The Bailout

The housing market is still locked in a self-reinforcing deflationary cycle. Until the cycle is broken there are only two ways out. 1. Government intervention. 2. Collapse to much lower than equilibrium levels.



A few words on each of these.

1. Government intervention won't work unless it's done in the right way. Paulson's plan won't work unless the government pays more than the mark to market value for MBS. Pro on this bill is that it may straighten out who now owns these mortgages and eliminate barriers to working out new payment terms. Therefore, this plan should be combined with an effort to restructure delinquent loans. Con is paying more than market value.

2. Collapse may happen because there seems to me to be a belief that it can't happen. We think we're too smart, etc. This is exactly the sentiment that precedes the fall, in my opinion. I just saw a front page Yahoo! newsline that read "The Depression: Why It Can't Happen Today." Con is depression. Pro is prices of everything get cheaper.

And now I want to talk about the dollar. DJIA down 800, dollar up. DJIA up 500, dollar up. What gives? Bankruptcies all over Europe. Canadian dollar dropping 2 cents as well. This trend will continue.

Deflation is here. History may very well look back on this day and say Bernanke didn't print enough.

Hedge Funds

According to Russ Winter, the Hedgie Wedgie Funds have $600 billion in cash. They're hoarding in expectation of huge redemption requests due by the end of the month. Here's my thinking: the funds are scared and are overly cautious. Any funds that have money left over will have a lot of money to put into the market. Where? It's got to go into commodities - the sector's been so beaten down it's unbelievable. I need to do a review of my portfolio and see how much room I have to buy stuff. Alright, I'm doing it: CLF at $49.18

It's looking cheap out there

I'm looking at CLF today, which has fallen to $49 and change from $115 on July 30th. That's got to be overdone. They just signed three contracts through 2013 with strong pricing. I'm tempted to pick some up here. But then again, if I did, it would be a trading play, as I still believe that the fundamentals of the business will be weakening.

Another One Bites the Dust

What I find really interesting is the amount of losses that have built up in the banks that are failing now. WaMu had $31 billion. Wachovia's assets will be written down by $42 billion by Citigroup. It's amazing to me that these losses weren't reported earlier. Why not? Because then these banks would have been closed earlier.

While the whole banking system is showing some serious strain, in the long run, this is bullish. These writedowns need to occur. It will still take years to rebuild, but this is a step in the right direction. When you have a problem, the first step to recovery is to admit the problem.

So, I just took a 50% hit on my bottomfishing expedition with NCC. But, due to the luck I've had with the rest of my portfolio, I'm still up. Slightly. The only thing that's not working the way I thought it would is PWE. I'm afraid that I've misjudged how tied to the price of oil they are.

The only player on Wall St. not to make a move yet is Goldman. Do they buy NCC here?

Oh, and don't forget the bonds. The 30-yr is up to 4.23% from 4.35%.

The smart money from Barron's has the universal opinion that the bailout will give a short-term bounce (a month or two) but we will be right back in the bear market through the end of the year.

What does this mean? The bounce is already priced in. Time to sell short now. The only thing left is tech. However, I don't know the sector too well, so I'll have to make some room on my portfolio if I want to short it. But I may just wait. The VIX is at 39 (!!!) and the bailout will undoubtedly bring in some more buyers for stocks. I just believe that the bailout bounce will be shorter rather than longer. Maybe just a week.

Couldn't Help Myself! Part II

NCC is now down over 45%. I just bought a 5% of portfolio position at $2.73.

Maybe I'm greedy and I want my own WaMu steal. But I think the reward is a good bank. I think NCC survives this.

In other news, the Baltic Dry Index is down 15% in the past two days. GDP was revised down 0.5%. Japanese exports to the US dropped 22% last month. Capex is down. Manufacturing is down. Heavy equipment and steel inventories are up.

All this = raw materials DOWN!

But everything's been beaten with the ugly stick for the past three months: CLF, ACI, RIO, X, POT, MOS, etc. Oil is the only thing up, so maybe I'll short some more.

What a Steal!

JPM buys WaMu from the FDIC for $1.9 billion. Actually, they bought the deposit-taking subsidiary. The holding company is now left with all the debt and nothing else, according to excellent research from Seekingalpha.com.

They will write off $31 out of $307 billion in assets.

And here's the kicker: they don't assume any of WaMu's $89 billion in debt, and they pay nothing for equity.

What a steal!

The question now is, do I buy any NCC? They're down 32% on the WaMu news...

Or do I pay homage to Jamie Dimon and buy JPM? Well, how much is WaMu worth? JPM wrote down WaMu assets by $18/(WaMu)share ($31 billion / 1.7 billion WaMu shares). But they dumped off $89 billion in debt ($52/share). In effect, they got paid $56 billion to pick up WaMu. Caveat: this could be lowered due to future writedowns. However, those will probably be minimal, as WaMu already has $12-15 billion to cover loan losses.

I might not be able to control myself.

This might go down as one of the greatest deals of all time.

Couldn't Help Myself!

So I read about how the Detroit just got $25 billion in bailout loans from the government.

Next thing I see is XGM trading at almost the 52-wk low. DUH! 20% yield. Bought it. There's no public outcry about a bailout for the automakers. I didn't expect this would be so easy for them. Downside = none. Do you think Washington will let GM go bankrupt? Upside = 20% for the next 20 years. Only problem is no dividend reinvestment plan.

Bought XGM at $8.93.

You Know It's a Bubble When...

Priceline had a market cap in 1999 that was greater than all the US airlines combined.

Today's bubble indicators are Barclays, the British investment bank. Barclays has leveraged their assets 60X, for a value currently greater than the whole British economy.

And just so we don't neglect our beloved homeland, news is out that 15% of homeowners or 7.5 million households are now spending over 50% of their income on their money losing house. This is UP from 7.1 million a year ago.

Numbers above courtesy of David Rosenberg, Merrill Lynch.

Trade

Bought DUG (Ultrashort Oil and Gas) at $35.87 today. Oil is at $106. I've been telling everyone that oil's going down to $50 next year. I'd be really silly not to put my money where my mouth is.

Just waiting on everything else. The bailout's up in the air, WaMu's still on life support, etc. There's just too much up in the air, so I've got to keep as much powder dry as I can.

What I'm Watching Out For

I think that I will have several opportunities come out of this current situation.

First of all, the temporary dollar weakness that is resulting from the giant bailout proposal has given me a golden opportunity to load up on some more bonds. I did buy back in halfway much too soon. However, as Merrill's Rosenberg says, the bond selloff after RTC was announced was a "great buying opportunity." I'm going to wait a little until after it's passed.

Secondly, as the economic numbers continue to show increasing global weakness, I need to short commodities. So, I am keeping my eyes open for any nice bounces in commodities. Oil, for one, is back up to $107.

One last thing: tech. It's held up too well. Tech has gotten a huge chunk of their profits from overseas due to global growth and dollar weakness. Now there's global recession and dollar strength. Tech is also the most overpriced sector, even more perhaps than commodities. The problem with tech, however, is that I don't know the sector, so I would need to short an index.

And one last thing. I'm going to look up the "frontier" markets ETF as a possible short. Frontier markets is just what it sounds like: the wild west in the early 1800's. Bloodthirsty natives, bandits, and natural resources to fight over. Only problem is they may be down too much, but being at the bottom of the pile, they'll probably never be down too much.

The Moral Hazard of Moral Hazard

First there was "too big to fail." This created a moral hazard which encouraged risky plays like PIMCO's forays into Lehman bonds. "Uh, oh. We have too many bailouts. If we don't let someone fail, we'll have to bail out everyone." So, they let Lehman Bros. go bankrupt. And, they tried to create a firewall by bailing out the next target: Merrill Lynch. Brilliant move. Except for one thing: Paulson and Bernanke forgot that there was someone right behind Merrill. AIG stepped right into place, probably in deeper financial straits because of the Lehman bankruptcy.

So, we have these moral hazards, and counter moral hazards that border on the metaphysical. If there's a bailout, then risky behavior is encouraged. However, most of the risky behavior as been committed long ago. Joe six-pack's pension fund is getting whallopped now. This makes bailouts more palatable for everyone.

Now that there is no such thing as "too big to fail," we have another problem. The government is on its own. Why should there be another Bank of America/Merrill Lynch bailout when you can wait for your mark to go bankrupt and pick over the bones. Just see Barclays getting the piece of Lehman that they wanted for a song.

Boy am I glad I got out of most of my shorts this week! Whew!

Closing Positions

I covered my shorts on GGP and ANF today. While the fear and risk in the financial system is real, I also believe that some of the selling is also caused by deleveraging. However, there must be money left in the system because gold and oil jumped back up. So, at some point, there's got to be a pop here. But then again, the DJIA's currently down 400 with five minutes to go. Well, I still have some shorts, and my best position today was OZN. How about that? I took 57 points of profit off the table, but maybe I didn't take enough. We'll see.

Credit Crunch Bites Down Hard!

Some important lending rates as of today:

Fed's lending rate to AIG 3-month LIBOR (3.06%) + 850 basis points = 11.56%

Overnight asset-backed commercial paper: was 2.15% to 3.5% on Monday night. Currently 4% to 8%.

MosPrime (Russia) overnight lending rate: 11.1%

And then there's this rate: 3-month Treasuries: 0.17%

Interesting news:

Russia has closed the stock market to stem the panic. The MICEX index has plunged 25% in three days. Why? Three reasons: 1. Oil down. 2. Distrust of warlike government. 3. Capital flight that has become a self-reinforcing cycle and self-fulfilling prophecy. This causes a highly leveraged bubble market to implode. "`Every day Russia falls due to people not being able to meet margin calls,' said Marina Akopian manager of the Hexam EMEA Absolute Return Fund in London" (Bloomberg).

What else is there to say? The credit crunch is spreading worldwide. Deflation is devouring bubbles like a hoard of locusts. Trillion-dollar companies like AIG are out of money. That said, I'm not sure what to do about it. I'm trying to have patience and wait for a commodity bounce. Maybe I should also look for an opportunity to sell FXP, the ultrashort Shanghai 25 index ETF. It disappointed me when it didn't drop along with the mainland shares. I have since learned that it tracks Hong Kong much more closely. But I'm stubborn. I want at least $150 for it. I've had to hold it since February, for Pete's sake. And eventually, it's gotta be worth $200. Also, the PE ratio is 15. 15?!? You got to be kidding me. This market will be lucky if it holds at 7.

Other than that, the only thing that worries me is whether I should have bought PWE and ALD yesterday. And is it time to pull the plug and give up on IPSU? Heck, they've got $9/share in cash. It's too late to get out at $12. Then again, it depends on what the meaning of "cash" is.

And one last thing. I was discussing the impact of lower gasoline prices on the economy with a fellow economically-minded soul. He was of the opinion that the drop in gas prices would stimulate the economy. I said that te new direction was down, and that whatever the stimulus, the weakness in the economy was the greater force, and would coontinue to pull down gas prices. Here is confirmation of this view - with numbers to boot - from Merrill Lynch's David Rosenberg.

Job losses offsetting drop at the gas pump
Ever since we highlighted that every penny at the pumps (down) gives
households an extra $1.3 bln of discretionary income to spend, we have been inundated with calls over this factoid. The search for the needle in the haystack is ongoing – but here is where reality bites: Every 30,000 decline in employment wipes out that $1.3 billion of gas price relief – so while gasoline prices are down 30 cents from the summertime peak, which is $40 bln of extra cash flow, the economy has shed 144,000 jobs, which has amounted to a $25 billion annualized decline in income (ie. offsetting two-thirds of the positive cash flow impact from lower gasoline prices).

I wonder if we can predict future job losses by watching gas prices...

Deflation Is Here

Bloomberg reports that CPI dropped 0.1% in August, after rising 0.8% in July.

Merrill Lynch economist David Rosenberg is a genius. He called this one perfectly. He's also the main reason I bought the long bond.

This means that deflation is here. Inflation is over. This will be my new investing theme. I will look for a re-entry point for bonds. I will look to short tech stocks as CAPEX plunges. I will look for opportunities to short international equities, especially basic commodity producers, and I will wait for opportunities to short individual commodities themselves.

Trades!

When I looked at the market today, the first thing I saw was the long bond up 5%! So I called Schwab and sold it. Immediately, no second thoughts, no questions asked. 5%! I don't think that has ever happened in the history of the US.

Then I looked at the stock market to see if it was still there. It was. So I closed shorts on DIG (oil), COF (my biggest position), and sold SKF (ultrashort financials).

Then while I was on a roll, I bought PWE and ALD. I'm almost certain Bernanke will cut; he pumped today until the stop out was 1.75% and there was still a slight drain on the system from maturing repos. So, I think the worst is over for US markets.

Well, how can the bond market take that much money out of the market and the DJIA still doesn't flop? I think that investors are bringing their money back from overseas markets. However, I still held onto shorts in commercial real estate (GGP),
retail (ANF, DECK, AMZN), homebuilders (ITB, KBH) because the govt bailout of Fannie/Freddie will prompt tighter mortgage rules, and international shorts (FXP, BCS).

So, this completely changes around my risk profile of my portfolio. Leverage is down to 1.31 times from 2.71 times. This gives me a lot of room to work.

Here's the risk picture:

US equity - long: 26% (up from 21%)
US equity - short: 43% (down from 80%)
Intl equity - long: 20% (up from 8%)
Intl equity - short: 32% (up from 27%)
Forex - long: 0 (no change)
Forex - short: 9% (no change)
Commodities - long: 0 (no change)
Commodities - short: 0 (down from 8%)
Options: 0 (no change)
Debt/Duration: 0 (down from 17,000/30)
Cash/Margin: 41%/82% (up from -49%/62%)
Leverage: 1.31x (down from 2.71x)

Does the Fed Trust the Banks?

Apparently not. They just lent out $70 billion in cash in exchange for agency and mortgage-backed securities. While the $70 billion is not surprising, given that the banks are raising $70 billion for their "Bid on Their Own Crap" fund, the price was stunning: weighted averages ranging from 4.63% to 5.46%. A quick check on Bloomberg showed 3-month LIBOR at 2.82%. Bullshit! All lies! Why would banks pay the Fed up to 6.26% if they could borrow from other banks at 2.82%?

This is a lot worse than it looks. It means that the banks HAVE NO MONEY.

They are paying 6% for cash from the Fed. They can't lend to each other, and they probably wouldn't if they could. It costs too much to hedge the risk, if it's possible.

The whole banking system has just become insolvent. Now there are two ways out:
Option 1:
Take over all the bad banks. This is every bank in the country if need be. Wipe out all common and preferred stockholders, all unsecured debtholders, and 50% of all senior debtholders. Recapitalize the banking system with some of the 50% of senior debt taken from the debtholders. Fed guarantees all deposits, even uninsured by FDIC.
Option 2:
USA becomes Japan, 1990-present. Only worse.

Rethinking

WaMu's bonds now cost 50% up front plus 5% a year to insure. What does this mean? This means that WaMu cannot borrow money and will be unable to refinance bonds as they come due. A quick look at WaMu's annual report shows that they borrowed over $40 billion from the Federal Home Loan Bank last year. They also had another $38 bil in other debt. On top of that, AIG shareholders have quickly abandoned the sinking ship, pushing the stock down -50%. I told you they should have taken whatever they could get. Also, Bank of America is currently down 15%. That makes the Merrill deal worth 15% less.

Of course it's down. Anyone owning Merrill shares will hedge their losses by selling BAC. Duh-uh! Maybe it's greedy, but I'm holding out for some big payoffs. I don't think the market is taking the Lehman bankrupcy seriously enough. The Fed didn't let them fail because they weren't important. The Fed let them fail because they had to.

Only Down 300?

The DOW is only down 288 points as I (begin to) write this. And why not? The government did the best thing they could. Here's an interesting rundown of the Lehman bagholders from Marketwatch. What caught my eye is that Lehman lists only $613 in debts against $639 in assets. How can a firm go bankrupt with more assets than debts? $26 billion more? A cushion of more than 4%?

I can't wait to see what those assets get bought for when Lehman is liquidated. Then it will get very interesting. I think I'm going to close out my BCS and C shorts today, and possibly my SKF as well. The government did the best they could, and they may chase the shorts out this week with a rate cut or some other shenanigans. However, when Lehman is liquidated, there will be a lot of prices for the investment banks to mark stuff to market. If I short anything else, it will be QQQQ, on the belief that as the banking crisis spreads, tech spending will plunge.

Worse than We Thought

I logged on to Bloomberg tonight eagerly anticipating some brightly-wrapped gift from the Wall Street banks to investors. In the back of my mind, however, there was a nagging little voice which asked, "What if the Fed won't save Lehman because they stand too much to lose with the Treasury for MBS swap?" Granted, I don't know how much Lehman traded for Treasuries from the Fed, and also there haven't been any trades for months now. On the other hand, the total traded is over $400 billion. The Fed is on the hook now. The can't afford another bailout, and everyone else is out of money.

Well, almost. They can still manage to cough up $70 billion, probably to fund a facility to dump the worst assets into and provide fake bids for much of the rest of the investment banks' holdings. Here are the juicy details from Bloomberg:

The Federal Reserve widened the collateral it accepts for emergency loans to securities firms, helping Wall Street weather a Lehman Brothers Holdings Inc. bankruptcy filing.

A group of 10 banks that includes JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. separately formed a $70 billion fund to ensure market liquidity.

Oh, the magic "liquidity" word. What will the Fed accept now?

The Fed will now accept equities in the Primary Dealer Credit Facility, its program for lending cash directly to securities firms, in addition to investment-grade debt.

What remains to be seen is how much of this $70 billion is really coming from the Fed.

In other news, AIG is in trouble and needs to raise cash. According to the Financial Times:

American International Group, the US insurer, is seeking to raise $10bn-$20bn (£5.6bn-£11.1bn) in equity from buy-out investors that could include Kohlberg Kravis Roberts, Texas Pacific Group and JC Flowers, as part of an emergency plan to shore up its balance sheet.

AIG has also petitioned to be allowed to borrow from the Federal Reserve’s discount window.

Bloomberg is reporting that AIG is seeking a $40 billion bridge loan from the Fed.

American International Group Inc., the insurer struggling to avoid credit downgrades, is seeking a $40 billion bridge loan from the Federal Reserve as it tries to sell assets, the New York Times reported. The insurer has turned down a private-equity investment because it would have meant handing over control of the company.

Standard & Poor's said Sept. 12 it may downgrade AIG's credit ratings because the share declines may crimp the insurer's access to capital. A ratings cut may have ``a material adverse effect on AIG's liquidity'' and trigger more than $13 billion in collateral calls from debt investors who bought the swaps, the insurer said in an Aug. 6 filing. AIG has already posted $16.5 billion in collateral through July 31. A downgrade could also set off early termination of swaps that may cause $4.6 billion in payments,
AIG said.

Seems like everyone's lined up around the block asking the Fed for handouts. And why not? Where's the money going to come from? I really don't know what AIG is thinking here. The private equity companies know that their time has come and they will get their deals. AIG is toast.

They should have done the smart thing and taken the money and run while they had the chance. Just like Merrill Lynch. See "Bank of America Said to Buy Merrill for $44 Billion." Sweet. They just got out for $29 a share. The only problem is that's in Bank of America stock.

I guess that Merrill's CEO John Thain isn't taking chances at becoming another Lehman Brothers. See "Lehman Said to Prepare Bankruptcy as Buyers Withdraw."
I think most people don't understand how dependent on daily borrowing the investment banks are. They really can't last more than a few days once their funding is pulled out from under them.

Looks like Bank of America is following the "let's make ourselves too big to fail" strategy. In the process, they are diluting their equity by about 30%. It still remains to be seen whether they will honor Countrywide's debt. I don't think they will. While they're at it, why not keep the good parts of Merrill and default on that debt as well?

What remains to be seen:

Will this cause a market crash?

Will the Fed cut rates on Tuesday?

Will this move 30-yr Treasuries to a new high?

How will the still unresolved situation at WaMu play out?

What does this all mean? The futures markets are showing a 300 point decline in the DOW. So, tomorrow might be a good day to take some profit on financial shorts. We shall see. Other than that, I need to keep a very sharp eye out for trading opportunities that may arise. If the banks are raising $70 bil, that has to come from somewhere. Some of it will undoubtedly come from the Fed. Some of it will also have to come from the market. If Treasuries sell off - a real long shot, but anything is possible, I will buy some more. I expect that commodity stocks will get dumped again. I expect that there will be a general flight to quality. If the selling gets bad enough, I may look for a bargain or two, but bottom feeding in this kind of environment is very risky. The risk doesn't seem to have the appropriate reward.

Failure!

There's an article from Reuters that says that Treasury Secretary Paulson won't bail out Lehman. I think at this point, the government has to let someone fail. Maybe not too badly, but I think they realize that they've got to let everything drop down a level.

This runs the risk of everything getting out of control, but I think it's out of control already. The Fannie/Freddie bailout stabilized the markets for one day.


There is one other thing we need to throw in the mix: Treasury yields are lower than they were a week ago. Paulson has to like that. It gives him a cushion for all the borrowing the Treasury has been doing with the huge deficit the government is running.


One other thing: WaMu is what's really important, not Lehman. According to recent financial docs, WaMu has $180 billion in deposits, of which $140-150 is FDIC insured. With WaMu in the news the last week, I've gotta believe that any rational person is yanking any funds that aren't insured. That's a lot of deposits for WaMu to lose.


On the other hand, do Paulson and Bernanke know how to do anything else except bailouts?


Nouriel Roubini said on Bloomberg that 50% of world GDP is contracting, which is a spread from only the US six months ago.


So, what we see here is that the fundamentals for commodities are terrible, but everyone seems to be pricing that in right now. If there was anything I'd short right now, I think it would be tech.

In the meantime, I keep liking my bonds more and more.

Watch Out for WaMu

While everyone's focused on Lehman Brothers, WaMu is on it's fourth down day in a row. They're currently trading at $2.13.

As for Lehman, they're toast. Actually, they're charred to a crisp. B of A is reporting 20% of its commercial real estate loans are currently non-paying, or in default. Lehman has $30 bil of this toxic waste. It's probably worth 60 cents on the dollar. I believe that the reason talks broke down with the KDB is that Lehman needs more than Neuberger Berman is worth to survive. Why give someone else a good deal if you're going to be left hanging anyway? Might as well say, "Fuck Off!" and pray for a bailout.

Speaking of which, anything can happen over the next couple of days to a week. But credit is still tightening, and deflation destroys equity values. The 30-year Treasury bounced off its resistance at 4.17% on Tuesday, and I expect will soon break through. When it does, the stock markets will plunge appropriately. We may even have to wait until the end of the month for this to happen, but it will.

Eery Calm

After the two wild days that began this week, today seems surreal. Maybe it's just the fog I woke up to this morning, but it seems appropriate. The big news is Lehman Brothers reporting losses a hair under expectations. Initially they got a boost, but they're already down. Also, they're lying through their teeth. If they thought they'd get a boost by just reporting a little better than consensus, they're wrong (well, technically not until the end of today). It's too obvious, and no one believes them any more. Now, supposedly they're going to sell everything off. They have buyers for everything. Really? What happened to all the buyers you had last week, and the week before that? And finally, what's left for the shareholders if you sell everything off?

And here's the quiet news: WaMu, which dropped 20% yesterday is down another 25% today, according too Bloomberg. Reuters is reporting that WaMu's CDS spreads are hitting records. Default expectations are at 45% for one year and 65% for five years. This kind of market is a self-fulfilling prophecy. I don't see how WaMu can survive this year. Is the FDIC prepared? No, of course not.

As far as my trades go, I'm not sure what to do here. I'm toying with the idea of buying some HTE or more PWE, due to natural gas being driven down by the hedgies. I'm also thinking of closing my oil short. I think too many traders expect the bottom to fall out, should the psychological $100 floor be breached. On the contrary, anyone with the firepower would be wise to defend the floor at all costs, given the number of long-term energy bulls out there. I would not be surprised if oil dropped below $100 intraday, but closed higher.

With the VIX jumping over 25 yesterday, I'm starting to think about taking some profits, but given the fundamental weaknesses in the global economy, I have to hold on for a bigger payoff. In other words, I need to see my shorts hit new lows, or the VIX jump back over 30, or both. So, most likely, I will just hang tight right now and wait.

The Train has Left the Station

Commodities were down yesterday, despite the huge rally. Today, with the market dropping about 100, they're down even more. Well, there's nothing to do but watch the train disappear in the distance. Actually, I should be watching for the next one to come in.

I was thinking of selling my bonds yesterday, but they actually went up despite the rally. Seems that the bond bulls aren't going to let go of their prize now. Neither will I.

So, where are the opportunities now? Maybe short tech. Just read in David Rosenberg's Merrill Lynch report that CAPEX spending in the US is now down four months straight, and a worldwide survey shows 43% of companies intend to cut tech budgets.

Then there's Russ Winter's play on grocers, food producers, and other companies that benefit from the bursting of the commodity bubble, and sell a necessary product.

With PWE and HTE down to almost yearly lows, I think I might pick up some HTE here, for a juicy 18% yield. Also, the short interest in nat gas is bigger than ever going into the winter. A little bit of cooling from Gullible Warming, some European price hikes from Mother Russia, and natural gas will be a gold mine. Errr, I mean before gold decided to take up skydiving.

Other than that, there are those "green", and with oil near $100/barrel, completely inefficient waste of resources, the windmill and solar panel companies. They have also dropped like lead turds down a toilet.

Commercial property bears some looking at, as a short opportunity.

However, with everything down sooooo much, maybe I should also look to take a profit or two with any other big drops.

And here's a gem from Russ Winter:

Although there are other costs, mining in remote regions is primarily an energy intensive operation. In terms of the capex necessary to develop mines, and the costs of operation, the focus should be on the relationship between costs and the final product. Simplifying it just a bit, one ought to be comparing changes in the price of oil and diesel versus the price of gold. In the big commodity correction so far, gold has sold off about 22% from
its peak, and oil 32%. That relationship or arbitrage should be bullish for
these companies. Indeed if we saw gold drop to $750 gold and oil to $90, it
would be even more bullish. Instead these names have been massacred,
creating some very good values.

I like it! I think I will buy a little more OZN, which is now down to $0.69, or about 40% from where I was buying it earlier this year.

One Step Closer to the Grave

WaMu has been placed under "special regulatory supervision" by the Office of Thrift Supervision, according to Reuters. Need I say more?

And what about the Fannie and Freddie bailout?

Time to close out my oil short and long bond position at the end of the day if the rally holds. It also feels good to take some real profits when taking massive (7%) losses on paper.

Shift!

Why did I give up on gold today? I finally gave up because the market was down on weak economic reports in employment and retail sales.

But the dollar was up.

Why would the dollar be up on US economic weakness? Because the weakness has spread to the rest of the world. Enough people now think this will continue to spread. But with US economic weakness and the dollar continuing to spread, I gave up on gold. It's funny, I don't feel bad about taking a loss. What drives me crazy is not knowing what to do. Now I'm out. Great, now I can move on and find another opportunity.

This market behavior signals a shift. Today, the decline in oil and commodities did not raise financials. Instead, everything was down. With this breakdown from down commodities/up financials, to everything dropping, it's time to start looking to take a profit or two. I will also be watching for commodity bouncebacks to short.

Fundamental Opportunity, Trading Nightmare

I'm trying to figure out how to play this market. I've been convinced now for a month or so, that the commodity bubble has burst. So, I have a fundamental reason to short coal, oil, crack-up-boom plays, etc. However, while I now believe that the fundamentals are on my side, the trading half of any investment decision is not there.

I'm finding it very difficult and frustrating sitting on the sidelines as they drop like coconuts from palm trees in a hurricane.

In the meantime, here's more proof from Bloomberg: Daewoo Ship Shows Subprime Woes Overcome Drill Orders. For the first time in their history, they've had a canceled order for a container ship. Also in the article are stories about orders for 12 more ships being terminated for lack of initial payments.

Trades

Two from yesterday: closed RYL @ $24.34, TOL @ $24.77.

Gave up on gold today and sold $29.81.

Confirmation!

Here's confirmation that China's economy is in trouble: China's Manufacturing Contracts for Second Month. If this is what's happening in the "world's fastest-growing economy", where will commodity demand come from?

Trading update coming later today.

Is Korea a Preview for China?

According to The Times Online, South Korea may have currency troubles. The Won has plunged 7% against the dollar in the last month, and officials are worried about a flight from the Won.

And here's the interesting part:

Heavy investment by the Korean Government in Fannie, Freddie and other
US-related agency bonds has left a potentially huge liquidity problem - perhaps $50 billion (£27.4 billion) - in the foreign reserve portfolio. Some believe that Seoul might have no ammunition left to prevent a significant flight from the won. Fruitless currency intervention by South Korea - increasingly desperate-looking verbal and financial measures to fight the market trend - cost about $20 billion in July alone.

Where is the savings glut now? The Won is being squeezed by high inflation and a rapidly slowing economy. Worse, foreign reserves are suddenly "illiquid." We may get an answer to what happens later this month:

Moreoever, the situation could worsen dramatically: $6.7 billion of Korean bonds mature this month, potentially creating vast downward pressure on the won if a large part of that sum immediately flees abroad.

Korea’s foreign exchange reserves stand at $247 billion.

In the meantime, the Bank of Korea has decided to raise rates to 5.25%, choosing to strengthen the currency at the expense of weakening the economy. Ouch.

What will happen to Asia when they all try to sell Treasuries, Agencies, etc. at the same time?

More News on China

China: Market Breaks Below 2300

This article makes a couple of interesting points. However, there's nothing really new here. I still expect the Chinese economy to undergo the biggest overheat and subsequent implosion the world has ever seen. The collapse of the stock market has reduced national wealth by trillions. Chinese real estate is also in complete collapse. Now we learn that local governments have no money. Wherefore is thy savings glut, O miracle of China? The only miracle is how many western investors have been conned into believing in it. There is no doubt in my mind: China will collapse. Eventually, their currency will plunge, taking them into a depression. However, these things take time; I expect this in the next two years.

So, let me try to explain what's going on with the Chinese money supply. For the first six months of this year, smuggling foreign currency into China and Yuan out was a bigger business than all Chinese manufacturing combined. We're talking hundreds of billions here.

So, where do commodities come in? They are the vehicle for this smuggling. I don't know exactly how it works, but Chinese companies have been paying more for copper on the Shanghai exchange than on the London exchange. Why? Because they can pay in Yuan.

I wouldn't be surprised if Chinese companies didn't buy copper with Yuan, bring it to China, and then sell it back to someone else for Euros or Dollars or some other foreign currency. Of course, there would be an appropriate level of complexity and trading back and forth, as money laundering operations are never this simple. But I think I have the gist of it.

So the conclusion to all of this is that commodities are toast. And there you have it: The World According to Me.

I'd like to put my money where my mouth is. However, with trading considerations being an important part of my trading strategy, I think I need to be patient. While I may not short anything later today, I've got to close out GG and maybe also OZN. If the dollar strengthens a bunch more, gold will get killed.