FDIC in the Hole

The FDIC is in the hole by $90 billion. They want the banks to prepay $45 billion in fees, which they will use to bail out the banks. How that bridges the other $45 billion they will need, I don't know. How many more banks will fail because they can't afford to pay would be interesting. Unfortunately, what will happen out of this is that we will wind up with an even more nationalized banking system that we had before the crisis. The too-big-too-fails are only getting bigger, as they survive on bailouts that the smaller banks don't get. It seems to me that Obama has completely dropped the ball on this. Where is the change? Do we have any hope?

Apparently not, as consumer confidence failed to follow the stock market upward and dropped back down to 53. Just a guess, but I think people who can't find a job are pissed that the bankers are getting their bonuses, and the stock market is doing well, but they're not getting any benefit from it. I'm thinking it may be a good time to short ANF.

Prediction Comes True, Hours Later (That Was Fast)

Bloomberg reports that Japan threatens to devalue the Yen. Until now, the Japanese finance minister has talked about tolerating a higher Yen. We'll see how long that lasts if the Yen goes even higher.

So, what's the solution? Print Yen (they're strong) and buy Treasuries. The U.S. is happy and China is screwed. China can keep printing, but if there's hyperinflation anywhere, it happens in China, not here in the U.S.

"Meanwhile Toyoo Gyohten, will is scheduled to be appointed an adviser to Fujii today, expressed support for the U.S. dollar as the world’s reserve currency."

Exactly. Except that he means Japan's reserve currency. And Japan might be increasing those reserves. This is worth watching.

Banks to Bail Themselves Out???

The FDIC is out of money. According to the FT, the FDIC needs billions from banks to bail out banks. So, banks are supposed to bail out the FDIC which then bails out the deposit holders at failed banks. In other words, good banks are being taxed to cover losses at bad banks. This is very bad for an orderly lending and credit market in the U.S.

The FDIC supposedly has a $500 bln credit line at the US Treasury, but that may run up against the debt limit. So the FDIC is considering "asking banks to pay three years' worth of its fees in advance." My question is, How many banks will fail because they cannot afford the extra fees? Hint: the FDIC's list of problem institutions is over 400.

But the likely effect will be hidden by accounting gimmicks. "The banks would not have to recognise the charges on their balance sheets until the quarter when the fees were due."

So how much of the fees collected in advance will the FDIC lose back to bailouts? Probably a significant chunk. But in the meantime, the denial continues.

Another important story comes from Japan: "Japan core consumer price index falls by record 2.4 percent in August." "Deflation is strengthening its grip." There may be a debate about inflation or deflation in the U.S., but there's no question about Japan. This story begs the question, How long can Japan afford to let the Yen rise? When will Japan try to beggar its neighbors by devaluing the Yen? The old government didn't do it. Maybe, just maybe, the new government will. The question is how?

Trades

buy 10% DUG @ $14.68. This is a couple-month bet on drop in oil price. This is the seasonally weak part of the year for oil. The dollar is at strong support levels. There are no hurricanes. Durable goods orders are still falling, so no industrial demand. China seems to have finished stockpiling for this year. The ultrashort is hard to borrow, so there will be a short squeeze if oil has a big drop.

short 20% SPY @ $104.90. I believe equities are overvalued and earnings
reports are going to be dismal. Especially consumer discretionary and retail. Consumer credit is collapsing and unemployment is going up. The consumer is still cutting back and will continue. Also, I like the idea of "renting" shorts over the weekend. Any news that comes out is more likely to be bad than good. That's the reason for a 20% instead of a 10% position.

Missed the boat with KBH. They came out with ugly losses and promptly
fell over 9%. Should have shorted them yesterday.

Will wait for better time to short ANF and/or RTH. ANF doesn't report
until November.

Sell the next bounce

I'm looking at this market and I've decided to sell the next bounce, perhaps as early as tomorrow.

Analyzing the market according to the principles of reflexivity and self-fulfilling prophecies, we can see that the 60% runup from the lows fits into the category of a self-fulfilling prophecy. So, the question is, can the runup in the market influence the fundamentals in the real economy? Can the runup in the market improve government finances and lower the deficit?

And the answer to both of these is a big "NO!" In fact, the economic fundamentals have responded very anemically to all the government money being thrown at them. To give an example, the US housing market was $6 trillion at the peak in 2006. This year, retail residential real estate transactions will probably total $1.5 trillion. And what's the government spending to keep it from falling further? The Federal Reserve is spending $1.5 trillion. The FHA has increased its mortgage guarantees by $1 trillion. Homeowners are being given tax credits equal to 5% of the price of a median home.

Internationally, Chinese equity markets are back in a bear market. The Japanese economy is suffering from a high Yen. Ireland and the UK recently revealed new bank bailouts. And global trade hasn't recovered.

The dollar is at strong support levels. As everything has gone up, most have not paid attention to the ONE thing that has gone down: the US dollar. So, if the dollar should begin to strengthen, everything will go down. There are a myriad of reasons why the dollar might strengthen. Flight to safety, dollar bouncing off strong support, weakness in commodity demand, shakeups in international trade, a jump in Treasury interest rates, or some unknown factor.

Why move now? First of all, my favorite sources Rosenberg and Winter have been harping on an overvalued stock market and are now making moves. Second, there's just too many signs of a top to ignore: valuations, sentiment, insider selling, and bullishness are at historic highs. Mutual fund sideline cash is at historic lows.

And then there's the small matter of the Fed withdrawing some support to see how the economy stands on its own. I think it keels over.

So, my ideas for shorts are SPY, ANF, RTH, OIL, and KBH.

I've already made a 40% move this week out of gold. So maybe I'll move another 1/2 to 1/3 over on a little bounce. I also like the idea of doing an extra short of the the S&P 500 over the weekend, as any bad or shocking news will probably hurt the market much more than good news here.

Trades!

Finally, a couple of good ones.

First, sold all my NG @ $5.26. +98% on the first bunch I bought, +28% on the second bunch

Second, sold half my ABX @ $37.36. for a 13% gain.

I still have a 10% position in ABX.

Here's my thinking. The market is at ridiculous sentiment levels. The dollar is at strong support. No one talks about it bouncing off, just what happens if it breaks through. Mutual Fund cash levels are at extremely low levels. The Fed's money printing schemes are sunsetting in a couple of months. Insiders are selling like crazy, probably as they look at analyst expectations for their companies. Chinese equity markets haven't been able to recover, even as the US markets roar higher. The Baltic Dry Index is about 30% below a healthy 3000 level. Stock prices keep going up on lower and lower volume.

So, I may do some shorts tomorrow, especially if the market jumps on Bernanke's Fed report today.

trade

Sold the 10-yr T bonds with a half a % of profit left in them.

It just feels like the market is back on a roll again and has been up for the past four days in a row. Bonds have been down.

Just time to pull back and focus on gold, which is working for me.

Looking for a Reason for the Gold Moves

Maybe this story from Marketwatch explains something: Hong Kong Recalls Gold Reserves. Another reason is that China has eased restrictions on owning gold and silver in China. A third was mentioned by David Rosenberg yesterday. China has made an agreement to buy $50 billion in notes from the IMF, which holds a lot of gold.

The first two stories are bullish for gold, the last is bearish for the dollar. The good news is that the second, middle story is not just a one-time thing, as the other two are. This is something I will have to do more research on. Private sector demand in China could be huge, given their massive credit bubble. If I lived in China, I'd be scared out of my wits about inflation. Gold is the only commodity you could buy there which isn't being stockpiled by the mountainload.

And some great charts from Mish's blog, showing the inadequacy of bank reserves against writedowns. It looks like only about 10-30% of banks have Allowances for Loan & Lease Losses that exceed nonperforming loans. In other words, as Mish observes, "bank earnings have been wildly over-stated." I concur. The FDIC problem bank list has over $300 billion in assets.

Other trades I'm considering right now are short Ford, because of the ridiculous belief in "cash for clunkers." This program is just guaranteed to cause a cliff-dive in demand as soon as the juiced numbers are out of the pipeline. Why Ford? Because they're up 40% in the last 3 months, while Toyota is up only 12%.

Another thing I'm thinking of doing is shorting the S&P 500 etf, SPY. It's at 130 times reported earnings, for Pete's sake! Talk about ridiculous.

And the last thing I'm thinking of doing is shorting oil. The historical relationship between oil and natural gas is that oil is about six times the price of gas. It's now 27 times. And there's no sign of demand for oil from tankers either.

Bloomberg reports that Supertankers May Halt Oil Trading, Frontline Says. Frontline says that they might start refusing cargoes within the next few months, as owners contribute $942 a day in fuel costs. This shows the dire situation of the industry, in my opinion. Why would anyone accept a money-losing lease? Hidden in the article is the fact that boats lose safety approvals if they're idle for too long. So the thing to do is fill up with oil and float with the current to save fuel.

trade

yes, I'm still trading.

Buy 10% position in SKF, ultrashort financials, @ $28.26.

I was going to buy this yesterday at the close, but I was running late for class.
Pity because I would have picked it up for $27. Well, there goes $70.

I might be wrong, but I think the bank stocks were the last thing holding this rally
up. And since all the hedge funds have been boasting recently about how much
they bought, it must be time to short. There's no one left to buy.