Trade!

I'm getting out of my oil short.

Buy to cover 70 (10% position) USO @ $36.71, -11%

Just got a feeling that I need to get rid of this one. Oil keeps going up on dollar weakness, and the supply news hasn't even dented it. Time to cut my losses here. I just have a feeling that the oil will be likely to keep going up, until something changes.

Bernanke's "Oh, Shit!" Moment

According to Bloomberg, mortgage bonds backed by Fannie Mae and Freddie Mac are now higher than when the Fed announced they would buy $1,100,000,000,000 (trillion) worth of mortgage bonds. These purchases have almost completely been bought from Fannie and Freddie.



The 30-year Treasury now yields 4.56%. 30-year mortgage rates are now back up to 5.00%.



I believe that this is the beginning of a trend that's going to become stronger. What are the consequences? First of all, there's oil back up to $63. The problem with a trend like this is that the supply overhang, the OPEC cheating, and the lack of demand growth, could cause a spectacular plunge in prices if the support of dollar devaluation is removed.



One thing's for sure, the consumer is going to be in a bad way if mortgage rates go back up to 6.5% and oil goes to $100 by the end of the year.



Here's my question: Is the monetization of debt that won't be paid anyway bullish because it lightens the debt burden (making growth possible?), or is it bearish because everyone now realizes it won't be paid back?



Do I keep my oil short with its risk of a continuing slow rise in oil prices, or keep it for the opportunity of a sudden drastic plunge? I'll keep it, but get rid of it if it costs me too much.



My Euro short? It would've been a great play if the dollar hadn't plunged to a four-month low in the last couple of months. Should I hold on to it? It's not hurting me, so, why not?

In the meantime, the chart is telling me to sell ABX. It's almost 20% over the 50-day moving average, the stochastic is showing overbought levels, and the RSI is also very high. I'm closing all of it.

Sold 30% position in ABX @ $36.43. This closes two positions, for an average gain of +9%.

Magic!

I like this so much, I'm submitting it to The Onion.



Last April the Federal Reserve Board of Governors met behind closed doors and discussed printing even more money to finance Treasury and mortgage-backed security purchases. The Fed has already committed to $1,100,000,000,000 ($1.1 trillion) this year.





It's all part of Ben Bernanke's secret foolproof formula to raise GDP. First, the Fed prints money and deposits it with the Treasury. The Treasury then spends it as part of Obama's stimulating economic recovery plan. Since government spending counts as GDP, "We can theoretically raise GDP as much as we want," said a Fed official quoted on condition of anonymity.





Ben Bernanke is rumored to be discussing just how much stimulus the American people are prepared to accept with the Obama administration. "We would love to dial in 5% growth throughout the remainder of President Obama's term. However, we need to balance that with what the people are prepared to believe," said a senior White House staffer.





Believe it or not, Bernanke's breakthrough represents a what may be a new era in economic prosperity for the United States, and possibly the world. In an unusually candid moment, Bernanke admitted that the idea came to him while gardening at home. "I saw these new, green blades of grass coming up out of the ground and said to myself, 'those are the green shoots that will get the economy going again.' "



Herbert Von Slivovitz, a popular economics blogger, however, is skeptical. "There's no such thing as a free lunch. Just because I'm an Austrian economist doesn't mean I wear a tin-foil hat. Bernanke can print all he wants, but money isn't going to start growing on trees."

Jim Cramer, however, applauded Bernanke's efforts. "Boo-yah! Waah-hooo! (waves arms energetically) Woooo-Ha! Buy something!"

In other news, the stock market was down for no reason at all.

The Dollar

In April, George Soros said, “The US-dollar is not strong because people want to hold the dollar, but it’s strong because people have debt in dollars.” The corollary to this is that people are trying to pay off their debt. They are creating demand for the dollar.

Who are they? Definitely not the government. If anything, they're borrowing more, and printing money out of thin air. So, what happens when the Fed prints money? Well, it makes it easier to pay off the debt, but the payment is also worth less.

The natural reaction of lenders will be to call in the loans, or find ways to limit their losses. Step one is to stop lending more money to the U.S. We can see that China has already started doing this by shifting their Treasury purchases to short-term bills. Japan, another major buyer has seen its trade surplus plunge, which means that they will not have the dollars to continue buying Treasuries as they have in the past. China has also shifted a lot of its investment into procuring natural resources.

Look at the difference between oil and natural gas. When oil it its low of $30 earlier this year, natural gas was at $5. Now oil is at $60, and gas is under $4. Why? My best guess is that natural gas is produced locally, while oil is imported.

And then there's the Fed forecast, which it downgraded yesterday. The Fed now expects unemployment at the end of the year to be in a range of 9.2-9.6%. Are they joking? Their previous forecast of 8.8% made in Janruary lasted only three months, until unemployment hit 8.9% in April. I expect unemployment to hit 10.1% by the end of August. The "stress-free tests" (as Mish calls them) assume a 10.3% unemployment rate at the end of next year.

The Fed has gone down the dollar devaluation road. I don't expect them to reverse course. The Treasury will have massive funding shortfalls this year. Longer term Treasuries are going to be under lots of pressure. The place to be will be in commodities and gold.

The consumer is not coming back soon. Look at California: their sales tax receipts were down 50.9% in April 2009 from April 2008! That's truly an unbelievable drop. This is an apocalyptic and depressionary number. And these are the green shoots?

Recovery Discounted

With the S&P 500 up 40% off the lows, there's a huge recovery priced into the market.

Housing start numbers tell a different story. There's no sign of a bottom in housing. There's still a 10-month supply of housing (not counting foreclosures, which are the market in many areas of the country), sellers of foreclosed houses at Ventura County courthouse auctions are accepting about 20% below Zillow prices.

Since foreclosure sales are now the market in southern California, those prices, in my opinion, are more real than the published prices.

The credit card companies have tripled or quadrupled off the lows. Their actions tell a different story. Capital One is refusing to extend new credit to anyone who lives in Florida, even with an 800 FICO score. Amex is laying off another 4,000 people. Other credit card companies are refusing people accounts, "because they don't carry a balance." Of course not. With a 7-8% cost of funding for Amex, anyone who pays off their card is costing Amex 7-8%. Ouch!

And on top of this, we need to remember that the banks aren't fixed. By the Fed's own admission, the adverse scenario causes $599 billion in losses to the nations largest 19 banks. The WSJ calculates that smaller banks need another $200 billion, meaning that they are in even worse shape.

U.S. gasoline demand is now falling for the second year in a row. This tells me that the consumer is tapped out.

Government tax revenues are plunging much faster than forecast. This will put lots of pressure on Treasuries. The Fed now finds itself on the slippery slope of declining Treasury values. If the economy recovers, they're worthless because the yield is so low. If the economy doesn't, then tax revenues and overseas buying will reduce demand. The only thing that Treasuries have going for them is that if the equity markets drop again, that will give Treasuries a flight-to-safety boost. That's where I want to short them.

Trades

short 70 (10%) USO @ $32.71

The world is running out of storage for oil. US gasoline consumption is again declining yoy, indicating an ongoing consumer spending pullback. As the Iraqi oil minister said, it's time to cut back more production because it makes no economic sense to pump oil out of safe ground storage and into a boat or above-ground storage. Except it does make sense for sellers to sell now, while they're getting a very good price. Iraq is now the fourth-largest producer in OPEC. Tried to short 5% in DIG, but it's hard to borrow. USO is the next best thing.

I was just at the mall the other day, and Abercrombie & Fitch has 3 stores there: A&F, Hollister, and Ruehl. Ridiculous! There's no way that's sustainable. I'm going to short them.

short 88 (10%) ANF @ $26.01.

Ideas

I'm thinking that I may want to look at shorting retail stocks. Or maybe something that is consumer-dependent. The consumer is smart enough to be paying off debt, cutting back spending, and saving. If we do get inflation or dollar devaluation that drives up the cost of raw materials, that will not be good for retailers or manufacturers. Just a thought.

I'm an Idiot

But that's not going to keep me from following my gut here. It tells me the rally is over. First of all, the Stress Tests were an almost guaranteed generator of positive news until they came out. Now where's the positive news going to come from? Second, the market is no longer ignoring bad news.

I feel like an idiot shorting COF at $24 after buying it at $30. But I did anyway. I have to move fast here.

Short 100 (10% position) COF @ $23.89.

Shipping

13 boats in the picture outside of Singapore, 722 not in the picture. 300 more outside of Rotterdam. 150 outside of Gibraltar. 6% of the world's fleet doing nothing.

Green shoots or weeds?

Trade

Bough a 10% position in TBT, ultrashort 20+ yr. Treasury bonds. I might be a little early on this, but it's a small position for Treasuries, and I expect that when news gets bad again, the Fed will devalue the dollar more.

Buy 46 TBT @ $50.37.

Green Shoots and Ham

In "California Continues to Implode," Mish analyzes the budget disaster that is California. General Fund revenues for April 2009 were -39% compared to 2008. Sales taxes were down -50.9% from last April.

The bank stress tests have gone well. If we want zombie banks, that is. Bernanke's stress test contained a little publicized calculation that the banks actually needed $599 billion, or 688% more than the $76 billion reported. It all depends on how bad things get.

California shows us that things are very bad. And these are recent numbers, from last month. As far as the stock market goes, I'm thinking the banks have enough liquidity to manipulate the shorts and run it up. But I don't see how this helps main street.

The Obama administration is just playing politics. They have decided to keep the zombie banks alive, they have picked out the UAW union for special treatment, and they've upped the budget deficit to about 14% of GDP. This is not good.

Instead of fighting the market, I'm going to have to come up with anti-dollar plays. I already have gold, but it oil stays over $50, Seadrill is cheap here. Maybe oil is cheap here. I also have to think about shorting some Treasury bonds. Bernanke's going to have to buy more.

Cleaning House

Well, I've decided to stop fighting the market. It seems that the Fed's quantitative easing has juiced it. I thought that maybe with the last of the potential bad news out of the way - the stress tests - the market might turn down. But that didn't happen, so it's time to get out of the way.

Lee Adler on Radio Free Wall Street was talking about data that showed that money from the Fed to the primary dealers correlated very well with stock market direction. So maybe the whole market is just controled by the dealers. That would explain why the Fed Treasury buying has freed up the dealers to bid up stocks. Basically, they're selling Treasuries and buying stocks.

DIG -21%
SKF -31%
EWY -46
EWY -73
COF -107
COF -57

And here is a great point about banks in America and Japan, and saving vs. borrowing. Perhaps with the recent lending numbers out of China, we have found where the new borrowers will come from. If this is the case, there will be lots of commodities to be bought. China will buy more and more, and the US will devalue the dollar to pay off their debt. Well, that's a long, long, term scenario. Who knows what it means for today's market.

Rosenberg says the banks are holding cash instead of bonds.

Well, I'd like to do a couple of things, namely buy Seadrill on the recovery in oil prices, and short Treasuries. I won't short Treasuries, because I was looking for a bounce today on the better than expected unemployment numbers.

Green Shoots and Weeds

It seems the green shoots may be weeds. Cracks in the system appeared today, as poor bidding at a government bond auction sent the 30-yr and 10-yr down 4.5%. Good thing I got out of those bonds!

Trades -Ouch

Cleaning house should feel good. What is it about "taking" a loss? It's marked to market all the time anyway. Is it the abanonment of hope and the embrace of reality?
Anyway, I dumped FXP today, which shouldn't be a big deal, as it's shrunk so much that it's one of my smaller positions.

Maybe it's my pride that hurts most of all:

FXP: -83%, -78%, -70%, -52%.

Also forgot to post the bonds I sold yesterday:

30-year Treasuries: -9%, and -7%.

There. Now I feel better. I can start over with a clean slate. These positions were the ones I really was feeling on the wrong side of.

Stress Tests and Chrysler

First, the stress tests.

Bloomberg has verified my prediction. The banks need capital, but they can cover the shortfall by converting government preferred shares into common shares. This is a farce, but will give the Obama administration what it wants: control of the banks. I don't think this is a bullish development at all. Government run banks are rarely good for an economy.

We see more accounting nonsense from Citibank. Part of their plan is to sell 51% of Smith Barney to Morgan Stanley, so they can write up the holding value of the rest of it. Citi will keep crumbling until there's nothing left. And BAC needs $34 billion, supposedly. We're going to need more bailouts.

The rally in stocks doesn't help the economy, because it's not stabilizing any of the collateral that banks have lent against. Wages are falling. In the UK, they've fallen -5.8% from last year and in Japan, its -3.7%. Over here, withholding taxes have collapsed. Part of this is exaggerated by the tax breaks, but part of it is also job losses. Can you say deflation?

This would be good for Treasuries, and may yet be. However, I suspect that quantitative easing is the only thing holding them up right now. What backs the Federal Reserve Note? Not gold. In the Depression, when the dollar was backed by gold, what did they do? They devalued the dollar against gold. Now what's the dollar backed by? Treasuries. So if they want to devalue the dollar again, what do they do? Buy Treasuries. Treasuries up, dollar down. Or, more likely, just dollar down. And at some point people will realize that Treasuries are in dollars and they will go down too, as the government can make an endless supply.

And Chrysler? The solution is to sell Chrysler to Fiat? Are you kidding me? The French think they can run Chrysler when the Germans failed. This will be a fiasco. The only thing the French are good at is letting unions destroy companies. It looks like the bankruptcy judge will let this buyout take the fast track, but I think by the end of the year, Chrysler's back for more bailouts.

Ditching Bonds

I'm out of Treasuries today at a 4.06% ytm. Well, better late than never. I'm also thinking I need to get out of my China short. Increasing lending by 600% yoy may not be sustainable, but it's also not something worth fighting. If anything, they will definitely blow a bubble with this kind of activity. In what? Commodities? I'll have to keep an eye on this.

And the US market is completely ignoring all bad news now. Which tells me that the market is trading on something other than news. Probably just momentum.

Well, anyway, I will probably close out FXI tomorrow. I'm also thinking of closing EWY, as Korea seems to have escaped out of the debt spiral I thought they might fall into.

Politics

Oh, and by the way, the Obama administration is in a lose-lose situation again.

They're blaming the Chrysler bankruptcy on "predatory hedge funds." Well, maybe that will stick. But the truth of the matter is that pension funds and mutual funds hold most of the Chrysler debt. And they will cry "foul." The UAW is trying to get a better deal. Maybe they'll get it, and maybe they won't.

But mark my words, the Chrysler bankruptcy won't be quick or easy. If the administration gets their deal for the union, then investors will flee union companies. And if the investors win, they may just have to liquidate the company and shut it down. Who wants pissed-off workers?

Information

Two thing I've been thinking about.

When I was killing the market and put up a 50% return in the first six months of 2008, I had two advantages:

1. Info that was out of the mainstream. Bloggers such as Russ Winter were doing fantastic work on real default rates on mortgages, and other similar data.

2. I danced in and out of positions very quickly. But was this actually an advantage? I only got 20% on my Bear Stearns short.

Conclusion: I need to find better data sources. David Rosenberg is pretty good. He may in fact analyze the published numbers better than anyone else. But what I really need are numbers that most people haven't even heard of . Like the Markit index of MBS CDO's.

Anyway, the banks won't be helping the real economy any time soon. And more people still want to pay off debt than want to borrow. Mike, the guy I met at the bar today, said he's never going to have a car payment again. The US consumer is 70% of 30% of the world economy. If the savings rate goes from 4% to 8% this year, that takes 0.7% out of the world economy. Ouch!

Also, I looked at CBS and Chesapeak Energy. When the hedge funds were imploding, both of these companies had major owners dumping huge stakes on margin calls. You'd think that forced selling would be a golden buying opportunity. But both of these stocks are below those forced selling points. And that's after doubling off the lows.

So how do I value things in this environment? I think I need to be more patient and wait for better information. I need to wait until I think I know what's going on, and if I don't know, I should close half, or pull back, instead of holding on to a prayer.

Anyway, on Monday, I'm selling the Treasuries, and maybe half of the Asian short exposure. That'll get me a new start to this month.

Humble Pie

Time to eat some humble pie, as April was my worst month ever, at -22%. The positive thing is that with the leverage I was carrying, it wasn't worse.

The main problem is definitely twofold. First of all, my decision to keep holding Treasury bonds was deeply flawed. Second was my decision to ignore my thinking that the Stress Test plan would prevent bad news for coming out for a month. Third was my general idea to go charging ahead when I had know idea of where I was.

Part of this problem is understanding myself. I know that I can become very stubborn and hold something longer than I should, either on the winning or losing side. Another troublesome trait is my tendency towards analysis-paralysis. I'm always going to be wrong about something and I won't have all the information. But I have to do something anyway. In the future, I need to go into positions with a clearer idea of why I'm taking them and what will invalidate my reasoning.

So, where are we now? It's very hard to tell where the global economy goes from here, as the numbers show small improvements. Also, the U.S. banks are still insolvent. They are arguing with the government over the stress test results.
Part of me want to just dump my Treasuries, FXP and my short on EWY, the Korean exchange, and start over this month. Part of me also believes that there's still a lot of overconfidence in the system right now.