That was Fast!

Yesterday's flashy rally is already over. Dow down 230 as we speak. Should've followed my instinct to short the bounce. I remember seeing that Goldman had lowered its GDP forecast from 3.0 to 2.7 just a couple of days before and thinking that this blatant attempt to manufacture "good news" probably wouldn't last long.

In other thoughts, I read Seadrill's most recent quarterly report, from August. They already have the cash flow to pay $0.70 - $1.00 per quarter. I am kicking myself for not buying them when they went below $8.00 earlier this year. The reason I'm thinking along this line is that I am thinking more about what strategy I should pursue. Although I like Soros's strategy of identifying cycles and trends, instinctly, I follow a fundamental value strategy. So I am going to keep my eyes open for long-term values to pop up.

And it's nice to see NG back down to $4.16 and ABX under $36. These will be good values and I will be tempted when ABX gets 10% below the 50 day moving average and NG goes 20-30% below.

And I'm going to reverse my position on bonds. The short is a bad idea. Bonds and stocks are moving in opposite directions once again. If anything, I should be selling the short-term and buying the long term. See Sudden Debt's analysis of the bond market. Cash is even shorter term than three months. So sell cash, and buy 30-yr's.

Trades:

buy to cover IEF @ $91.94, -0.35%

buy 80% position 30-yr Treasury @ 104.4882, 4.230 ytm.

trade

I bought a 10% position in VXX @ $42.62.

The VIX is at pre Lehman bankruptcy levels. Need I say more?

Also, the 50-day moving average is $52.66, or almost 20% higher. This is way oversold. I'm looking for a return to the 50-day average.

Stuyvesant Town

Another blow to commercial real estate. Bloomberg reports that tenants have won a lawsuit against Tishman Speyer Properties, which had argued that when they bought the property, the sale deregulated rent controls, allowing them to raise rents. The judge disagreed, noting that the complex had been built with city assistance and benefited from tax breaks. The company may owe millions in triple-damage rent refunds.

“The tenants argue the current and former owners of the properties, respectively, were not entitled to take advantage of the luxury decontrol
provisions of the Rent Stabilization Law, while simultaneously receiving tax incentive benefits under” New York City regulations, the court wrote. “We
agree.”

But at this point, it doesn't mattter. The property is worth $2 billion, and $3 billion is owed on it. This brick will make a huge splash in the commercial real estate pond. $600 million in reserves is practically gone. Steve Kurtz at Realpoint LLC says default is "practically inevitable." Ouch.

Niall Ferguson

Bloomberg has a very interesting interview with Niall Ferguson. Niall says that the U.S. economy is in deflation and that the stock market and commodity price run-ups are due to the decline in the dollar. The danger to the U.S. economy is that real interest rates rise as the government debt to GDP ratio rises over 100% by 2011.

This argument makes a lot of sense to me. Two trades come to mind. First, short Treasuries. The public has poured their money into bonds, which signals a top. The U.S. government's tax revenues have not had any help from the stimulus plan. If the dollar keeps falling, yields have to go up. Maybe bonds are on the wrong side of the trade. Also, the Fed is just withdrawing its support for Treasuries.

The other trade would be to get rid of my oil short. But if the dollar strengthens, that's the only thing I have. TBT, the 20+ yr. Treasury bond has the most daily volume. Let's see if it's shortable. So, TBT is not shortable, so it's a 25% (quarter bond position) in IEF, the 7-10 yr. Treasury etf short at $91.62.

Government Finances

"Suddently people are punting bonds." - analyst quoted by L.A. Times. The story details the sad reception for California's junk bond sale. Not only did they have to pay more to borrow, but California couldn't even raise the full amount. And they had such high hopes a week ago. But the news is now out that there's a $38 billion shortfall over the next three years. AGAIN???? Oh, wait, who's really surprised? It is the land of fruits, nuts, and useless politicians after all.

Dozens of states face imminent financial crises. Sales taxes are down in the high teens, yet retail sales metrics are improving? One set of numbers is lying... Just thinking contrarianly, maybe the states are exaggerating the shortfall so they can beggar Obama, but then again, maybe the retail sales numbers are being juiced. Either way, it's not good.

As far as the big picture, I don't know what to do right here. The dollar's still sliding, and gold has broken out. Rosenberg says he expects Obama to devalue the dollar as much as he can get away with. But this will hurt consumers with higher energy prices. But as a deficit country, maybe it'll do more good than harm. We can probably guage the level of it working by the bitching from our trade partners. Obama has shown China he's got no qualms about a trade war. What better way to devalue the dollar?

The question is "Can Treasuries hold up?" They held up in Japan, but their debt was always financed internally. And the biggest source of internal funds, the Fed, will stop buying very soon.

And here's Ralph Nader on Obama, "a frightened man." Nader is fearless, brilliant, and I like him here. "And they gave him the peace prize?"

Unfortunately, I am better at identifying unsustainable trends than the timing on when they will break down. So, I've just got to keep the leverage low (like now at 60%) and be patient. Let's see what the bank earnings look like at the end of the week.

Bonds Fall

Treasury bonds have been in full retreat for the second day in a row. The 10-yr. is down 3% for the second day in a row now, with the yield rising from 3.16% to 3.35% currently.

Why?

Because the dollar is finally strengthening. Obviously, this is the opposite of what we usually see. But with the whole market upside down for the last few months, it's not too surprising. Or maybe it's the other way around. Bonds sell off, yields goes up, and the dollar strengthens.

Commercial Real Estate

Here are some interesting numbers on commercial real estate in America. Speaking of numbers, most quants and economists want to explain the world with numbers. This results in a "what's wrong with the world that it doesn't match the numbers?" disconnect. When I see numbers, I try to take the opposite approach. How does what's going on in the real world get reflected in the numbers?

Anyway, enough of the philosophical detour. Commercial real estate loans outstanding total $3.4 Trillion. Bloomberg is reporting that office vacancies are at 16.5%, a five-year high. Naked capitalism has a link to the WSJ with some great numbers and n.c.'s commentary on what this means for the banks. Leon Black, from Apollo Management estimates that CRE losses may top $2 Trillion. Since banks own more than half of CRE loans, their losses might reach half of that number. Unlike MBS, most commercial real estate loans stay on bank balance sheets. According to the WSJ, 800 banks have more than half their assets in CRE loans. Ouch! Collectively, banks have only $0.38 for every $1 in bad loans. Prices have already fallen 50% on most properties, so banks are way behind, especially if CRE gets worse.

No wonder the FDIC is bankrupt.

And despite their public statements to the contrary, the Fed is criticizing banks for being slow to take losses, according to Yahoo! As I dig into the details here, I find that I have to copy the article in its entirety and comment on it. There's so much here for such a short story.

WASHINGTON (Reuters) - The Federal Reserve told bank examiners last month that banks were slow to take losses on their commercial real estate loans that have suffered as property values sink.

The Wall Street Journal initially reported the Fed's concern and Fed
sources on Wednesday confirmed a presentation was made on the topic to
regulators but described it as a training exercise for examiners about potential real estate issues.

The Journal report said the presentation was made on September 29 by Fed analyst K.C. Conway, a senior real estate analyst at the Atlanta regional Fed bank.

It suggested that regulators were preparing for a rerun of housing-related
losses that plagued many banks after the residential property bubble burst, the newspaper said.

Fed sources said the intent was to provide examiners who work directly with banks with training they might need to evaluate emerging risks.

Conway's report predicted commercial real-estate losses would reach roughly 45 percent next year, the Journal said.

According to the paper, the report said that the most "toxic" loans on bank
books were interest-only loans, which get no benefit from amortization, since it requires borrowers to repay interest but no principal.

The Journal said the report also stated that banks have been slow to absorb
the losses on their loans, partly due to "capital preservation" concerns.

(Reporting by Biswarup Gooptu in Bangalore; Additional reporting by Glenn Somerville in Washington; Editing by James Dalgleish)

By calling this a training exercise, the Fed is attempting to downplay it. However, the the training exercise may be real. This is why it is important to watch what the Fed does, not what it says. What it says is more likely to be caluculated lies or propaganda. But this tells me that they really are worried about CRE. And by the way, 45% losses means at least $750 billion in bad loans and probably $400-500 billion in losses. This is much worse than I previously thought. That's why I'm spending so much time on it.

And I have one question as I look at the stock market today:

IF THERE'S INFLATION AND THE DOLLAR IS GOING TO COLLAPSE, WHY IS THE BOND MARKET GOING CRAZY?!!?!?!

Trades!

sold ABX @ 35.97, +9%

If the dollar goes up, as I expect, short term gold is overbought. Just locking in the gain.

Buy 5% SKF @ 26.82.

This is a leveraged ultrashort, so it's actually a 10% position in terms of risk. The FDIC is broke
and the banks are going to do well for the rest of the year? You're kidding, right?

Short 5% URBN @ 29.12.

This is a retail short. RTH is hard to borrow, as is Abercrombie & Fitch and J. Crew. This was my third
choice, so it'll have to do. I expect retail to be under pressure while jobs losses continue.