A Peak Under The Hood will be dedicated to providing unique insights into macro topics happening around the world and how these topics may affect financial markets. We will try to provide an entertaining, but informative blog, on subjects ranging from Real Estate, Mortgage Markets, Commodities, Major Stock Indexes, Bonds, and Select Trading Ideas. Our site will contain original posts, charts and also include opinions from outside investors and reporters who furnish original thoughts. We will attempt to dig deeper than what can be found on major network financial news outlets and it is our hope that you will continue to visit the site as we provide intelligent analysis that may be counter intuitive to mainstream ideas.

Sunday, February 27, 2011

Is Bernanke The Gangsta Rapper of the Financial World?

I have been wondering one thing lately: 

Is Ben Bernanke the gangsta rapper of the financial world? 

I think he is—Strait Old School G, 'Ben Wizzie' Bernanke. 
As a genre, Gangsta Rap hit the scene hard in the 80s and spoke to a repressed, depressed society of youth.  The message of the music was to live hard to make money on the streets at all costs—even killin' thy brotha.  The music carried a heavy political message that at times promoted violence, shooting, thievery, robbery and materialism.  A gangsta rapper was true to his hood, but always had his own back first and foremost.  There also tended to be a fair amount of exaggeration in the music in regards to booty and cash-money spending.   
If this is the true definition of Gangsta rap Bernanke is an Old School G—a beat boxing gangsta for shiz.  Bernanke’s reckless monetary policies are no different than the hard lyrics of Ice Cube, NWA or Public Enemy—improve the economy at all costs, even if it means destroying everything in the process.  His policies of dollar and bond manipulation have led to massive increases in commodity costs across the world, which in result has led to worldwide violence, deadly shootings, thievery of the dollar’s value, robbery of asset’s true valuations and materialism (False wealth effect due to stimulus based stock market super recovery) .  Bernanke is true to his hood, the US economy, at all costs and openly exaggerates and manipulates the economy’s true health by never ending stimulus shimulus.
I know nothing of his skylarking with the ladies, but it is Washington so I wouldn’t put it past him.
Life as a rapper has been good for Ben Wizzie, but Bernanke needs to watch his back—Gangsta rappers get killed for their words. (I am by no means saying Bernanke is getting killed here—it is a metaphor for him losing his credibility when his policies start to fail miserably, which I believe is already happening).
Some of Ben Wizzie’s hits: 
If you’re having Inflation problems I feel bad for you Yuan

I got 99 problems but inflation ain't one

China’s overheated inflation is starting to cause massive waves in the economy as citizens that make less than $1 a day are unable to buy basic needs.  This political unrest recently has created the need for massive tightening for the Red Dragon Empire.  China’s flame as the little red engine that can, and does, run the global recovery is about to be derailed.  China has Inflation Issues
CHINA’S INFLATION DATA (National Bureau of Statistics Feb 15)
*  China’s CPI increased at 4.9% year over year in Jan
*  Food cost were up 10.3%, including grain up more than 15% and fruit up 34%
*  The China cost of living rose 4.22% due to housing costs
*  Monthly loans by State-owned Chinese banks were 1.2 Trillion Yuan in Late Jan 2011—over DOUBLE the amount issued in Dec 2010, less than one month earlier (Chinese Business news)
*  China raised rates SEVEN TIMES ALREADY in 2010 to stop inflation and it has not worked.
Inflation is killing China, as shown in consumer confidence numbers.  China's Consumer Confidence has fallen dramatically since QE2 and is now at recession levels.  I expect China to raise rates rapidly to combat inflation which will freeze lending.

Ben Wizzie, however holds to his own that there is no inflation in the U.S., despite gasoline costs skyrocketing up to 10% in the last 10 days.  Why? The funny math of CPI does not take into account rises in food and energy costs.  Personally I think this is stupid.  Fuel costs affect everything, especially consumer spending. Please read this Washington Post piece about rising fuel costs-- Consumers spend less as gas rises. 

I agree with everything here especially the part about consumers being less able to take on increases due to higher unemployment and lower home values.  The one thing I disagree with is his call for $3.75 a gallon as the tipping point for the economy.  I feel that we have hit the tipping point already—The consumer is dead until Christmas. 
Ben Wizzie’s other hit being played right now:
It’s Me Against the World
Ben Wizzie is ripping this track from Tupac, but he is about to be ripped from everyone in the world for the lyrics of this tune.  Expect this song to be sung this week when Ben Wizzie speaks.  Expectations are that the Feds will NOT raise rates due to unemployment and will NOT stop QE2-MUCH due to the same reason. 
The problem is that the rest of the world has had enough of the Fed’s QE.  World economies cannot handle the steep inflation pressures and many are already raising rates, while others are planning to raise soon.

*  Already going up:  Indonesia, Australia, China, India, Russia, Vietnam
*  Expected:  Canada, UK, Brazil, ECB
Bernanke is heading into some nasty gangsta warfare here—On one side of the coin, raising rates will hurt his hood recovery in the US.  On the other side, failure to raise rates will kill the dollar, which could lead to a continual rise in dollar based commodities (OIL).  Any further increase in costs will bleed into his smoke and mirrors CPI data, which will creep prices higher for consumers or lead to massive layoffs to deal with margin erosion.  With no wage growth I don't see prices going up, but I do see companies handing pink slips to cut costs.    
Ultimately, Bernanke will probably do nothing but preform his version of Insane in the Membrane.  His version talks about how there is STILL no inflation in the US and that the recovery is crawling on the bottom.  He will probably talk about how QE2 worked, despite the initial intention of it lowering borrowing costs.  He will beatbox about how an OG like Ben Wizzie has to work hard for the economy, and that raising rates now would kill the recovery in its tracks.
Bernanke is not a rapper.  However, I believe he is convinced that he is a master wizard that can perform magic to raise the economy via monetary expansion.  Sadly though for Ben Wizzie, QE is not magic-- it is desperation.  The last attempt of a fiat currency to stabilize is through money printing.  Magicians are not real, neither is magic and neither is a sustainable recovery in the US without stimulus. 
The US cannot recover with rising prices either. 
This must be how Charlie Sheen feels when presented with choosing between a stretch Hummer full of drug hungry hookers or a mirrored plate of cocaine:  He needs the coke to satisfy the needs of the hookers, but he needs the hookers to justify the need for the cocaine.  For Sheen, he doesn’t have to choose—he will just take both.
Bernanke needs to choose between stoping inflation with raising rates or continual stimulus for the economy, and he can’t have both.  
COUNTERPOINT:  Remember though, that when economies melt down from inflation they often fall into recession.  Any recession at our current levels will lead to massive deflation.
I said a hip hop,
Hippie to the hippie,
The hip, hip a hop, and you don't stop, a rock it
To the bang bang boogie, say, up jump the boogie,
To the rhythm of the boogie, the beat – Sugar Hill Gang
That’s a Rap.  

Friday, February 25, 2011

The Cost of Stupidity : BAC : Past Present Future

I understand there are no EASY buttons in the investment world, but sometimes you have to wonder WHY some companies do things that are just so STUPID.  When a company does something so unbelievably stupid in the past, you have to look at what this event is doing to the present dynamic of the company to determine if you should buy the company for profits in the future. 

Case and point:  Bank of America's purchase of Countywide AFTER the housing market collapsed.  Bank of America bought Countrywide in the first part of 2008, when the housing market was collapsing faster than Lindsay Lohan's career (that is FAST people!).
BAC paid over $4.0 billion for Countrywide in stock, after they had already dumped $2 billion at $18 a share-- all of this was done in 2008 during the same time that Countrywide as a company was quickly falling to having $0 in equity and a $0 stock price.

All in, BAC paid over $6 billion for Countrywide in 2008. BAC is stupid
In Countrywide, Lewis gets the “best, total mortgage-banking company in the U.S. by far,” Hendler said. Countrywide’s sophisticated back office is a valuable asset that makes Bank of America a much bigger competitor with Wells Fargo & Co., Washington Mutual Inc. and others, he said. In 2007, Countrywide had $408 billion in mortgage originations and has a servicing portfolio of about $1.5 trillion with 9 million loans.

They bought Countrywide to compete with WASHINGTON MUTUAL in 2008... 2008, not 2004! I don't know if there has been a more STUPID deal ever... EVER... I'm guessing there is one out there, and if you know of one, please leave a comment on which deal that would be.

Chase picked up Wamu 8 months later for $1.9 billion, but that included over $900 million in deposits (albeit a bail-out and not a purchase-- Jamie Diamond's deal with the devil is a different topic what-so-ever!).


Today, BAC is being charged by investors for misrepresentation of Countywide loans.  People want money for crap mortgages from 2006.

Last month BAC took a $6.1 billion write down from the Countrywide acquisition.

BAC's recent write down was eqaul to the price BAC paid for CFC in 2008!


If you were forced at gun point to put your money into BAC right now I would say take the bullet.  BAC is paying the ultimate price in share destruction because of the Countrywide Disaster.  This will only get worse as the ball unravels with each passing day.

BAC trades over $14 today.  Why is this stock in the double digits?  I guess everyone gets a little kick from QE2 much.  There are truckloads of legal fees about to slam BAC in 2011 from the foreclosure robo-signer incident resulting from Countrywide trash loans.  Significant BAC legal fees in 2011.  This is not baked into the current price of this stock.  Any dip in financials and watch out below-- BAC falls hard. 

BAC as a stock and a company is a Bunch of Absolute Crap, and should be Bankrupt After Countrywide.  Dodd-Frank rules should strip profits from BAC while Countrywide's losses mount faster and harder with each default.  With each default, investors around the world will pile on BAC's back asking for cash.  Will BAC remain too big to fail?  Wizards who believe in magic (Bernanke et al) will determine that.

While none of the financials are sexy, BAC is the ugliest girl at the bar and she has some funky disease called Countrywide that is incurable.  To top it of, this BAC chick is just stupid... You can lose weight and you can buy nicer clothes, but you can't fix being stupid.

Wednesday, February 23, 2011

Smoking Crack(s) in China (Real Estate)

Some things take a long time to materialize.  Foundation damage is one of these instances.  In some cases, years of poor grading, inadequate draining or improper initial construction grow and build until there is a major shift or crack in the foundation of the home.  The homeowner can either ignore the damage and allow for further deterioration (of the home and their bank account) in the future, or fix the problem.  If the damage is severe and the neglect has been going on for some time the fix is very costly, in some cases costing more than the value of the home.  

China has been showing major foundation cracks in it's property bubble for years, but there has been little done to fix the impeding collapse.  Today, in addition to recent rate rises, China's 5 major banks have pulled the plug on 1st time home buyer discounts.  Bye Bye discounts .  This will take away the 15% discount many Chinese have enjoyed on their first-time purchase of 344 sq feet of grossly inflated high rise condos in many a city in China.

China is in the first stage of grief: DENIAL, in regards to their property bubble.  This was made most apparent on Feb 17th, when the gov't decided to stop publishing the countries index of property prices. No more property data in China.  I'm sure that China doesn't want to publicize the declines when they start coming harder and faster each month.  As stated in the above article:
"It's just like changing the scale of a thermometer, and then telling a patient they no longer need to take medicine for their fever, and the whole family cheers that the illness is cured,"

China's property bubble may be the largest real estate bubble of all time, making California's housing bust look like a Pomeranian next to a Great Dane.  China's property bubble is the fat person that has to buy two airplane seats that makes you say, 'dammmmmmmmmmn that guy is fat.'  You would think that after years of ridicule fatty would slow down, but instead he keeps pounding pound cake despite knowing this binge eating will kill him.  China's property bubble is an economic cancer that keeps growing and growing.  At this point, regardless of the diagnosis or treatment, the cancer will kill the economy.  The crooked Dr. (the Chinese  government) has been telling everyone for years that the sick are well, but now that the patient's skin is falling off and they are puking up blood, there is no way to hide the fact that someone is going to die.  Still though, the Dr. says everything looks fine.
China is smoking crack if they think they can stop the bubble at this point.  There is no such thing as a soft landing for a property bubble.  No rate manipulations, bank program suspensions, credit expirations or all the kings horses and all the kings men will be able to save the China Dumpty real estate market once the bloated housing market falls off the wall.

To be sure of this I found Humpty Dumpty translated in Mandarin Chinese:

"Huendih Duendih tzuoh de chyang-jongjiall:Huendih Duendih igulu shuai leangball. Suooyeou hwangdih de maa, gen suooyeou hwangdih de ren,Yee tzay buneng baa Huendih Duendih pin-cherng g huluentwen."

Trust me on this one-- Yee tzay buneng baa Huendih Duendih pin-cherng g huluentwen is bad.  It does not mean sunshine and cookies for real estate and a soft landing for all.  

It mean once the crash comes, you can't just 'fix' it.  
China Dumpty is barely holding onto the wall. The wall is a tall jagged mountain that rises higher than Mt. Everest.  There is no base camp on this Mt. Everest.  It rises up rapidly to the peak, miles above the earth, and strait down on the other side.  

Tuesday, February 22, 2011

This is NOT your Grandfather's Housing Market

As if the news of oil booming, tensions in the Middle east booming and anger in Wisconsin booming was not enough to be a bugger on the old stock market today, the news on the once booming—now dooming—housing market continues to stink worse than a laundry basket of poop filled newborn diapers (of which I now have in the house).

So, with all the negativity, is NOW the perfect time to buy a house? 

If you looked at consumer confidence numbers in Feb, you would think that YES, it is time to buy, but I still say MAYBE.  Consumer confidence rose to 70.4 in Feb vs 64.8 in Jan.  Despite the rise, only 4.4% of people said they are planning to buy a house—this is a Bigfoot on Steroids drop from 5.2% only a month earlier.    

Why have we seen such a boom in confidence but a continual decline in housing?  Simple—consumers have been gaining in confidence because everything has become cheaper—flat screen TVs in every room of the house at these prices! This means that despite not having any more money, cheaper goods means they can buy more stuff.  More stuff makes us happy.  It makes consumers more confident.  People are cool with deflation!

But is consumer confidence sustainable?  I say no—this is apparent as prices on goods increase.  As gas goes up, money supply for Hannah Montana concert tickets, Red Lobster Ultimate Shrimp benders and Shake Weights goes down.  As consumers can buy less stuff, they will fill feel less confident about their personal economies.  You don’t have to be a wizard to understand that. 

Ok… so what does this say about housing?  

Distressed sales accounted for over 49% of sales last month.  If you are buying a house at full price, you are just barely in the majority.  Depending on the market, that still means that 51% of homebuyers are suckers.  Paying full price for a home right now is financial suicide, unless you are (a) paying cash, or (b) buying for the long haul. 

This is not your grandfather’s housing market—there is no guarantee you will make money in housing in the future-- You may not make money in 5 years, or 10 years, or 20 years if you don't buy correctly.
Housing prices in the last 3 months of 2010 are down 4.1% from the year earlier.  This was also during a time when rates were their lowest in history. Look at that nasty bubble… see the false rise in price from government interventions!  You can’t have a double-dip if prices never recovered.  Feb 22 Case Shiller Report with Charts

So, why do I say MAYBE now is a good time to buy a house?  I think that you can get a good deal if you shop hard and have a good imagination.  Every home buyer wants to buy a foreclosure, but most buyers opt out of this when they see the work needed to get the home Pottery Barn ready.  If you can see the true potential of a home, have the cash resources to do the repair and understand that prices in your neighborhood will fall BECAUSE you bought under market, I say jump in.  You won’t make 120% of your kitchen upgrade in 2011, but you may be able to buy at a price where you will never be underwater as the market slides.  As always, location is key—A screaming deal in the ghetto is only a good deal if you want to live in the ghetto. 

On the other hand, if you are a 22 year-old that thinks a screwdriver is a cocktail, renting is best.

Remember too—housing sucks right now.  Robert Shiller is calling for another 25% drop in housing.  Your house will not be immune, nor will your neighborhood, you state or your country (I'm talking to you Canada).  You will lose money in housing over the next 5 years if you pay full price for a home today.  

Think of it like a car.  If you are like me, you shop all over the country for the best deal on your car.  I had a 4runner shipped from Kentucky to save $4000, and I shipped my wife’s car from Omaha Nebraska to save $5000.  Some people would think this is crazy— buying sight unseen from a seller you will never meet eye to eye.  If you are one of those people, go and buy the brand new townhouse with the dramatic finishes at the top of the market—set the high water benchmark for your neighborhood and I will ship you a ‘I’m a Sucker’ button for Christmas next year.  If you see these car purchases as an opportunity to put $9000 extra to work in the market, or the means of financing your next few years of family vacations, then YOU are a candidate for the big MAYBE of home purchasing. 

Maybe I am wrong.  Maybe rates go to 9% and housing prices skyrocket higher like financial porn sites want you to believe.  What a crazy world that would be—9% unemployment, no wage growth, $6 gas and 9% mortgages… Funny that I fail to see home prices rising in this Bernanke Wizard Utopia world (though I do believe the wizard will eventually achieve this disaster scenario). 

Pay full price for housing right now or stab yourself in the eyes with scissors—both are the same— painful blindness or blind buying into a painful reality.  

Monday, February 21, 2011

To Solve A Murder Suicide

I may not be a forensic psychologist, but I did stay at a Holiday Inn last night (credit card points and the Hyatt was full).  Despite not having the medical schooling, I can see when someone is planning a murder suicide.

I'm sure everyone watched oil boil higher today-- Almost up 10%. The inflation straw that will break the oil dependant camel lover's back is getting closer to melting down any US recovery, but the real story of the weekend was that Europe is borrowing truckloads of money again... Europe Borrows Massive Emergency Cash

I love the fat finger explanation from the financial porn site CNBC. 

In my opinion, however:  Someone is trying to kill the Euro.

I'm pretty sure it is the EU, by means of a Euro suicide.

To solve a murder you need (a) physical evidence, (b) a crime scene and (c) a murder weapon.

To kill the Euro, the evidence will be the uncontrollable and never ending EU buying of failing bonds from bankrupt countries like Portugal and Spain.  Germany, the killer, will also be the crime scene where the currency dies, and the Euro itself is being used as the murder weapon.

The Euro killing the Euro with the Euro: One Euro at a time.

I have always wondered why the Euro gets to be the elitist fiat currency to the dollar.  Would you really stand behind Europe vs. the dollar in a 'Who's the toughest fiat currency' death match? 

What a pathetic match that would be-- In this corner the dollar, backed by the Wizard Ben Bernanke, throwing bloated state pensions and buckets of 'gauranteed' T-bills and mortgages into the ring with an IOU note that reads, 'Consumers and tax payers to pay back after recession ends when cars fly and people live on the moon.'  In the opposite corner a German stands with an EU flag, looking strong and powerful wearing laderhosen, but he is holding a stinky bag of shitty Portuguese and Irish bonds and leftover defaulted real estate euro-trash on the books of Spanish and British banks.  There is a drunk Irishman standing behind him yelling something about the 'stupid Icelandic cheeky monkeys...'  To the left of the German a Greek, wearing an I'm With Stupid shirt with the arrow pointing at the German, is performing a smoke and mirrors magic show about the smoke and mirrors Greek economy recovery.

Let's get ready to rumble print money uncontrollably! 

I bet the dollar and the Euro would just see how much the other wanted to be paid off from some central bank, instead of fighting.

Dollar would win that one...

In my opinion, the Euro shouldn't have any premium to the US Dollar.  Not now.  Maybe in the future (if it makes it) and maybe in the past.  But maybe never.

Both currencies are debt traps that will never be able to pay back the quanitiative easing (uhhh... money printing with no backing), but the dollar has one thing going for it-- there is only one country that stands behind the dollar.  The Euro is a bunch of countries with different banks, economies and different politics.  It just doesn't make sense.  I just can't understand how Germany and Ireland share the same currency. 

Sure, someone like Portugal benefits from the Euro.  Instead of the Portuguese bond yields screaming to 15%, the EU jumps in and keeps the rates down.  Sound like the US?  Yes and No.  Yes, the US is buying its own debt, but NO because the US is not competing within itself by damaging the financial reputations of 'stronger' nations like Germany, England and France.
I don't see why Germany stays with the Euro disaster-- for Germany it doesn't make sense to support bottom feeders like Portugal and Greece.

Will Germany be the first to secede from the Euro?  Will there be some hybrid currencies created. ie. a strong Euro and weak Euro (we have that here -- the weak currency is called the Peso).  Maybe Portugal realizes that it is pulling down the other countries and nicely pulls out, resulting is a complete meltdown of their economy and rampant hyperinflation when they reintroduce Escudos at 10,000 to 1 Euro.  Maybe-- and maybe North Korea sends flowers to the US on July 4th.
The Euro is dying-- The Euro sucks as an idea.  It is a worse idea than the Bacon Genie-- Bacon Genie

I'm not saying the dollar is a great in comparison, but the Euro is being killed... by the Euro.

The Dollar can't kill the Dollar-- it will only multiply if you feed it after midnight. 

When the Euro has been murdered it will never come back... Ever.   

Friday, February 18, 2011

Long Babies. Short Silver and Santa

My wife is 9 days late for our first child today.  The house is very tense as we wait yet another day for something we have waited so long for already.  While I am going crazy in anticipation for the little one, the sheer mania of suggestions we have gotten to start labor is maddening.
A few of the sure fire suggestions include:

Peanut Butter, Swimming, using swings in a park, jump-rope, spicy food, walking up hill, heavy metal music, love-making, wine, scary movies, walking stairs, bumpy car rides, creamy soups, 2 glasses of champagne, Wii fit video games, chicken parmesan,  moving furniture, massages, evening primrose oil, mopping the floor, raspberry leaf tea, laughing, castor oil, go outside in the rain… the list goes on.

What I have determined from all of this is that people are fixated on one thing that they perceive ‘started’ their individual labor process.  The majority of the stories go in this fashion—‘I did XYZ event and in XZY time I had the baby.’  The event could be ANYTHING (literally—one person told us they ate a Monte Cristo sandwich and labor followed promptly after the powdered sugar was licked off her lips), but the time frame is a constant—24-72 hours after the event the baby was born.  All the stories, labor suggestions and ‘miracle’ induction methods create a baby in 24-72 hours time.  

Amazing really!... or is it…
I am guessing that you have figured out the purpose of this posting—people will convince themselves of ANYTHING to connect one event to the next.  In the labor situation, many of these women were past their due dates and probably uncomfortable.  When they did one event that failed to produce labor, they tried another, and another, and another… until ‘POOF’ baby arrives.  I am guessing that somewhere out there, a pregnant couple drank 2 glasses of champagne and made love on a swing-set after jump-roping in the park while listening to heavy metal music while mopping the floor on a bumpy car ride, and if you asked them what caused labor they would tell you with 100% certainty that the combination of these events was the ABSOLUTE reason that 24-72 hours later the kid arrived.

The facts of pregnancy are:  Normal term for delivery is between 37 weeks and 42 weeks.

There is no factual evidence for Peanut Butter, Wii video games or scary movies (though making my pregnant wife laugh and seeing her belly bounce up and down is one of the greatest joys I have ever experienced in life!)

Interestingly enough, the same can be said about investing.  When an investment gets on fire there are thousands of reasons why it is a BUY, even if the stock/fund/commodity being discussed has run up 100-200% in less than a year and it is trading WAY outside of historical norms.  ANYTHING can be used to connect the investment with a never ending upside.

We saw this last with oil in 2008.  Oil screamed from $70 in the summer of 2007 to $140 in the summer of 2008, only to crash below $40 in 2009.  While crude has recovered somewhat today, the zenith of $140+ a barrel wasn’t been attempted again, though the same reasons why crude was going to $300 a barrel are prevalent today—2008 story:  Financial Times July 2008 Oil to $300

Here are the ABSOLUTE TRUTH events that were sending oil to the moon in 2008

1.    Alternative energy sources are poor in comparison and supply
2.    Political unrest will raise prices
3.    There are no new oil fields out there
4.    World economies are growing and thirsty for oil.

Have any of these changed?  No.  No they have not. 

If these ABSOLUTE events have not changed why isn’t oil at $500 today? 

Or $900?

I have asked people this question and they tell me—“it is because we had a recession, duh!”

Ah yes… a recession:  An economic contraction that (a) makes alternative energy sources better alternatives to oil, (b) stops political unrest, (c) creates new oil fields and (d) stops the growing world need for oil.  If you spin it hard enough you can almost make a point for stopping the growing world need for oil, but you would need a good spin doctor for that one as most of the growing world economies have not abated their need for crude what-so-ever, but have instead increased their needs and consumption. 

It is all a Ponzi scheme at some point. 

The price of XYZ can raise as long as someone (investor or fool albeit) is convinced that it will go higher.  Sooner or later though, there are no buyers… and the only way for the AMAZING, ABSOLUTE & UNSTOPPABLE investment to go is down.

Of course all of the reasons listed above are reasons why oil cannot trade at $0, but none of them support a case for $300 either.  Once an investment is on fire, generalizations tend to become the ABSOLUTE TRUTH on why XYZ investment is in demand, despite the lack of factual evidence to support these claims. 

When you were a kid Santa Claus came and brought you presents.  If you were never told that Kris Kringle was a hoax, you would have thought that one year Santa must have died or retired (or turned to the bottle).  It would be tragic really—you, a 14 year-old, sitting in your Pooh Bear pajamas, alongside the Christmas tree with no presents.  After time however, you would find out that the ABSOLUTE TRUTH that Santa was real, was really a lie.  Over time you would do some research on these claims to realize that a 400 year fat old man that lives on the North Pole in an undisclosed location, who is living with thousands of asexual toy-making elves, with no electric power in a gigantic toy-making factory, with no food source what-so-ever to feed his army, who once a year, on the same day every year, delivers toys and gifts (the rich kids get better gifts because they are better people!) in a flying sleigh that is powered by talking, red-nosed reindeer that also have the ability to fly… IS JUST RIDICULOUS.

You would think to yourself, ‘Why was I so stupid to believe all of this?’  Easy answer—Because everyone you knew and trusted told you that Santa was real.  Investment mania is just the same—at some point almost everyone believes the Ponzi scheme BUY reasons, and despite all the evidence that reindeers don’t fly or that we are not running dry of oil in the next 5 months, people pile on without reason.  At this point they will believe ANYTHING to support the claims of the investment to go higher. 

I’m firm on saying SILVER is 2011’s crude story.  I see no reason why it has risen 100% in the last year, or 75% in the last 5 month,  no reason what-so-ever, other than Ponzi style speculation.  I have heard almost ANYTHING on why silver will go higher—XYZ bank is manipulating the market, world resources are scarce, it is an inflation hedge… etc… all of these reasons are Ponzi scheme BUY reasons, but I have a hard time justifying them as factual reasons to buy silver today.  This bubble forming reminds me too much of people believing in flying reindeer and asexual elves.

Sure, Silver can go to $33 or $38… or $40.  Silver is going completely Berserk today!  Remember though, oil was overpriced at $100 in 2008 and screamed higher, despite fundamentals, because EVERYONE was still buying.  I have met many an investor who bought $100 oil (or oil stocks/funds in summer 08), but did not sell $140 oil (most sold at $60-$70 on the way down, while others who held are almost even a little over 2 and 1/2 years later).  If you were buying USO USO CHART in July of 2008 at $110, today that ABSOLUTE investment would be down 66%, worth a cool $36 and change.      

Regardless of the ‘upside breakout’ mumbo jumbo from your favorite 24 year-old investment panelist on Cavuto, if it looks like a grossly inflated bubble and smells like a bubble— sell (or be prepared to sell-- Boy Scouts honor) that hot silver skinned potato and stand back!—It may not be this Monday or next Monday, but sooner or later that puppy is about to pop! 

While it is impossible to call the exact date and time of a market event, you can plan accordingly for when it happens.  9 months ago I knew I would have a baby in February… and no matter what I do, what she eats, or how many walks we go on uphill in the rain, the baby is coming… in 24 to 72 hours. 

That I would put money on.

Silver I would short. 

R and R Feb 18th
PS—I CAN’T WAIT to tell my kido about the magical Santa Claus!

Thursday, February 17, 2011

Lets take a peak under the hood at what corporate insiders are doing

The latest action by corporate insiders shows clear evidence that insiders don't see current value in their shares. The pace of their selling increased further to the worst sell/buy ratio we recall. On a historic basis this is almost panic selling. This is a warning.....and not something we feel you should take action on. It is another piece of information that investors should be aware of right now.

Tuesday, February 15, 2011

As Heard in the Corporate Board Room: "Thankfully it is ONLY 314 days Until Christmas!"

Happy 314 days until Christmas!
I have a hard time determining who, the product making companies or the consumer, is more excited for Christmas 2011.
Headline inflation numbers are screaming in January and the tone of companies is changing fast—Hanes is raising the cost of undies up to 30%, Jones New York is planning to raise costs, and Kraft is planning to put the cost squeeze on the consumer by raising the cost of sqeezey cheese.  For the consumer, food is expensive, mortgage rates are screaming higher and gasoline prices are not abating.
I say one thing:  Bring on Christmas.

The battle will continue all year if prices stay high—consumers not buying and companies trying to find a way to make an extra nickel here and there… until Christmas. 
We have raped the consumer’s attitude over the last few years to understand one thing—Anything you buy will be cheaper at Christmas… ANYTHING. 
So raise the price of cheese and superman PJ’s corporate America.  Raise them 2% or 20% and pray to god that someone will buy them.  In the meantime, as sales fall and consumers tighten up, remember that Christmas is only 314 days away, and during that time the consumer will have been window shopping for months in bated anticipation of buying your products at liquidation prices.   
On another note, Home Depot is hiring 60,000 temp employees for 60 days (Two whole months!)… Lowes is cutting more employees back to part-time.  Smoke and Mirrors at the big box home retail stores. 
While the financial porn sites will spin this as ‘growth in XYZ sector,’ the truth about this story is that part-time employees are awesome for companies as they do not have to pay benefits.  Way to go Home Depot and Lowes—shining as bright as Wal-Mart or a Bangkok sweatshop in regards to employee appreciation.  I can see it now… “Hey Nick,” HD manager says to slimy part-timer.  “Stack those 14 pallets of compressed stone siding into attractive end-caps and then pick-up all the wood shavings in isle 7 by snorting the shavings up your nose.  After that, I need you to move about 5,000lbs of railroad ties to the garden center… Oh yea.  Nick, make sure you are off the clock by 11am—that is your 14 hours this week.”  Manager turns away but then turns back to Nick.  “Tomorrow is day 60 too Nick.  Last day buddy.  We will take the cost out of your orange apron out of your last check.”
Happy Window Shopping!
R and R Feb 15th

Monday, February 14, 2011

Housing Bubbles Crash... ALWAYS...

Tiny bubbles (tiny bubbles)
In the wine (in the wine)
Make me happy (make me happy)
Make me feel fine (make me feel fine)
DON HO—Tiny Bubbles
Tiny Bubbles Popping Everywhere
Seattle’s cancerous housing market is finally showing its true colors—now down 30% from the peak.  Seattle was predicted to have a 11% drop, or a soft landing, being the only housing bubble in history to obey with homeowners needs.  Now the reality is here—and the prediction is for another 5-7% drop in price.  If this prediction in additional drop is anywhere close to the initial estimates, 5-7% will become a 15-20% additional drop in price.  This would be just about right—40-50% from the peak. 
Seattle was somewhat different on the way up because there were more high-earners than many other cities that crashed, but eventually buyers dry up, and the downfall will eat all sweet, crack-like wealth-effect equity up VERY quickly on the way down.  There is no such thing as a soft landing for housing-- not in Seattle.  Not anywhere in the world.
The only part of the story attached at the bottom of this paragraph I disagree with is how rising mortgage rates will get ‘people off the fence.’  These people should hold their fence position.  This is NOT 2006—when rates go up, buying ability is crushed.  In 2006, all the buyer did was state a higher income, or take a loan where the payments didn’t cover the interest due—there were ways to manipulate qualifications in 2006.  Today there are no programs for buyers to s-t-r-e-t-c-h income truths.  Rates at 5.15% today mean that a person with a principle and interest budget of $1200 can afford $30,000 less house that when rates were at 4.00%.  Rates at 5.50% will equal buyer deterioration of over $40,000.  Where does this vanishing money come from?  It comes off the vanishing equity in the sale price.  Read more about Seattle here:

Seattle Is Crashing
I bought my first home in 2005—therefore I am a sucker, right?  I also got the loan for $0 down.  Why?  It wasn’t because I didn’t have the down-payment (I would have gone with an FHA loan with 5% down vs. a conventional loan at 20% down).  It was because I COULD do a loan with 0% down.  Anyone who tells you they put money down during the housing boom because they HAD TO is lying.  Call their bluff or hook them up to a lie detector.  After the results, make them eat soap—dirty liar.
People tend to be on the right side of the fence when it is convenient.  Many of the same people that didn’t buy homes in 2005 because they ‘couldn’t afford’ the house are now saying they ‘knew the crash was coming.”  Funny how when we look at the past we can easily manipulate our non-actions of the current day to make us more superior than anyone who took the big dive on housing (or stocks, or tulips, or beanie babies…)

Enter into play: Red Dragon, the Down Under Croc and The Maple Leaf.
I have been watching global housing for some time and I can honestly say I am scared.  Many worldwide housing bubbles are in the 1st stage of grief—DENIAL.  While there are many countries in the world that have already had housing crashes (USA, Spain, Ireland, Costa Rica…) there are many large players, through massive credit manipulation and expansion, that are just now reaching their peaking points.  Maybe, just maybe, this will be the 1st time in history when we have a massive worldwide housing bubble that has a soft landing and everything is happy and cheery with pastel colors and smiling faces.  Maybe there will be a parade to celebrate it and people will bask in the sunshine and eat cookies and tell stories of how the great bubble never burst and that everything is hunky-dory.  Maybe?  If you have forgotten, that scenario is what it was like to live in Palmdale CA in 2005, or Seattle WA 18 months ago.  That is what the mood is like today in China, Australia and Canada… just another BBQ of ever rising housing prices for the Red Dragon, the Down Under Croc and the Maple Leaf.     
How Long Can China Keep the Game Going?CHINA.  China knows they have a problem and they are trying to slowly raising rates like the sorcerer Alan Greenspan to create a ‘soft landing.’  There is no such thing as a soft landing for an asset bubble.  China’s answer is the same as the Field of Dream’s theory:  Build it and they will come.  They hope by simply building beyond supply that people will buy and the game will play on forever.  Basic economics 101:  Supply vs Demand.  What happens when there is no demand?  Prices may not have peaked in China this Monday, but there are not too many Mondays left before China’s market melts down.   
Australia is Running out of Buyers in the Ponzi Scheme AUSTRALIA.  Australia may be the closest to being in a pure bubble crash.  There is little support left for this housing market and credit is starting to tighten.  Of all the world housing bubbles, Australia will be the one that gets the press first.  While the article above is an opinion piece, I like how he calls the housing market a Ponzi scheme, requiring more and more buyers to buy into the belief that prices will never stop going higher.  Down Under they are running out of buyers…
Canada ... Oh Canada... CANADA.  Poor northern neighbors—they are in the worst state of denial!  Canada is following almost exactly in the USA’s footsteps.  They are raising rates and restricting credit in hopes to control the 9000 LB pink moose in the room.  Canada is trying to wean its way out of the complete housing collapse by getting rid of the funky longer amortization loans, and raise down-payments.  All this will keep prices stable right?  Feel free to visit any bubble town in California in 2007 when they got rid of 100% financing loans, interest-only loans and raised interest rates.  Heck—look at almost anywhere in the United States in 2007 and compare it to today. 
Don’t believe the mania is happening in Canada?  Watch this video and tell me this is NOT 2006 California:  Canada is in a Bubble

USA does the Dip… Double Dip…
Please remember that the USA is in the BARGAINING stage of grief for the housing bubble.  We have tried giving money to people to buy homes and massive interest rate manipulation.  This last week the Feds announced they would wind down Fannie Mae and Freddie Mac.  They want more private money in housing… why?  Because the housing market was (perceived to be) stronger with private money.  Ben The Wizard Bernanke hopes private money will come back the same way it did during the bubble and fill in the void for loans that the GSE’s won’t write—high loan to value trash, stated or no doc garbage, and negative amortizing junk. 

The problem with all of this is that wizards are not real—they are fictional, as is The Wizard Bernanke’s last ditch effort to re-inflate the US housing bubble.  The next stage of grief is Depression—fitting really.  Housing will decline far worse than the great depression.  The final stage is acceptance.  We are far, far away from acceptance… my belief is that people still believe in wizards for the time being and will hang their hat on bargaining while the market double-dips rapidly. 
Please take the time to read one of my favorite bubble pieces that ran in 2005 in Time Magazine about the AMAZING US Housing market: http://www.time.com/time/magazine/article/0,9171,1069097-1,00.html
Feel free to also scour the web and relate this article to many sunshine and cookies articles in China, Canada, Australia, New Zealand, South Africa, Great Brittan, Singapore, India… all in Denial. 
Denial leads to Anger.
R and R Feb 14th    

Friday, February 11, 2011

The Government Announces: We Need Giant Hot dogs that Cure Cancer and Sing Show Tunes

Today the government sent a shout out to Fannie and Freddie:  We need to reduce your mortgage exposure by almost 50% giant hot dogs that cure cancer and sing show tunes..
Through this reform, the bad twins Fannie and Freddie, will be reduced from 90% of the mortgage market to 50% of the mortgage market.  This will be done by raising down payment requirements and encouraging private investment into the mortgage market installing innovative micro-chips in the hot dogs that sing show tunes in your belly to kill cancer cells.
Timothy ‘Paper Tiger’ Geithner called the mortgage giants ‘Government Backed Hedge Funds’ based on their actions during the subprime mess.  Figures from The Congressional Budget Office estimate that the tax payer cost of Fannie and Freddie will cost $380 billion from 2008 until 2020.  From Geithner, this reform Hot Dog Treatment will take some time make smiley faces appear out of nowhere if you are riding a unicorn on the moon, and will need the support of the private securitization market robot monkey people that turn human farts into bacon cheeseburgers.
If you can’t tell, I think this reform idea of Fannie and Freddie is the most ridiculous idea from the newly formed department of absolute mania… I love watching politicians try to control capitalism.  I thoroughly enjoy it when reform is presented (like this) that has not been thought out what-so-ever in real terms.  Saying that you can reduce Fannie and Freddie to 50% of the mortgage market from 90% of the mortgage market is about as realistic as telling Pfizer that they have 12 days to make giant hot dogs that cure cancer by releasing cancer fighting micro-chips that sing show tunes.  Mania!
Housing is as fragile as it has ever been right now—the market continues to depreciate despite massive intervention from the government in terms of interest rate manipulation and tax credits.  You would think that housing would magically pick-up when rates fell, but there is ONE catalyst that has been left out:  MORTGAGE CREDIT IS HARDER TO SECURE THAN PURE COCAINE AT A MORMAN PICNIC
The #1 reason that housing boomed in the 2000s was expansion of credit—that is it.  Nothing else. 
Private market securitization 101:  How we created the housing boom:
1)      We gave 100% LTV (loan to value) loans to tweekers with no income from 2003ish to 2007ish.
2)      We game 125% loans to people with or without income from 2003ish to 2007ish.
Today it takes an act of god (not the 2005 housing appreciation gods) to get a loan at loan at 80% LTV with fully documented income and an anal probe.
HOUSING BOOM MAIN ISSUE:) lending standards were only as strict as the rules at a divey strip club.  I have seen some sh*t and heard some stories about people at strip clubs.  Everyone can see the bouncer that tells the guys, ‘Hand’s off,’ as they cop a feel while trying to stuff $2 bills down some acne-faced hoe’s garter belt, but what happens behind the closed doors of the lap dance room are not to be discussed, nor are the actions to be run by the manager in regards to the house rules (or so I have heard…).  Lending in 2003 – 07 was done in the same fashion.  On surface, the loans looked good—they were almost all packaged as highly rated loans and the credit scores were all in the upper realm, or they were sold as lower grade loans. 

This, like the bouncer, is what lenders wanted the investors to see.  When the doors were closed, the real mortgage machine was being worked.  Many loans were brokered to one lender and turned down on a full doc, to be quickly turned to another and written as a stated doc or no doc loan.  If 28 year-old Suzy 2nd grade teacher could only prove $45,000 yearly with bank A, then screw bank A!  All you needed was bank B to accept $90,000 on a stated income deal and Suzy could GET THAT INTEREST ONLY ARM LOAN on a $600,000 house that she deserved!  I mean why not!  Suzy has been out of school for 5 years, and for 3 of them she didn’t even have to have a roommate to split the $800 rent.  And if bank B didn’t like the inflated salary then the lender simply raises the middle finger to bank B and sends the deal to bank C with no income, assets, or job history.  All bank C requires is a credit score and Suzy never missed a single payment on her Victoria’s Secret card (mind out of the gutter boys—Suzy remarried in 07 after the foreclosure).  Think those banks are all out of business?  Some of them are, but you trust your checking and savings today with some of the same players that handed Suzy the keys to that home in Las Vegas. 
This was the PRIVATE SECUURITIZATION MARKET during the housing boom. 
And that was how the game was played with the Non-GSEs.  We opened the flood gates to borrowers who should never have qualified for homes… and you know what—they bought like CRAZY.  If you have ever watched Caddyshack II, you have seen what happens when you let anyone into an exclusive club—shit gets ugly when the have-not’s try to mingle.  With more buyers than ever before, the market took off… high rates or low rates… didn’t matter. 
The #1 reason the housing market rose in the fashion it did was due to the availability of easy credit, high LTV loans to people that should have never gotten loans in the 1st place.  When this spigot was turned off due to massive defaults and tighter lending guidelines in 2007, the pool of never ending buyers (middle school janitors that overnight became $100,000 earning sanitation engineers) went ‘poof.’ And so did the housing market.
I say bring it!  I know that there will never be a housing boom like the 2000s again, and I know that crazy-whack-funky Subprime loans will not return, but if the government WANTS private market securitization they better ACCEPT that there will be some further pain in the housing market because of it.
Private securitization will not lend money for 30 years at low rates.  This is why most subprime was written as Arm loans, or the fixed rates were 2-3% over market rates.  Private money cannot tie up all their funds for eternity.  If the government wants private money it will be in the terms of short term ARM loans from 1-3 years, written with heavy prepayment penalties with massive adjustments after the fixed period.
Private securitization will not accept these losses again.  Do we not learn from our mistakes?  Private money will do the same thing to mitigate the losses of loans—they will slice and dice portfolios and sell them to insurance companies and pension funds. 
Private securitization will leave the market again when (not if) the market turns further south.  First and foremost I think it is ridiculous to think ANYONE will get into housing right now under private market securitization, but when the market turns again in the future, players will just get out again.  New Federal Reserve lending laws for originators and Dodd-Frank rules make is near impossible to be a heavy hitting private lender as it is, but if the boat hits an iceberg, the captain will be the first (and only person) on the one and only lifeboat. 

Good luck with this one government—your uphill battle of housing just became hiking Everest in the dead of winter in your gym shorts.  I can’t wait to see what magical reform giant hot dogs that cure cancer and sing show tunes does to the continual decline of housing.
$380 billion in Fannie/Freddie losses will be NOTHING compared to the $2-4 trillion that will be wiped out in home equity when credit becomes ever tougher due to the reduction of the GSEs…
So, next time you are at the gas station filling up the sedan after a 13 hour day at the office to earn a wage that barely affords you the HD channels for your new flat screen TV (that you paid for with cash because the monster bank that holds your HELOC cut the balance in 08), and you see some tweekers huffing down menthols by the Diesel pumps, remember that in 2005 they probably would have been approved for a 100% LTV mortgage and could have been your neighbors (and may have been) that foreclosed after 18 months, and if the government has their way, forcing private money back into the market, they will be your neighbors again in the future...  And the resulting foreclosure will be the same. 
"And if all others accepted the lie which the Party imposed—if all records told the same tale—then the lie passed into history and became truth. 'Who controls the past' ran the Party slogan, 'controls the future: who controls the present controls the past.'"
- George Orwell, 1984
R and R Feb 11, 2011