than announced, and if so how? Maybe real estate (I doubt it), maybe hedge funds (!)

For the rest of us, cash is king. Cut spending. Pay off credit cards as fast as you can.

W.

Edited January 21, 2008 by Wolf DeVoon

[Brant Gaede]

It is now 7:30 ET

Dow futures down 501 or 4.14%

Nasdaq futures down 77.75 or 4.2%

S & P futures down 59.9 or 4.52%

Overseas markets are down +5% and they are still open for their second big down day this week. US markets won't trade until 9:30 tomorrow for the first time. If there is no foreign reversal before then, we are likely to lose up to 2000 on the Dow during this week--or even more if panic chases panic. The big losers will be those on margin and sellers. If you own a share of stock and nobody wants to buy it except half what you paid for it, so what? The stock is still yours as long as you don't sell it. If you didn't buy garbage in the first place, it will recover. If stocks don't end up suffering too badly this week by the end of the week, remember the basic big grind down is still going to be with us for quite a while.

--Brant

Edited January 22, 2008 by Brant Gaede

[Brant Gaede]

The futures strengthened about 10% then reverted. Some markets are down 8, 9 nearly 10%. US markets will be hit hard tomorrow, but I don't think/hope so bad. Treasuries are up. That means interest rates are down. Now I own two stocks. One doesn't count (MDR) for I never trade it. It will probably be down pretty big tomorrow. Mox nix; it's only 60 shares. My Mother inherited them over ten years ago. Then they had a dollar value of $800. They went down to about $100 because of the asbestos nonsense. I think they peaked at around $62/share and are now back down to $45 and change. (See what I mean about not using margin?) I don't know for how many years my step-father owned them before he died. As an investor he was a great professor of Spanish literature. The other stock is Altria (never mind my short; you don't own shorts; you are just responsible for them; it might well go UP tomorrow it's such a queer, small-cap case [don't short a small cap. I've learned my lesson. What a bucking bronco!] But if it's down I'll probably cover for it'll probably be down for the wrong reason. The other stock is Altria (MO). With it's 4% yield it should tend to act like a bond, but in a general sell off it will probably sell off too, BUT for a snap back it's guaranteed! If you want to make some money buy down big mid-day tomorrow regardless of the market! It doesn't matter if it keeps going down; it's near bond status all but guarantees you'll make a lot of money on it in the next twelve months plus one day. BUT, no more than 20% of anybody's portfolio; better ten percent MO and the rest cash.

Don't be afraid; the future's a blast! I want as much of it as I can get (absent an asteroid hit)!

--Brant

[Brant Gaede]

The futures are continuing to deteriorate. This is good news for me. The more the market goes down the sooner the more I can play a snap-back rally.

--Brant

[Brant Gaede]

Panic is generally overplayed. I know. Once I was panicked out of a short position on a short squeeze. The next time I added to my position. It's like flying an airplane in real instrument conditions. If you don't/can't trust your instruments you will die! The seat of your pants will kill you!

In Oct. 1987 the damage was generally confined to the US--that is, it was US this and US that. Now it is the world this and the world that. What this means is that no matter what the US does to counter the panic it will be substantially less effective than in 1987.

Anyone who buys before Wednesday--except me--is nuts.

--Brant

[Brant Gaede]

Damn, this is so exciting! I'll need a pill to go to bed, which I must right now! The futures are still deteriorating, but they no longer matter unless they reverse significantly on Europe. Futures can say the world is going to end in two hours and actual markets go the other way. Two days of panic in foreign markets before the US even opens for its first day tomorrow means I might be able to buy Altria tomorrow for a trade!

--Brant

[Wolf DeVoon]

from Toro:

"Anecdotally, I am hearing that the hedge fund community is having a terrible year. The consequence may be that any rebound could be met with waves of selling as hedge funds try to lock in gains on a bounce to minimize realized losses."

Stand clear for a few days. Cut spending. Pay off credit card balances.

W.