cubetrader.com

Article: After the Money’s Gone

From the December 14, 2007, New York Times:

After the Money’s Gone
By PAUL KRUGMAN

On Wednesday, the Federal Reserve announced plans to lend $40 billion to banks. By my count, it’s the fourth high-profile attempt to rescue the financial system since things started falling apart about five months ago. Maybe this one will do the trick, but I wouldn’t count on it.

In past financial crises — the stock market crash of 1987, the aftermath of Russia’s default in 1998 — the Fed has been able to wave its magic wand and make market turmoil disappear. But this time the magic isn’t working.

Why not? Because the problem with the markets isn’t just a lack of liquidity — there’s also a fundamental problem of solvency.

Article: The Wages of Financial Sin

As hinted at weeks ago, the Fed today took action to inject more liquidity into the market in a desperate attempt to stave off the now inevitable recession (IMHO). It seems they are now driven by fear, like American politicians and consumers, only reacting to events... and reacting too late.

The Wages of Financial Sin

"The western world has embarked on a speculative journey for which all the historical precedents are ominous."

Peter Warburton[i]

Make no mistake about it - if the Federal Reserve is holding back on interest rate cuts because of near-term inflation fears, it will be fiddling while Rome burns. The collapse of the structured finance edifice must be understood as a highly deflationary event. The sell-off in the equity and credit markets signify a severe loss of confidence in the benchmarks of value established by market gatekeepers such as rating agencies, underwriters and market makers. A failure of the Federal Reserve to demonstrate that it recognizes the systemic threat posed by the collapse of structured finance and the subprime mortgage market could send the markets into a full-blown tailspin.

Fortunately, Federal Reserve Vice Chairman Kohn, in a November 28 speech, made it clear that the Fed is getting ready to act. He acknowledged that a change in market conditions had occurred that posed a threat to economic activity, and stated that uncertainties about the economic outlook were "unusually high." HCM expects a 50 basis point cut in both the Fed Funds rate and the Discount Rate at the December 11th meeting of the Federal Reserve's Open Market Committee accompanied by a statement confirming that the central bank will endeavor to remain ahead of the curve.

Article: Black Swans and Endogenous Uncertainty

Black Swans and Endogenous Uncertainty
by John Mauldin

December 7, 2007

-Ubiquity, Complexity Theory and Sandpiles
-Fingers of Instability
-A Stable Disequilibrium
-General Equilibrium with Endogenous Uncertainty
-Identity Theft and New York

How does the risk of default in California or Thailand get spread throughout the world, causing problem in money market funds in Europe and Florida? Yes, we can trace the linkages now, but was it possible to predict the crisis beforehand? And can we use what we learn to predict and hopefully hedge ourselves from the next crisis? Why do these things seem to be happening with more frequency? This week we are going to look at some economic theories which will give us some insight into the above questions. As it turns out, the more that individuals hedge their risk in economic markets - the larger the network - the more the entire system is put at risk. There is a lot of ground to cover, so we will jump right in.

Before we get to the economic theory, let's review part of a letter I wrote in April of 2006 discussing chaos theory, as it will give us a useful mind picture to understand the latter part of the letter. This was part of a letter where I laid out my thoughts that we would indeed experience a crisis in the future along the lines we are now seeing.

Ubiquity, Complexity Theory and Sandpiles

We are going to start our explorations with excerpts from a very important book by Mark Buchanan call "Ubiquity, Why Catastrophes Happen." I HIGHLY recommend it to those of you who like me are trying to understand the complexity of the markets. Not directly about investing, although he touches on it, it is about chaos theory, complexity theory and critical states. It is written in a manner any layman can understand. There are no equations, just easy to grasp well-written stories and analogies. (see or buy on amazon.com)

Article: Icebergs

Icebergs
John Riley, Chief Strategist
12/03/07

Did you hear about the Fed Chairman that had his head in the oven and his feet in the freezer? He told Congress, "On average, I'm comfortable."

Dead, but comfortable. This is the danger of using some averages, they don't tell the whole story and it is the methodology that the Federal Reserve is following.

Three Icebergs, Two Imported, One Domestic
What is going on in our economy is out of the Federal Reserve's control. There is nothing they can do about it. It is like an iceberg bearing down on us and everybody can see it, but nobody can do anything about it. (It's actually 3 icebergs, more on them later.)

Article: The blood on Greenspan's hands

The former Federal Reserve chief now admits there is a housing bubble, yet he still refuses to take the blame he so richly deserves.

By Bill Fleckenstein

A debate is beginning to rage about where to lay blame for the mortgage mess: the lenders or the borrowers. In some cases, I'd point to the lenders; in others, the borrowers; and beyond that, a combination of both.

But I think that where absolutely ridiculous mortgages were issued to folks who didn't make much money and could be considered somewhat naive, the blame ought to fall more on the lenders. Of course, the lenders didn't worry about their own exposure to risk, as they passed these mortgages on to financial companies. The latter sliced and diced them into derivatives -- products that, in turn, got peddled to the next bag holder.

Claiming innocence abroad

Alan Greenspan

Article: The Stealth Public Bailout of Reckless "Countrywide": Privatizing Profits and Socializing Losses

Yet another excellent article. See yesterday's piece and the day before's as well.

Nouriel Roubini | Nov 27, 2007

The letter by Senator Schumer questioning the $51.1 billion that Countrywide borrowed from the Federal Home Loan Bank system (specifically the Federal Home Loan Bank of Atlanta) has finally revealed the little dirty secret - that was known only to a few insiders and was noticed on a blog a month ago - that Countrywide, the largest US mortgage lender, has received a massive stealth public bailout that has put at severe risk taxpayers' money. Here is Countrywide - the premier poster child financial institution of the reckless and predatory lending practices of the last few years - getting in severe financial trouble because of its rotten lending practice in subprime, near-prime and prime mortgages - and whose CEO Mozilo is under SEC investigation for potentially illegal activities - now receiving a massive $51.1 billion of public bailout money with little official supervision of such lending. Mozilo is under investigation for his accelerated sales of Countrywide stock under a 10b5-1 plan. Mozilo has made more than $100 million on stock sales this year, while Countrywide shares collapsed more than 50%.

Article: The Coming US Consumption Slowdown that Will Trigger an Economy-Wide Hard Landing

(click on the chart above to have it popup in a new window so you can read my comments)

I chose the chart above to go with the following article because it shows that U.S. Private Fixed Investment (PFI) is already at recessionary levels. As you can see, the chart goes back 25 years, covering the past three recessions, the official start and end dates of which are called -- well after the fact -- by the Business Cycle Dating Committee, National Bureau of Economic Research.

Key points are as follows:

Article: Goodbye, expansion; hello, recession

This is old news for anyone who follows markets and economics and thinks for themselves, but it's interesting that the mainstream media is finally starting to understand. See the following article from CBS MarketWatch. As a sidenote, a rally attempt should appear soon, after the swift fall from recent market highs. Cheers!

Goodbye, expansion; hello, recession
Commentary: Signs are everywhere, particularly in the plight of the consumer
By Dr. Irwin Kellner, MarketWatch
Last Update: 11:29 PM ET Nov 12, 2007

PORT WASHINGTON, N.Y. (MarketWatch) -- No matter where you look, signs of a recession are beginning to proliferate. Indeed, it's getting more and more difficult to come up with reasons to expect this aging expansion to continue.

Blurb: China to Move From Dollar to 'Stronger' Currencies

Remember what happened to the dollar before October 1987? Doesn't mean history repeats, but it might rhyme. Cheers, chrisco

The dollar slumped to record lows and stock index futures fell sharply early Wednesday after Chinese officials said they would further diversify the nation's $1.43 trillion in foreign reserves in view of a declining U.S. dollar. "We will favor stronger currencies over weaker ones, and will readjust accordingly," said Cheng Siwei, vice chairman of China's National People's Congress, told a conference in Beijing. Siwei's comments sent the euro to a new record high of $1.4703, gold futures up $20 to as high as $848, and oil futures as high as $98.6. At the same conference...

Article: Roots of credit crisis laid at Fed's door

Just as we've been saying for years... and why AlansBubble.com exists.
Click here for the CBS MarketWatch.com article. Cheers!

Equity Cheat Sheet

weak data = Fed ease, stocks rally
consensus data = lower volatility, stocks rally
strong data = economy strengthening, stocks rally
bank loses $4bln = bad news out of the way, stocks rally
oil spikes = great for energy companies, stocks rally
oil drops = great for the consumer, stocks rally
dollar plunges = great for multinationals, stocks rally
dollar spikes = lowers inflation, stocks rally
inflation spikes = will inflate all assets, stocks rally
inflation drops = improves earnings quality, stocks rally

Source: From a friend via email.

Moral Hazard - Thanks, Ben!

August 11, 2007
Market Swings Are First Crisis for Fed Chief
By LOUIS UCHITELLE

Should the Federal Reserve help bail out billionaire hedge fund managers and millionaire traders — the very people who bought the risky mortgages that led to the current market panic?

That, in essence, is the question swirling around Ben S. Bernanke as he confronts the first crisis of his 18 months as Fed chairman.

Alan's Bubble Is Back (also Wash Post article)

Well, we've finally dusted off AlansBubble.com, bringing it back as a standalone memorial site dedicated to Alan Greenspan... Check it out and sign the guestbook. Cheers!

PS: Click through to read today's Washington Post article about Greenspan, the deflating housing and mortgage bubbles and who knew what, when. The media, congress and public are finally figuring it out...

Here's IBD's Take On Yesterday's Action

As a follow up to my "quick update" yesterday, here is IBD's take on the rally:

1) Because the correction lasted less than a month, there hasn’t been much time for stocks to form proper, seven-week bases.

2) Also remember that while every market uptrend has started with a follow-through, there have been some false signals.

3) Wednesday’s bottoming signal came less than four weeks from the start of the correction. That’s unusually brief for a correction to work itself out.

3) Over the past decade, most successful follow-throughs occurred at least two months from the top. Moreover, follow-throughs occurring four or five weeks after a top were usually unsuccessful.

Click through to read the entire article:

Bill Gross's Investment Outlook

Bill Gross always has something to say... Click through to read his latest:

The Day The Bull Market Died

NASDAQ Update: 4:20 AM NYC time, February 28th: Just a quick note to mark an important day, the end of an era, the death of an old bull market. Indeed, yesterday marked, with a grand finale that nobody could miss, the end of the 1,599-day (4.37-year), 1,423-point (128%) rally in the NASDAQ. A fine rally it has been, enriching many a needy investor, speculator, investment banker and trader. Alas...

Quick Housing / Recession Update

Some grist for the mill:

Euro Breaks $1.30 - First Time Since April 2005

As discussed in my posts going back to November 2004, the dollar has serious fundamental and technical problems. The chart above is the latest manifestation, showing the Euro Currency ETF (Amex: FXE) breaking to a high against the dollar. More problems can be expected over time, though with such as vicious thrashing over the past few days a short-term counter-trend is likely. New positions could be considered on that bounce’s failure. See below for the blurb on CBSMarketWatch.com’s home page today. Cheers!

This Is The Main Reason Why We’re Looking at a Recession in 2007

That’s why the yield curve has been inverted and why the current bull market extension is just that, an extension of an old, tired bull market, not the begging of a new one. With a very high probability, we can’t have a new bull market until after we have a new bear market. See my Housing Market Article Index, which goes back to October, 2004, just after I put my money where my mouth was and...

Relief Rally on Fed News - But...

The Cubes (NASDAQ: QQQQ): 3:45 AM NYC time, June 30th: Just a quick post to note Thursday’s huge relief rally after Tuesday’s shakeout and Wednesday’s intraday reversal to the upside. The Cubes were finally able to close above the 20-day EMA, after almost two months of trying and failing to do so. The 3% rally was the biggest since...

Paulson on the Dollar

At his confirmation hearing, Treasury Secretary nominee Henry Paulson, Goldman Sachs’ chairman, told senators that he'll focus on improving U.S.’ “competitive position” in trade. Cubetrader.com translation: Hank likes a weak dollar strategy.

America's Debt: The biggest A.R.M. in the world

From the June 11th NYT Magazine (cover story):

CHAPTER 1: THE NATION; Reasons To Worry
By NIALL FERGUSON (NYT) 3026 words
Published: June 11, 2006

Think of the economy of the United States as a dinosaur -- one of those huge herbivores whose bulk shook the ground. A brachiosaur. A brontosaur. A diplodocus. Like them, the U.S. economy is mind-bogglingly enormous -- two and a half times as big as the next largest economy in the world and almost as large as that of the six other members of the Group of Seven combined. The catch is that it has to consume almost incessantly to sustain its great heft.

Waiting on the Fed (and BOB)

Monday was the quietest volume in weeks for the Cubes (NASDAQ: QQQQ) and major stock market indexes, which are all holding their breath for Wednesday’s Fed news, which is expected to bring perhaps the final 1/4-point Fed Funds rate hike. The potentially market-moving part of the show will, of course, be the reading of the minutes and subsequent market reaction (dollar, equity, fixed income).

Some of the slogans going around Wall Street right now are...

Article: Protection from a Falling Dollar

Seems like the recent fall in the dollar has finally gotten people's radar screens blinking. See the following article from the April 27th edition of BusinessWeek for Merrill Lynch Japan's doomsday scenario.

Protection from a Falling Dollar
By Jesper Koll

Merrill Lynch's Jesper Koll argues that Japan, China, and Europe must focus on domestic growth and beat the U.S. at its own game

Growing numbers of analysts and economists worldwide are trying to forecast the fate of financial markets based on predictions about what will happen to economies. Unfortunately, much of this may very well be a waste of time. Often it isn't what's happening to economies that explains financial markets. Rather, what's happening to financial markets is an indicator of what will happen to economies. Specifically in 2006, the issue is not whether the economic recoveries in China, Japan, or Europe warrant a stronger yuan, yen, or euro, but whether enough has been done to cushion against a collapse of the dollar.

Dollar vs. Euro Resfresher Course

From today’s IBD, a good refresher article on the U.S. dollar vs. the Euro and other currencies. Cheers!

Another "No Shit Sherlock" Moment...

This WSJ article comes AFTER a major dollar downdraft and after my most recent Euro vs. Dollar and FXE posts (about 5-points ago). In fact, this article coming now and receiving prominent placement by the WSJ may signal a short-term top/time to take profits and look for the next good entry point. Cheers!

Krugman: Why haven't we paid a price for our trade deficit? Just you wait...

Usually I post these Krugman articles (with a 3-day lag) on my political / anti-Bush blog, but this article's economic focus brings it on over to Cubetrader.com and gets it published right now, with no lag. Check it out. Cheers!

PS: He is only talking about one of the twin deficits: the trade deficit. The other elephant in the room that nobody seems to care about is the fiscal deficit. How did we get a record fiscal deficit, you ask? Take a record fiscal surplus, add George Bush, the most irresponsible president in U.S. history and the one that is probably overseeing the topping of the USA. Thanks George. A-hole.

Did You Take Your Second Chance?

As mentioned in my April 8th posting, there was a terrific second chance to get long Euro / Short dollars… Well, today’s almost 2-point Euro rally was your gift if you got in on the trade. Cheers! PS: If you made some money from this and want to say thanks, you can try out the Make a Donation button at the top left of my blog :)

Euro vs. Dollar - Head and Shoulders Almost Complete

Here we see the dollar, as represented by the Euro Trust ETF (AMEX: FXE), taking it's largest 1-day plunge against the Euro in two months. The dollar selling / Euro buying took us right to the neckline of a 3-month head-and-shoulders-type formation (see chart). A close above $1.22 could mean a quick move to test $1.23. A close above 1.23 could signal the beginning of the more significant move down for the dollar I expect for 2006, likely against most other major currencies. See the continuation of this post for the Gold chart.

Euro vs. Dollar Update

Just a quick post to note the 5-day, 3-point slide in the Euro ETF (Amex: FXE). This puts the dollar at new 1-month lows and close to longer term lows. You know how I feel about the dollar. We’ll see how it goes from here. Cheers!

Inversion Update

The chart above covers the entire period to date of the now much talked about yield curve inversion, particularly the inversion between the 2-year treasury note and the 10-year treasury note. This chart shows the actual yields on the respective notes to show how the spread changed as yields rose about 50 basis points (1/2 of one percent) from the end of December through today. That’s a big move in a short period of time. Ok, back to the chart…

Gong Part 2 - The Dollar Slide

Here we see a chart of the first-ever currency ETF (exchange traded fund), the Euro Currency Trust (AMEX: FXE).  The chart shows the entire trading history of the FXE.  The short green line pierced by today’s candlestick is the 50-day EMA (exponential moving average), which most of you know by now is one of my favorite tools.  Today’s move reflects the 1.1% beating the dollar took vs. the Euro after the ECB (European Central Bank) raised its overnight rate and boosted its inflation outlook.

.

Note, this “news” is not so important...

Taking the Pulse of America (Income, Assets, Liabilities, Net Worth)

Here’s the short version.  Click to read the continuation of this post for today’s Washington Post article and a blurb from IBD.