For me the current elections are so much different from the 2000 and 2004. I feel relaxed.

In the past, I felt like the country is attacked by the evil empire and the majority of population is cooperating with the aggressor.

This time, I have no negative feelings toward any of the candidates. They both are very decent people, deserving respect and capable to be among the leaders of this country.

What is driving my choice now, besides the obvious parallel with teh FDR, because the country is economically in the similar condition compared with 1930s and requires similar policies, is pure qualification.

What I see is that one candidate is very smart, definitively much smarter than I am. When I watch him answering questions I understand that I’m simply not capable to think that fast. He is also perfectly educated, better than I am. In him, I see what I want – a manager. A macro manager to lead the country. A micro manager to deal with every small issue, in complex or separately.

Then I see another candidate. First on all I doubt that he is smart at all. Maybe he is simply lost when he speaks to the camera, but it looks desperate. I can answer almost every question better than he does. Sometimes I feel that he has nothing to say and he simply squeezes out some meaningless word soup.

I also see how badly educated he is. His education is far inferior to mine. I don’t even compare him to another candidate’s education – that’s just a joke. I compare him to myself and I see that compared to me he is almost a high-school dropout. But I’m not running for president – he does.

I also see his judgement in action. The most important desision before elections is to pick a VP. And he chose the candidate even less qualified than himself. That is worrisome, because in order to be a successful president he must chose every single cabinet member to be at least 10x smarter than himself. And I doubt that he can.

Otherwise, he is a very nice guy and I wish him long and happy life. Somewhere away from the White House.

Please go and vote. That’s not only a duty, that’s more a privilege, one of those rare days when your opinion is worth more than zero.

The mounting losses from mortgage papers forced financial institutions to raise capital. While capital inflows seem to be healthy the dangerous trend is developing.

(continued…)

Mobile Site

That Guy Drinks Beer asked me to make an RSS feed that could be easily read from the mobile phone, i.e. includes the complete text of every post.

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I want to offer you better content and have more control over RSS feed. For example, I want to add some content to my RSS feed that is not published at the wallstreetexaminer.com site, like thie message.

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Initially I was looking for some feed creator that will let me to make RSS feed not from the original website RSS feed but directly from HTML, which would let me to publish the complete content in RSS but still have the split-post feature used. I failed to find any solution to do that. So I would suggest you to re-subscribe to this new feed above instead of the original RSS.

The real life demands compromises. The traffic at the new site is less than here so far (here I had ~500 cl/day, there ~200), but the “quality” of the clicks is much netter. A lot of people are coming directly from the “wallstreetexaminer.com” page and I’m sure they are very interested in what I’m writing. Here a lot of people are coming after googling for “stupid people”, “florida vacations” or “bear”. I don’t think they read anything.

About ads – they are quite annoying but please take into account that WSE is a for-profit enterprise. It’s different from me because I have a full-time job and I’m blogging to communicate with people and share ideas, I’m not interested to earn extra $20 from ads. For now I’m not getting anything because the readership is too low and there is nothing to share yet. But if new people will come I’ll get few bucks.

Please read new post:

The last bubble in the investment desert

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Hi All! I want to share with you that I was cordially invited to start my own blog at Wall Street Examiner. You probably know this site very well as Russ Winter is contributing there as a blogger and Lee Adler is posting his excellent daily reviews for subscribers.

This is the location of my new blog, it’s titled “The yellow brick road” and I’m opening with a new installment of “Where is my recession?” serial.

Please share your feedback, do you like it, is it working well. I’ll continue to announce every post here for easy transition and I think I will keep this site for all posts that I will consider not applicable for WSE

You probably know that I like to add the outstanding commercial paper from CP release and banking credit from H8. To some extend it is mixing apples and oranges together but the result looks very reasonable to monitor the trend. It matches what you would expect.

What you see here is that the sum made a top at $11,322 bln at the end of March. By the end of April it stands at $11,189 bln. The credit contraction is only starting now.

I think the troubles of the “subprime” meltdown made all the attributes of a typical recession visible by December-January, but the mainstreet economy fell behind the market turbulences and only now is showing the first tentative signs of the slowdown.

Update: instead of sitting here all night and preparing an extended overview of various bonds issued recently with all interest rates out there I’m cheating, I’m taking a shortcut. All you need to know is here, Fannie Mae raised $7 bln at 8.25%, Freddie Mac will likely do the same.

Wait a minute, the average prime mortgage rate as compiled by Freddie Mac is 6.05%. So those guys are losing 2.2% on every prime mortgage they write. Those are the two most important corporations in our economy and they are in the tailspin that eventually will be stopped by the bail-out. Bernanke cuts rates to 2%, where are those rates? This is what the credit crunch is, the inability of the Central bank to control interest rates on almost anything except treasuries. This is what “pushing on the string” is – Federal reserve can’t push money into economy

At April 30 I’ve posted “Kiss this rally goodbye“. Well, I was wrong by 2 days and 18 points in the S&P. I’ve said that the peak will be 1404 at April 30 but now it looks like the real peak was fixed at 1422 at May 2 (both intradays). After yesterday 3.5% carnage in financial stocks they are tumbling by another 2% today. Financial sector is a leader in rallies and falls, so we won’t see that May 2nd 1422 level for months and, who knows, maybe years or even many years.

What happened? In this post 2 days ago (and the follow up discussion) I’ve suggested that Feds will have to make sacrifices in order to save the bond market. That had to do something nasty to scare the money out of stock market into bonds. My proposal was that the Feds will either suggest that they will allow Countrywide to fall or they will hint of possible rate hike.

Yes, they made a hint that the rate hike is possible, that worked very well – I was right. Second, the SEC declared that investment banks will now have to disclose the liquidity levels. That worked even better. The market is tanking exactly as Bernanke wants it to.

Yes, we know that Bernanke put exists for the bulls. Now we know that Bernanke call for the bears exists as well. Those who think that he will allow the stock market to rise at the expense of the treasury bonds are terribly mistaken. He will make all necessary sacrifices

I hear that the stimulus package just started in May and its effect will be felt over the next three months.

To this I will say c’mon guys, that stimulus package is already in the full force for the two full months. In early March we all knew how much it will be and when it will come (and if we qualify, unlike me, for example). Most people have credit cards and can pre-spend the check in advance.

That’s what they did, the just released data show that consumer credit in March rose $15 bln, well above expected and above $5 bln in January. I assume that most people are making the best efforts to manage their finances and if they increase debt in the face of obvious economic difficulties I assume they do it within the margin set by this check in the mail. So those who planned to spend the check are already doing so.

The second category of people are those who don’t have any credit lines left and can’t pre-spend the check. I assume that those people have horrible debt situation and whe they get the check it will go straight to pay the pile of bills. Those people will not spend much when they get this check.

And the third category of people are those who don’t plan to spend it at all. It will go to savings, to reduce debt, to pay for the college for the Fall and stuff like that.

Looking at all this I think I can estimate that about $60 bln of the $110 bln stimulus package will be spent and the rate of spending is set in March, i.e. about $15 bln/months. So the last dime will be spent during the 4th of July fireworks. The recession, which is interrupted by now, will resume in July. Plan accordingly.

The trouble in BOA-CW deal came at interesting moment. As I’ve noted here, the T-bonds are at the most critical juncture in 10 months. Too much complacency (VIX sub 20 for a while) and too much T borrowings are about to produce a major T-bond “sell” signal.

There are three major buyers of T-bonds: domestic investors looking for safe heaven, FCBs and speculators. If the chart bends the third group will be out, the first group will shrink. The T-bonds will fall until they find a firm support, but that could be a disaster for the economy.

I’ve demonstrated my concern. Now Bernanke needs to show his concern. The very good and sure way to save the treasury market will be to let Countrywide to fail. They are not so important for the economy and it would be a fair price to save the rest of us. Think of it as of timely sacrifice

Please read this nice post from sudden debt about rotten Friday job report. I’ll just add few comments.

As you know after the crash of Communism a lot of manufacturing jobs in US were outsourced to China and replaced with service jobs. The difference between manufacturing and service sector feels during downturns.

Suppose you have a manufacturer who lost 10% of sales. What he will do? He will just fire 9% of factory workers, as simple as that.

Now suppose you have an auto dealer who lost 10% of sales. Suppose he employs 10 people. Will he fire one them? No, he will switch three of them to work part-time (and cut health insurance to all three). This way he has more flexibility to cover Saturdays and evenings. Sometimes the car manufacturer has a promotion and he will give those 3 guys more hours for a week or two. If he loses another 10% of sales he will switch another three of them into part-time. As you see the payroll statistics will show no lay-offs from this firm.

Look at the chart of long-term T-bonds:

The last 3 minimums made a very clear neckline for a potential head-and-shoulders, but the chart happily bounced again to start the next run up. Until yesterday. The chart fell back to the neckline. If it bounces it’s all fine. If it falls through down we’ll have a nasty downfall of treasury bonds in the face of deteriorating economy. The consequences could be pretty nasty.

What’s the reason? Please read here.

Just after I’ve made two posts here and here saying that in the case the stock market does not flop back to bull mode the current level already looks like an exhaustion point after which the bear programming should continue. I also copied two messages from other board here where Charmin says that the current point is very similar to June of 2001. Everything that happened in the last two months is very, very typical for the bear market.

Well, apparently Bernanke is reading the charts as well, and I suspect that he’s reading the charts much better than I do. He made the announcement to expand TAF by another $50 bln. Remember this post? Where Bernanke says he’s now accepting catshit as TSLF collateral? Well, today he announced that even miceshit is accepted. The Fed coffers must be quite smelly now

The time of this announcement was incredibly damaging for bears. Surely the stocks rally with a danger that the technical parameters of the bear market will be broken. As millions of people are trading by those charts you can expect an extended rally that will fly away from any fundamentals. Bernanke does read the charts, this is why Bernanke put is so real.

Before you trade check this nice site. Trade safely.

A little bit of chartism. Look at the Nasdaq:

• Look how all my moving averages crossed each other in early January at 2500. We are just 20 points below that magical crossover
• Look how today close is exactly at the trendline that connects November and December peaks
• We are one shot below 200 DMA
• Slow stochastic is where it was back in October

Now the weekly chart:

• The slow stochastic is at October maximum

Conclusion: if we are in the bear market than it’s a perfect point to turn down. If it turns up from here than we are not in the bear market anymore. Very interesting, critical moment

1. The expectations are running high

The week of April 28 Barron’s ran a cover story “The Bulls are Back”.

AND NOW, FOR SOME GOOD NEWS: THE OTHER SHOE isn’t going to drop. After a winter of discontent marked by massive write-offs on Wall Street and a wilting economy on Main, America’s portfolio managers have declared that the worst is over. More than half of the institutional investors participating in our latest Big Money poll say they’re bullish or very bullish about the prospects for stocks through the end of 2008. Their forecasts suggest they’re even more upbeat about the first half of 2009.

The market expectations run high:

This Barron’s declaration prompts me to write several posts that I want to unify by the title “Where is my recession?”. The goal is to carefully run through the bulls and bears arguments and collect the readers opinions that will help to proceed to the next step.

Are the bulls correct and the economy (what they really care of are the profits of listed corporations) is on the way to bottom soon and recover going into later this year? Or what we see is a classic front page indicator marking the foolish euphoria right before the real meltdown starts?

2. The economy as a dynamic equilibrium

First of all, what are we talking about? What is a downturn or a recovery? If we think about the economy is like a big barge that almost always exists in a state of some kind of dynamic equilibrium. Dynamic equilibrium means that there is a multitude of forces that are constantly pulling and pushing this barge in different directions and those forces sums up into one force that is making this barge to slowly drift in one direction. Most of the time this barge is slowly drifting in one direction with GDP growing close to 2.5% trend growth. Sometimes it slows below 0% or above 5% – way out of the trend.

What it this trend move at all? The civilization exists by consuming natural resources and converting them into goods. The western market economy proves itself to be the most efficient in processing the natural resources, which makes the developing world to ship their natural resources to us rather then trying to process them themselves. The whole process of working out natural resources and consuming the final goods is quite profitable and the western world is booking the profits according to this advantage.

Sometimes the inefficiencies develop. They can be different. Sometimes the natural resources are overconsumed and that moves the profit from the processing to extraction, i.e from the West to the developing world. That makes the West profits to fall and the chain of overproduction unfolds backwards until it hits the initial resource extractors. Sometimes one of the West countries tries to book future profits and that makes it fat and lazy and then the creditors come and bankruptcies follow.

To sum it I can say that when GDP grows too fast it it inefficient, when it grows too slow it is unprofitable. The economy is bouncing between the efficiency and profits but makes it very slow, in 4 and 8 years cycles. This process is slow and the economy spends significant amount of time at the both ends of each swing. When a trend develops it takes a lot of time before it can be reversed.

So the purpose of this exercise is to find out if the forces that are pulling the economy out of this recession are on the rise while the negative forces that are pushing are deeper are contained.

3. The bull argument

Let me try to collect the essential bull arguments.

1. The interest rates are extremely accommodative. Compare current rates with 8% rates at the beginning of the 1991 recession
2. The Feds are extremely cooperative with all other measures. For example, they are lending to non-regulated institutions, which never happened since 1930s
3. The stimulus package will help the consumer to overcome all the temporary problems ad restore confidence and consumption
4. The subprime incident is almost over

The following posts will address those questions

Let me test my predicting powers.

I think today market action was very bearish (and I loaded more puts). First, the very happy rally of +170 points in the Dow was completely reversed to the -12 decline. And that was the 4-month intraday high combined with a complete reversal – fit the final exhaustion move.

Second, in the bear market, for any meaningful accumulation at the bottom you must expect financial stocks to outperform general indices. They are early leaders and they must lead. Today the broad financials XLF closed -1.01%, broker dealers IAI -0.94% and small mainstreet banks KRE are distressed and closed -2.08%.

Third, this is May. Sell your stocks and go away.

And finally, if this post is about stocks I need a chart. Here’s the chart, the discount (stigma) borrowing:

I think the rally from March 10th $SPX of 1273 to today intraday 1404 (nice 10.3% correction for a bear market) is over and we will start long and painful slide back to 1273 and below. The trend moves are usually slow and I expect the 1273 to happen somewhere in late June or even July.

Disclaimer: I’m just an anonymous blogger, my opinions are for entertainment purposed only

Update: Another chart, just to make the post longer. Here’s the ration of financials to S&P:

Financials are very early cycle leaders. Last time the ratio bottomed in a very beginning of a bear market, about 2.5 years till the bottom. But this metric we may easily have the bear market till 2010

I think you can dig a lot of interesting stuff from the GDP report. Let forget all those financial woes for a moment. It’s important what consumer is doing and what the private business is doing.

First of all the chain deflator is 2.6%, believe you or not. So whatever numbers you see are adjusted for 2.6% inflation.

Consumer cut its durable goods expenditures by .48%. The only other decline in the past 4 years was post-Catrina 4Q ‘05. I think that was expected, nothing special. But now hold on to your chair. The food consumption went down by .05% and gasoline and energy by .05%. We are eating cheaper and driving less.

Is the business prepared for this decline in spending? Apparently not. In the 4Q ‘07 business cut inventories sharply subtracting 1.79% from GDP. They thought that this would be enough to adjust for the slowdown. But in Q1 the inventories rose adding 0.81% to GDP. The early stages of the recession is not a good time to grow inventories. You can spot the growth of inventories in the outstanding banking credit that was growing most of the quarter, except late April. It is easy to finance unsold goods by credit as long you promise the bank that you will cut production. I suspect that the real cut in production just started in mid-April. I will examine it in one of the future posts.

GDP minus inventory accumulation is called “sales of domestic product”, which is -0.2%

Please read the fine post from immobilienblasen about price control in China. I want to dig a bit more into this topic.

Let start from the basics again. To simplify the things the world economy works as an entity that extracts natural resources from the Earth and process it into consumable goods. If you divide this entity into countries that are essentially sub-entities unified by some policy and other common properties of business units located in that country.

Each country has a particular competitive advantage in certain fields of processing natural resources and the logic of the world economy pushes those resources into this country. For example, Japan is very good in converting oil and silicon into flat panel televisions. So those countries who extract oil and silicon from Earth are sending them to Japan and then Japan sends those flat-panel TVs to the rest of the world. In case of Japan this advantage is in technology, patents and know-how.

In case of China the competitive advantage is the abundance of extremely cheap yet relatively qualified labor, concentrated along navigable rivers and backed up by business friendly government. There are many countries in the world with cheap labor but few of them are stable, qualified or accessible. The output from China is pretty much anything that is labor-intensive and can be easily outsourced from the West. Like plastic toys.

Now more about cheap labor. In the market economy there is a certain proportion between luxury, durable items and staples. For example, one day at ski resort will cost you the same as 10 bags of rice. The basket of consumable items will include the mix of staples and luxuries, both rice and ski resorts. The feedback loops between consumption of all those items creates this typical basket and the typical cost of labor in Western countries. Every kid in USA once in a while comes to Disneyland and this is a part of the basket.

Now very clever Chinese authorities came to a very clever idea (used in all Eastern European countries before) that they can subsidize the staples and change the proportion between various items. So the day at Disneyland (or ski resort) will cost not 10 bags of rice but 50 bags. So the typical consumption basket will include more rice and less Disney, overall supporting all the life necessities at cheaper price. The idea is that only a fraction of the country output is sufficient to be used for subsidies but overall it will make the labor artificially cheap and thus supporting the big trade surplus.

In the completely free market economy the China market would quickly adjust itself, the basket would be more expensive and include more luxury items and services, the price of labor would go up and the trade surplus shrink quickly. But this doesn’t happen.

So what is the conclusion? The world economy is in market equilibrium based on certain price of all goods. But the big player China is distorting the market mechanisms. First, they consume more natural resources than they would otherwise. Second, they produce more artificially cheap goods than they would otherwise. And this disproportion is widely based on subsidies that are coming from large trade surplus.

If anything in this artificial, non-market structure will start breaking the results may be disproportional the the cause because the market usually adjusts itself much better than any government structure. It looks to me like a big house of cards which is much more stable flat rather then tall

Just a technical observation. I love various oscillators, because they help me to visualize the market internals. This weekly chart (link) shows the relationship between percentage of the S&P 500 stocks over 200 day moving average and over 50 DMA (click to zoom).

As you can see in the bull market the 200 DMA line is mostly above 50 DMA line because many stocks oscillate above and below their 50 DMA but they mostly stay above 200 DMA. In the bear market it is exactly opposite. I think you can use this chart as a definition of a bull or bear market, not a single definition, but one of the best out of many.

This chart gave you a perfect, amazing warning back in October. The 200 DMA line in freefall while 50 DMA line was making another high.

Let zoom the same chart to the daily one (link):

I don’t think I can fetch from this chart where stocks are going next week but I can clearly see that we are deeply in a bear market. Only 40% of stocks are scrambling above 200 DMA while 70% of stocks are flying above 50 DMA.

I think the well-pronounced top in the current counter-trend run will happen when the 50DMA line will start making lower highs (examples – late October and late December)

Update: I’m adding the chart from Eugen comment:

As you can see it is indeed a very good indicator during bull market. But now it is on uncharted territory