Saturday, February 7, 2009

Real Estate, Bubbles, & the CMBX Index – Still Showing Severe Stress…

Back in early 2007 I was still running my company, State of Mind Seminars, Inc. At that time, I was writing more formal weekly newsletters and giving educational seminars, but most people remained blissfully unaware of the crisis that was about to unfold… That’s why I was hammering away on bubbles and the spectacular excesses of credit that I saw. People generally didn’t want to hear it then, and I’m sure most still don’t want to hear it now – but at least they are paying a lot closer attention, that’s for sure!

Heck, some who didn’t pay attention are now homeless and living the lyrics of the Rolling Stones…

The Rolling Stones – Gimme Shelter:

The bubble in residential real estate is what first got me interested in bubble dynamics. I owned many rental properties and began to notice how the rents that I was able to obtain were simply not enough to pay for the cost of owning homes – something had changed, obviously. I wasted no time and promptly began to sell all my real estate holdings, despite being quite good at the leverage it up game. Friends and family thought I had gone off the deep end! Not so much anymore.

Now, almost everyone is all familiar with that, but most people remain unaware that Commercial Real Estate (CRE) was at least as out-of-whack. How did I know? Because CAP rates were at HISTORIC lows. All this means is that the ratio of rents received to the capital invested was less than at any other time in modern history. For a good review of bubble dynamics, I included my recap of Hyman Minsky’s Seven Bubble Stages near the beginning of my article Half Way to Zero.

Back in late 2006 I pointed out in my newsletter that China was, in fact, experiencing a bubble. I included the following chart of the Shanghai index and mentioned that its parabolic phase would not end well:

Today, this is what that chart looks like:

As you can see by that chart, owning investments on the back side of parabolic curves is not fun. Well, just a couple of months later in March of 2007, I warned in my newsletter that commercial real estate typically lags residential by approximately 18 months. I then showed a chart of how vacancy rates were spiking:

And how the homebuilder’s index had peaked in July, 2005:

I was watching for a peak in CRE by using IYR, the Ishares Dow Jones Real Estate Index ETF. I included this chart showing the parabolic advance:

And then I showed this chart showing how support had been broken and that the peak in CRE was almost EXACTLY 18 MONTHS TO THE DAY!

Was I short IYR at that time? YOU BET I WAS, it was the most profitable trade I had in the year 2007. And here’s a look at a chart showing the parabolic rise and collapse on the back side of the curve:

I’ve been harping on those bubbles, haven’t I? Exponential rises are always followed by collapses, and the losses happen faster than the gains – EVERY TIME!

But that’s all history. By now people are beginning to realize that not only did we build too many houses, but we also built too many shopping malls, too many Starbucks, and just too many of almost everything. What about the future? Is the move in CRE over? Has all the misallocation in supply been reflected in price?

Today we have a new tool to help us tell what’s happening in the Commercial Real Estate arena. A company called Markit provides credit spreads on CRE companies given their various commercial credit ratings. Their indexes track the spreads and present them in graphical form via their CMBX index charts. Here’s where you can find the Markit CMBX Index Charts.

As the spreads rise, they show more stress in CRE as investors are demanding more money to assume risk. I can tell you that I believe defaults on CRE have just begun, and now the spreads are beginning to rise again as you can see in the following series of charts:

While the AAA chart may not be making new highs yet, most of the others are. How many CRE companies would fall under the AAA rating? Ah… not many. That monkey pretty much sums up how CRE owners are feeling right about now!

So, I was looking at those CMBX charts and noticed that they look awfully familiar… They look just like the chart of IYR, which looks just like a chart of the SPX, which looks like all the other indices but turned upside down!

So, I took my IYR chart and inverted it in a mirror image:

My, oh my – that’s the same chart pattern. Don’t tell your friends, but there’s a divergence here. Do you see it? If the CMBX is making new highs, IYR should be making new lows, but it’s not. It’s looking more like the triple A charts than the triple B. Is all CRE triple A? No? I thought not.

So, the question then becomes is that parabolic collapse over and was the November low THE low in IYR? It could be, that 74% haircut was pretty dramatic and is in the range where parabolic declines can end. They can also end in 90% losses too. Well, if the CMBX is leading and you look at these breakouts, it leads to me to believe that that parabolic collapse may not yet be over.

When making investment decisions, short or long, I like to look at the Point & Figure (P&F) charts to help me determine if I’m on the right track. Here’s a P&F of the Dow Jones Real Estate Index that shows a target that is still beneath us. I note that the IYR P&F just flipped and is showing a breakout higher with a higher target. Here’s both, which is correct? That’s for you to decide, I’m just providing the evidence on this one!

If we haven’t seen a bottom in IYR, we are obviously much closer to one that we were in 2007! Picking bottoms is a fool’s errand, however. While the prospect of quick gains from a big bounce sounds tempting, it is still completely possible to lose 50% of your investment or more on a continued collapse.

Me? I believe it’s best to get involved long when the fundaments are in place to support sustainable growth. I don’t think we’re even close in that regard and with spreads still widening, any long bet here should be considered short term, least that divergence between spreads and price get you.

Oh, and I know a lot of people reading this like to play short IYR by investing in SRS, the double inverse of IYR. As IYR goes down, SRS is supposed to go up. Without getting into a big discussion of why, SRS does not do the job over time – only on a daily basis. Thus SRS is NOT to be bought and held – here’s a two year chart of SRS, it should look more like the inverted chart of IYR above, instead it looks more like the upright chart!

Here they are overlapped, if SRS was tracking it would reside up in the region of the blue circle:

So, watch the CMBX index to help determine if the underlying stress has lifted on CRE.

And, if you’re wondering how to tell when the time is right to invest in residential real estate for your situation and your area, it’s simple and it takes just a few minutes of research. Start by identifying what you believe to be a good rental property then add up all the costs of owning it WITH CONVENTIONAL 30 YEAR FINANCING. Include everything – principle, interest, taxes, insurance, and maintenance. Then look through the classifieds and talk to realtors about similar homes in the area and see what that type of property receives in rents. If the amount you can rent it for is less than the amount it costs you, then it’s no investment at all, it’s a beast of burden. Hey, isn't that a Stone's song too?

The same can be said for people who have held their homes and are now underwater, pouring tons of money into increasing taxes, utilities, and upkeep. During the bubble, everyone wanted to own multiple homes, now they are finding that their own homes are also beasts of burden. But enough of the Stones, no EconoTunes article on parabolic collapsing property values can go by without including a song entitled “Landslide!”

Stevie Nicks – Landslide:

Digg my article

DoctorMad Weekend Update - A General doesn't blink when staring into the eye of massive BULL

The bulls looked an awful employment report straight in the eye at 8:30 EST and charged straight at the bears routing them from their lines. The rest of the day was spent with follow up as the bulls chased the bears all the way back to 870.

However, note the falling volume today. There was one big volume spike at the open and after that it was anemic with no further impulsion. The falling volume is a bad sign for the bulls and shows that their supply lines are already starting to get extended. The problem with rising prices and the reasons all bear market rallies end on low volume is that as prices rises it takes more and more cash bids just to buy the same amount of stock you could have bought for half the price when market prices were lower. As an example, think of how much less FCX stock you can buy today for 10 million bucks with the share price at 30 compared to when it was at 15 a couple of months ago. As prices rise and bulls extend their lines eventually they run out of ammo. They just don't have enough of those 10 million dollar bids available to support a higher price level and eventually the bear ammo (natural, forced, and fear based selling) overtakes them. And unless the bulls have fundamentally altered the supply/demand picture for stocks from supply > demand to supply < demand, the bears will once again push them to new lows. The main point I am trying to make is watch the volume closely! When will "sell the news happen"? When the bulls run out of ammo and the last sucker puts his troops in the bull camp or pulls his bears.

NQs - Take a look at how the Nasdaq has traded after the previous major tops on October 12, 2007, May 19 2008, and yes I'm calling January 6, 2009 another major top. We may still come all the way back to test those highs, but I highly doubt the bulls have the firepower to break out. Notice how shallow the initial down channel is on the NDX off these major highs especially when compared to the steep DJI, RUT, or SPX down channels off of the major highs. During each of these initial few weeks following a major top you have had the bulls all fly into the safety of tech and you hear stories about how tech is safe, insulated, and cheap only to have those bulls get slaughtered later on during the second half of the bear campaign [that’s a great point, Doc]. Note also the same wave basic wave structure within all 3 channels up to this point including what could be a similar throwover. It is also possible that the NDX will make its major top later on as the RUT did on June 5, 2008.

Here is a chart of the NQs showing how they have behaved during the beginning of previous major declines:

The next obvious line of resistance is the top of the SPX triangle line.
ES - The key to focus on is the pink C wave channel. That puppy could go all the way to 945 and this would still probably just be wave 2. Any shorting you do before the channel breaks is front running, which might not be a bad idea if you catch it near the top of the channel range. The smart trade next week is going to be to short a break of the pink channel or the retest once from the underside after the channel breaks. I'm also throwing out a channel projection that looks unlikely as more upside seems probable and nobody is looking for this to immediately reverse after today's mini breakout (contrarian indicator perhaps). The reason I put it out there is that it fits like a glove along the bottom half. If it does hold and pan out you can all call me a genius later.

- DoctorMad

Heck Doc, I already do think you’re a genius! To have survived this war with your troops in tact proves it, especially on the real world battlefield where your troops can easily be KIA’d by the dark and evil enemies to free enterprise that lurk behind Wall Street!

Bank Failure Friday – Another Triple…

The FDIC is really knocking the ball hard, scoring their second triple in two weeks. Who knows, at this rate they’ll be hitting home runs soon?

State regulators close three banks

FirstBank Financial Services of Georgia and Alliance Bank and County Bank of California become latest victims of banking crisis; nine banks have failed in 2009.

By Kenneth Musante, staff writer

NEW YORK ( -- State regulators shuttered three banks Friday evening, bringing the total number of bank failures this year to nine.

Deposits at FirstBank Financial Services based in McDonough, Ga. will be taken over by Regions Bank (RF, Fortune 500), based in Birmingham, Ala., according to the Federal Deposit Insurance Corporation.

FirstBank's four branches will reopen on Monday as Regions Bank branches, the agency said.

FirstBank held assets worth about $337 million, and held deposits worth about $279 million at the end of December, the Federal Deposit Insurance Corporation said. Regions Bank has agreed to purchase about $17 million of FirstBank's assets.

Meanwhile, deposits at Alliance Bank out of Culver City, Calif. will be assumed by California Bank & Trust from San Diego.

Alliance Bank held assets totaling $1.14 billion, and deposits of $951 million, the FDIC said. California Bank & Trust agreed to purchase $1.12 billion of Alliance's assets at a discount of $9.9 million.

California Bank & Trust also agreed to share some of the asset losses with the FDIC, the agency said.

Alliance Bank's five offices will reopen Monday as branches of California Bank & Trust.

Finally, County Bank of Merced, Calif. was closed late Friday. The FDIC said that Westamerica Bank of San Rafael, Calif. will assume all of the deposits of County Bank.
County Bank had total assets of approximately $1.7 billion and total deposits of $1.3 billion. Westamerica Bank (WABC), in addition to assuming the deposits, agreed to purchase all of County Bank's assets.

The FDIC said County Bank's 39 offices would reopen as branches of Westamerica. Branches with Saturday hours will reopen Saturday while the remaining branches will reopen Monday.

Customers who banked with FirstBank, Alliance Bank or County Bank will automatically become customers of the new deposit holders, and will retain their account protection under the FDIC, which insures single accounts up to $250,000, and joint accounts up to $500,000, the government agency said.

Over the weekend, those customers will be able to use checks, ATMs and debit cards as normal. Customers who have taken out loans from a failed bank should continue to make regular payments, the FDIC said.

Altogether, the three bank failures will cost the FDIC about $452 million.

The unfolding financial crisis continues to take a toll on banks. If banks continue to fail at a rate of at least one per week, on average, then 2009 could see twice as many failures as in 2008. Last year, 25 banks were closed nationwide, which was the highest annual total since 1993, when 42 banks went under.

Economists expect the number of failed banks to continue rising this year as the financial crisis plays out and the economic outlook remains dark.
While I certainly don’t mind being COMPLETELY disrespectful to the fallen – I just don’t think I can stand another week of Queen screaming out “ANOTHER ONE’S GONE, AND ANOTHER ONE’S GONE, AND ANOTHER ONE BITES THE DUST!” So, no matter how appropriate that song is for Bank Failure Friday, this weekend I just won’t play it.

Instead, I bring you a little Kansas that’s a little more peaceful in terms of bank failure music – and it may be more soothing to the ears of the elderly who are being forced to work countless hours of overtime at the FDIC, it's fitting to play at funerals, AND it's a fine song to play as our fiat money makes its eternal journey back to the fiat gods.

Kansas – Dust in the Wind:

Friday, February 6, 2009

End of Day/Week 2/6

Definitely a black candle day today despite more horrific employment data. The market is “looking through it” or “already had it priced in” or we are “in the process of pricing in the stimulus/bailout/big bang” that’s coming on Monday. Take your pick of teevee favorite excuses; it was definitely a day that was painted black.

On the day, the DOW gained 217 points, the S&P jumped 2.7%, the NDX rose 2.6%, and the RUT was in the lead, as it usually is, by gaining 3.4%. The XLF was really looking forward to the bailouts/distortions/moral hazards and rewarded those betting in the casino with a 7.5% gain.

Internals were very bullish today with advancing issues over decliners by 5 to 1 on the NYSE and about 4 to 1 on the Nasdaq. New lows fell substantially and volume was 91.7% on the advancing side. Those 90% up days are significant, especially if we get another within the next 3 trading days. Who knows, perhaps Big Bang Monday will produce one? Hey, the very scientific poll on my blog is saying 7 to 1 that Monday will be a big bust, so if we view that in the same light as a put/call ratio, perhaps it’s truly bullish and we’ll get that 90% up day Monday!

Let’s start on the charts by looking at a 3 month weekly. Remember last week that I pointed out that inverted hammer… well, we got an up week that followed. Volume was pretty good, too, slightly higher than the previous week:

Now let’s zoom into a 30 day SPX chart were we see an ascending triangle in red, and that we are slightly below a complete retrace of the entire last wave. There are a couple of ways to count this, but I’m not going to go over them here as it would take a while. Suffice to say that if you think there’s only one possibility, you would be wrong. Again, we are still in that overall large triangle and playing inside them can be very difficult. As far as the stochastic goes, we are overbought on all timeframes up to 60 minutes. Today was a good reminder that they can stay overbought (or oversold) for quite a while. The oscillators are HISTORY indicators, BUT if you want to put the odds on your side, you will short when they are overbought and go long when oversold – obviously. We managed to close above the 850 pivot area and that is now support. The next longer term pivots above are at 912/13, and then 935. If you look real closely on this chart, there is a small gap that’s open just below 930:

Next I want to take an internal look at the NDX on a 30 day chart. Here we are very close to a 100% retrace which opens up the possibility of a double top. Note the open gap on this chart that was filled today. There is a fresh sell signal on the 30 minute stochastic and on the NDX all stochastics are now overbought all the way up to the DAILY chart. If you look at the RSI on the bottom of the chart, you will see that there is a pretty sizable bearish divergence in place with the last peak lower than the previous, but the price much higher than the previous. This is also true when you look back nearly a month at the last peak… again, although we are equal in price, the RSI is lower:

Now let’s look at a DOW daily. Very bullish candle and good volume, but not progressively more than yesterday. On the DIA and SPY volume was lower today than yesterday. The DOW is still way below its 50dma and note the rapidly descending upper Bollinger which would provide additional resistance if the DOW were to run that high. We do have a buy signal on the daily stochastic, but are still on a sell signal on the weekly:

Next is the DOW’s P&F chart. It broke higher, reversing the last sell signal and producing a bullish target of 9,250:

Next up is the P&F for the transports. They also broke higher producing a higher target. Have you seen that the Baltic index has been advancing? Don't get too excited, when something has fallen 90% leaving only 10%, then a 50% move of what's left is only like 5% of its previous self. The rest of the indices were already on buy signals, thus the consensus in the P&F world is that higher is in the future:

Now let’s look at the SPX daily. Again nice candle that ran into the 50dma and stopped. 850 was an important hurdle, now you can see resistance at 880, and then at 912. Here, too, the upper Bollinger is pointing down pretty sharply. Usually the steeper it is, the more resistance it offers:

Here’s a chart of GS, just to show those interested that there’s an outside hammer on the upper Bollinger band and in overbought conditions. The other financial don’t show this, it’s just a pigman central thing. I wouldn’t be long Goldman on that… oh wait, come to think of it I’d rather own an all tobacco and oil portfolio than to let one share of GS touch my account (unless I’m short that is – lol)!

Since I brought up that NYSE Advance/Decline line divergence last week, here’s a current chart comparing the A/D line (red/blk) against the SPX. Remember that the A/D jumped over the SPX on this chart and the gap was getting wider. Today I note that the gap between the two has, in fact, narrowed slightly but is still divergent:

Overall, a good week for the bulls in equities, but they are being suckered by interest rates and the bond market. My short bond position has been a nice play for quite awhile, remember that most people don’t realize what’s happening until most of the move is over. The TNX broke to new highs today…

Market moving economic data will be light next week. Monday will be a lot like today for me in that it is all going to be news and sentiment driven on big bang bailout dreams. I believe this news gets sold at some point, I’m just not sure exactly when. The market’s overbought short term and needs a rest.

And did you hear? Heck, the NDX is UP for the year, don’t you know (is that saying much)? CNBS was SHOUTING IT OUT, but they neglect to remind people that it’s down 73.5% since the year 2,000 or 42.4% since Oct. 2007… shhhhh

I’m sure that no matter what happens on Monday, the tape will be painted to suite the likes of Goldman and the direction of their bets. Today there was no question. It was a day they painted black…

The Rolling Stones – Paint it Black:

Marc Faber Interview...

Mark Faber... always interesting to listen to listen to his perspective. You may not like hime, but he's been more correct than most, and he's definately correct in what he's saying about government intervention...

Marc Faber interview on Bloomberg (10 minutes):

States Beginning to See Reality… But will they Face it?

The numbers do not work at the Federal level and despite that, Politicians are looking to lower Federal income by reducing taxes, while at the same time increasing spending. This is math a fourth grader can understand does not work. Now the states have the same math difficulties, but instead of facing their math reality, they are going hat in hand to the Federal Government for bailout money.

This is the same convoluted thinking that got them into this mess to begin with. The states are comprised, after all, of the same tax payers who provide the tax income on the Federal level. It doesn’t matter what level of government the money comes from, it ALL comes from the same taxpayers.
States to Congress: Send money fast

Governors and mayors nationwide are hungry for billions from the economic rescue plan to create jobs and fill budget gaps.

By Tami Luhby, senior writer

NEW YORK ( -- Massachusetts state workers and retirees face higher deductibles and co-pays on their health insurance.

Many welfare recipients in Tennessee may lose their state-funded child care.

And kids in Riverside, Calif., will likely have to continue walking to school on the roadside instead of on sidewalks.

These are but a few of the programs and projects that the weakening recession has put on the chopping block as state and municipal officials wrestle with widening budget gaps.
At least 46 states are facing shortfalls in their budgets as tax revenues dry up. They are making harsh cuts to social services, putting infrastructure projects on hold and laying off government employees.

That's why governors and mayors are pressing federal lawmakers to pass the stimulus package, which could send billions of dollars into their coffers. The funds could help reverse planned budget cuts and revive their economies by putting people back to work on public construction projects.

States could receive as much as two-thirds of the stimulus package funds, which top $900 billion in the current Senate version. The majority of the money is being targeted for programs such as education, Medicaid, infrastructure and unemployment. But governors will also get billions to help close their budget gaps.

"It allows them the flexibility to fund their priorities," said David Quam, director of federal relations for the National Governors Association. "The money is not going to fill all the gaps, but the states are willing to make the changes they need to make for the long run."

The Senate was racing to vote on the package by Friday, and Congress hopes to send a reconciled bill to the president next week.

Though most of the rescue money is going to the states, some will trickle down to the cities. Many mayors, who converged on Washington this week to urge lawmakers to pass the stimulus bill, already know how they can use the funds.

The mayors have put together a "Ready to Go" report that details 18,750 local infrastructure projects in 779 cities that can be started as soon as funding is received. The projects, which represent an investment of $150 billion, would create 1.6 million jobs in 2009 and 2010.

The states can use their infrastructure allotments to fund these projects. Plus, the cities will receive more money from community development block grants contained in the package.

In Riverside, Calif., Mayor Ron Loveridge said much of the stimulus money he receives will go to the city's water mains, roads, community centers and sidewalks. Not only will it provide long-term improvements, it will help reduce the city's unemployment rate, now at 10.5%, far above the nation's 7.2% level.

And once people start working again, they can start shopping again. That will help the city close its $14 million budget gap by increasing sales tax revenues.
"It stimulates the economy by providing jobs," Loveridge said.
Wow, that’s some kind of math genius there. Loveridge sounds “ready to go.” How come so many of these whizzes wind up in government? Unbelievable the misunderstanding; no wonder we are where we are… if only we can get people who are in debt up to their eyesockets and taxed to death to go shopping and spend more money they don’t have. That’ll solve our problems. And did I see the words “trickle down” in there? Uh, huh, that’s sound math too. Of course adding further tax burden onto those constituents will really help.

The truth is that government has grown to gargantuan and unsupportable size. The only way to get the math to work is to do the exact opposite of what is being proposed. In other words, government must shrink and taxes must be raised. If you fear higher taxes killing the economy, you would be right, but the root of the tax problem can be found in the debt. It’s an ugly situation no matter how you look at it, and getting out of it will not be painless.

I’ve been talking about how we’ve reached debt saturation, that’s what the math says (Death by Numbers), and it’s why we’re experiencing deflation (Inflation or Deflation – It’s a Mystery…).

Now I’m going to tell you that the same people who are debt saturated are also tax saturated. Again, incomes do not support the current combination of debt and high taxes. Therefore, defaulting to clear the debt must occur by someone. The banks have weaseled their way out, the automakers have weaseled their way out, and now the States want to weasel their way out.

But guess what? The debt and budget short falls are still there. If there’s a light bulb that’s lit in the political or Keynesian economic world, I don’t see it. Put a fourth grader on it, at least they will be able to understand how the math doesn’t work!

TARP Shortchanged Taxpayers... DUH!

Are you kidding me? $78 billion? Nice Dream…

TARP Shortchanged Taxpayers by $78 Billion, Watchdog Panel Says

By Mark Pittman and Bob Ivry

Feb. 6 (Bloomberg) -- U.S. taxpayers are being shortchanged by about $78 billion through the Treasury Department’s bank bailout, the panel overseeing the program said.

The Treasury, when it was headed by Secretary Henry Paulson, received bank assets worth about $176 billion in exchange for capital purchases of $254 billion under the Troubled Asset Relief Program, the Congressional Oversight Panel said in a report today.

“The loss estimate is conservative,” said Representative Alan Grayson, a Florida Democrat on the House Financial Services Committee. “It could turn out that those assets in the end are worthless. These are massive handouts to favored institutions to try to make up with taxpayer money the mistakes they made with investor money.”

The public’s stake in the nation’s banking system continues to grow as first the Bush administration and now President Barack Obama’s team work to pull the U.S. out of the deepest recession in at least two generations. TARP, which is part of the more than $9 trillion the government has pledged to rescue the financial system, has guaranteed $350 billion to banks so far, with another $350 billion set for use in coming months.

Treasury spokesman Isaac Baker declined to discuss the panel’s report directly. He said Treasury officials have already “prevented a systemwide collapse” and plan to make an announcement next week.

“We will outline a comprehensive strategy to strengthen our financial system in order to provide American businesses and families the credit they depend on, while strengthening transparency and accountability measures so that taxpayers know where and how their money is being spent and whether it’s achieving real results,” Baker said today in an e-mail.

Neel Kashkari, who runs TARP as a holdover from the Bush administration, told a Mortgage Bankers Association conference on Dec. 5 in Washington that the government isn’t “looking for a return tomorrow.”

“We are looking to try to stabilize the financial system, get credit flowing again, and over time, we believe that the taxpayers will be protected and have a return on their investment,” he said.

The oversight committee faulted TARP’s “one-size-fits-all investment policy” for the shortfall.

“The use of standardized documents probably contributed to Treasury’s ability to obtain speed of execution and wide participation, but it meant Treasury could not address differences in credit quality among various capital infusion recipients,” the report said.

TARP Money
More than 200 companies, from New York-based Citigroup Inc. to Saigon National Bank in Westminster, California, have received TARP money, according to Bloomberg data.

“From day one, it’s been apparent that Treasury’s interest leaned more favorably toward that of the bank’s, with taxpayers as simply an afterthought,” said Representative Scott Garrett, a New Jersey Republican on the Financial Services Committee. “Unfortunately, the actions of the Treasury ultimately resulted in negative, albeit foreseeable by some, consequences for the banks, and questionable benefit for the taxpayer.”

TARP hasn’t succeeded in clearing bad assets from banks’ balance sheets, which would allow the companies to lend money and get the economy going again, said Gregory Miller, chief economist at SunTrust Banks Inc. in Atlanta. The KBW Bank Index of 24 financial institutions has fallen 58 percent from Sept. 15 through yesterday.

‘Hasn’t Helped’
“It hasn’t cleaned up the asset side of bank balance sheets and it hasn’t helped bank uncertainty about bank balance sheets at all,” Miller said. “Uncertainty has now overwhelmed economic decision making.”

Paulson, who was succeeded last month by Timothy Geithner, designed TARP as a possible money maker.

“This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything,” Paulson said Oct. 20.

No doubt that Paulson "The Pump" and his Kashkari sidekick Mini-me are living in a Goldman Sachs inspired fantasy. The stuff "loaned" into the TARP program is undoubtedly the worse of the worse. Odds of recovering anything near their estimates? Zero.

January Jobs... Unemployment Rate 7.6%, Loss of 598,000

This was worse than the 525,000 that was expected. Seasonally adjusted U-6 is now 13.9%, up from 13.5% in December, and a soaring 15.4% unadjusted.

U.S. Jobless Rate Soars as Payrolls Plunge by 598,000

By Shobhana Chandra

Feb. 6 (Bloomberg) -- The unemployment rate in the U.S. climbed to the highest level since 1992 in January and payrolls tumbled as the recession showed no sign of abating.

The jobless rate rose to 7.6 percent from 7.2 percent in December, the Labor Department said today in Washington. Payrolls fell by 598,000, the biggest monthly decline since December 1974, after dropping by 577,000 in the previous month.

The loss of jobs, at employers ranging from manufacturers like Caterpillar Inc. to retailers such as Macy’s Inc., is shattering consumer confidence and crippling spending. President Barack Obama is likely to use the first employment report since he took office to prod lawmakers into agreeing on a compromise economic stimulus package by the end of this month.

“We’re losing jobs at an alarming pace and bracing for more weakness,” Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis, said before the report. “The private sector is flat on its back at this point. The government needs to step in with a stimulus, the sooner the better.”

Treasuries slipped while stock-index futures headed higher after the figures. Contracts on the Standard & Poor’s 500 Stock Index gained 0.3 percent to 843 at 8:34 a.m. in New York. Benchmark 10-year note yields rose to 2.92 percent from 2.90 percent late yesterday.

Deeper Cuts
With a revised decline of 597,000 jobs in November, revisions subtracted 66,000 workers from previously reported payroll figures for the last two months of 2008. The U.S.
economy has now lost a total of 3.57 million jobs since the recession started in December 2007, the biggest employment slump of any economic contraction in the postwar period.

Last month’s losses mark the first time since records began in 1939 that job cuts exceeded half a million in three consecutive months.

Payrolls were forecast to drop 540,000, according to the median estimate of 75 economists surveyed by Bloomberg News. Estimates of the decrease ranged from 400,000 to 750,000.

The jobless rate was projected to jump to 7.5 percent. Forecasts ranged from 7.3 percent to 7.6 percent.

Well, the market is evidently thinking that this wasn’t a total disaster. Of course to any of the real people behind this huge number, it is.

Here’s a link directly to the BLS Announcement.
These adjustments are huge again. If it were up to me, I’d dismantle the BLS and start over:
“The change in total nonfarm employment for November was revised from -584,000
to -597,000, and the change for December was revised from -524,000 to -577,000.
Monthly revisions result from additional sample reports and the monthly recalculation of seasonal factors. This month, the annual benchmarking process also contributed to these revisions.”
The BLS changed some of the methodologies again – ugh. Details can be found within the BLS Announcement.

Here is an employment chart from John Williams. It reflects unemployment numbers that are closer to the way they used to be calculated and, as you can see from the U6 number (15.4%), it is huge. This chart will automatically update once John Williams gets the data in:
Chart of U.S. Unemployment

Morning Update/ Market Thread 2/6

Good Morning,

Well, sometimes it takes a while to digest the data. Futures ramped a little on this “non-end-of-the-world” employment report, but like the old adage goes, it’s a recession when your neighbor looses their job, it’s a depression when you lose yours. The trend in unemployment is undeniably up at a dramatic rate, and when we cut through the bull of seasonal adjustments and “birth/ death model” adjustments, we find a 15.4% unemployment number which is much closer to the way the data used to be reported. Thus, keep in mind that it is NOT VALID to compare the 7.6% number to depression era data. I don’t know what you want to call the threshold for depression, but I believe we are already there.

Okay, remember that the 30 and 60 minute oscillators are overbought and thus I would expect pressure to be exerted on the downside at some point this morning. Futures are already fading from their mini-pump.

Bonds are down again, it’s interesting that on the last FOMC announcement and now on this employment report that it has been the bond market reacting dramatically. There’s a message in there, do you hear it Mr. Bernanke?

Appreciate the good participation on the thread yesterday, keep your good input coming. Here’s a current chart of the futures just prior to the open:

Good luck to your day,


Thursday, February 5, 2009

DoctorMad – The General is set to Rumble

He speaks softly but produces a mean chart:
Intense fighting as evidenced by the increased volume the last couple of days as the bulls and bears edge ever closer to one another and their entrenched lines. This is heading for a climactic battle very soon. We could potentially spend one more day trapped in these ranges, but by early next week the winner will be clear. You better make sure your troops are either on the winning side or you hedge quickly if it breaks against you. The ensuing retreat of the losing side is likely to be chaotic and disorderly with huge follow up by the victors.

- DoctorMad

U.S. Auto Suppliers May Seek $25.5 Billion in Aid...


U.S. Auto Suppliers May Seek $25.5 Billion in Aid for Industry

By Alex Ortolani

Feb. 5 (Bloomberg) -- U.S. auto-parts suppliers, struggling with losses as sales dwindle, may seek as much as $25.5 billion in government aid to prevent an industry collapse.

Three proposals for federal action could be used together or separately to shore up partsmakers, the Motor & Equipment Manufacturers Association trade group said today in a statement. A presentation to the Treasury Department this week spelled out amounts for each program that weren’t given in the statement.

The appeal for help is aimed at widening the Treasury’s commitment to the auto industry as the U.S. market sinks to its lowest since the early 1980s. General Motors Corp. and Chrysler LLC are working to avert bankruptcy with $17.4 billion in loans and face a Feb. 17 deadline to prove they’re viable.

“When one aspect of the automotive market fails, especially with its just-in-time structure, it ripples across the industry rapidly,” said Mary-Beth Kellenberger, a Toronto- based analyst with consulting firm Frost & Sullivan.

A $10.5 billion aid program was the costliest of 3 “bridge solutions” in the trade group’s 11-page presentation to the Treasury Department this week. That document didn’t indicate that the programs might all be used, for a total of $25.5 billion. They were labeled “options” in today’s statement.

Calls and e-mails to the Treasury Department for comment weren’t immediately returned.

About 40 U.S. suppliers filed for bankruptcy last year, according to the trade group’s presentation. The “stress is now compounded” after automakers bought fewer parts because of extended plant shutdowns in December and January, MEMA said.

‘Closing Entire Companies’
“Without appropriate action, automotive suppliers will be unable to return to required operations in March 2009 without shuttering facilities or closing entire companies,” according to the trade group, which is based in Research Triangle Park, North Carolina.

One scenario for aid would be for GM and Chrysler to have access to a $7 billion revolving line of credit created from the Troubled Asset Relief Program to pay suppliers faster than usual. Payments could be made 10 days after parts are shipped, instead of the usual 45 to 55 days, the trade group said.

A second suggestion would be for the government to guarantee promised payments from automakers should one of them file for bankruptcy or be unable to pay. That would provide about $10.5 billion in available funding, helping suppliers use the promised future payments as collateral for bank loans, according to the presentation.

Under the third proposal, $8 billion of TARP funds would be made available to suppliers in need of capital. That scenario also includes the option of commercial banks being called on to use TARP funding to provide credit to partsmakers.

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End of Day 2/5

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Okay, I’m going to keep this one fairly short… (or not)

On the day the DOW finished up 106 points (although it *felt* like a thousand – lol), the S&P gained 1.6%, the NDX is experiencing its second coming and finished up 2.4%, while the small caps in the RUT just didn’t draw as much attention as tech (for what reason I do not know) finishing up 1.5%. The XLF reversed hard intraday and managed to finish up 1.6% - BAC put in a hammer bottom on high volume while gaining 3% on Ken Lewis’s doubling-down on his insider buying (how’d that first batch work out?). Seems like people all around are acting a bit desperate…

Internals were positive by about 2 to 1 on advancing issues, and volume was slightly better than 2.5 to 1. I’m not sure if we satisfied the McClelland Oscillator’s signal from yesterday or not, but I’ll find out tonight and if it’s significant, I’ll let you know in the morning.

As far as tomorrow goes, the release of the unemployment numbers will be everything. Is the market expecting a disaster and have that priced in already? Sure doesn’t seem like people fear it much by the way the past several days in the NDX went. The VIX couldn’t stay over 46 and closed at 43 and change… elevated, to be sure, but is it commensurate with what’s happening on the jobs front? I DON’T KNOW. We’re going to find out tomorrow, and I think that makes all the charts I’m about to show you a moot point.

But let’s look anyway.

Starting on a 20 day, 30 minute SPX chart I see an RSI divergence as annotated by those red lines. The peaks in price are almost level, but the peaks in RSI are lower… that’s a bearish divergence – albeit a small one on a short time scale. Note the green channel lines… we touched the top one but failed to break it. Note the 30 minute stochastic – overbought, meaning lower prices tomorrow are likely, and the 60 minute is likewise overbought. Note something else interesting on this chart… see the dark blue lines that crossed yesterday above the candles? Those lines are from the beginning of the triangle back in October of last year, and they finally crossed but we are in the same old area, 4 months later.

Here’s a six month chart showing where that triangle originated (sorry for the busy “working man” charts. BTW, if you look at the SPY chart and see that giant hammer, it’s a bad print):

And just because I haven’t shown a clean looking chart in awhile, here’s a daily SPX with all the garbage turned off so you can see that there is still a clear triangle/ pennant pattern in play:

Next is the one month chart of the DOW. This candle looks a lot like all the others except for the NDX. Higher volume day, but again, generally lower prices and generally higher volume on down moves as a whole – although this is obviously looking pretty much like a triangle or flat. On the daily stochastic, my settings have yet to produce a buy here, but have on all the other major indices:

Next, let’s check out the risen one, the NDX. That is one big candle, with a massive 50 point range. Ran right into resistance at 1,250 which is coincident with the upper Bollinger. Note how the daily stochastic is almost overbought already, that’s just plain old diverging from the rest of the market. It did break that blue line which would correspond to the green channel line on the SPX and is a breakout higher. But is it just a throwover? Also note here that the green 50 day average is now upsloping, that’s pretty bullish, as is completely engulfing yesterday’s tombstone doji, which obviously did not verify a reversal of the uptrend:

All that said – if I could see nothing else in the market, I would think we are about to go to the moon based on all that. So, let’s look inside the NDX at the 20 day, 30 minute chart. Again, we see the breakout above the upper boundary, but look at the RSI and compare the red line there to the prices up above. That is a very substantial bearish divergence, one that should not be ignored. It is, however, on a short time frame and correcting it may not mean a huge move is required. Also note the overbought stochastic indicator that just issued a sell signal by having the fast cross below the slow:

Be careful if you are long GLD here… another outside hammer was posted today right up near the same resistance line as the last one. The last one did confirm, gold prices fell nearly $50 an ounce in the next two days, but as you can see jumped back up. Maybe it’ll make it back above resistance if it keeps trying, but beware of outside black hammers, especially in sets that could produce a double top:

Overall, because everything is moving sideways in a triangle it is very confusing to people. One day we see an upright Head & Shoulder pattern, the next day it morphs into an inverted H&S pattern. The truth is that unless you are very quick at catching corners, playing inside of triangles or sideways patterns is an account robbing experience. I’ve managed to do well recently, mainly on the back of my larger bond market plays.

And to sum up the media, our government, our President, and all the Pigmen out there… all I can say is grow up, possess and demonstrate some morals and ethics, stop acting like children, understand and take care of the math, and stop acting like a gang of desperadoes…

The Eagles – Desperado: