Saturday, January 14, 2012

Debt Downgrades are not the issue…or the trigger...

Over the last week, we have heard many politicians in France swear that there was NO WAY France would lose its pristine debt rating. We will assuredly hear the same from German politicians too. Well, some of those politicians got them anyway regardless of their protests and attempts to project them out of their future. However, the issue at hand has nothing to do with slow moving credit analysts assessments. These agencies are always late to the party or the best case is that they are trying to save face in front of a major calamity. These same agencies missed making a single warning regarding CDO’s and MBS in 2007 and most likely want to look at least a little more credible now. However, the implosion can be seen in what people are not saying…because what they are saying is a complete distraction. The reality of the matter is that the biggest commercial banks in Europe are insolvent and will transfer their losses to their public sectors in the imminent future. Both Germany and France have sold more than their entire economic future trying to prevent the collapse of their largest and highest levered institutions. The entire reason for all these gymnastics is that the worst banking implosions lie in France and Germany for Europe right now. Germany in particular wants to cover up its highly risky and highly leveraged betting parlors affectionately called banks.

One can see the desperation in the markets. The constant bid under US equities. The persistent sale of assets that we previously viewed as safe havens - such as Gold and Silver…there is quite a lot of selling other very large markets aswell…however, those are holding up. What we are witnessing is most likely the largest collapse of credit in history. So, despite JP Morgan’s prognostications about its increased lending to business - small and large alike. The question has to be asked, if people are successfully able to borrow money, what are people doing with the it? In the case of large public companies - they are going into a lot of debt in order to finance purchases of stock so that they can shrink their float and keep demand and supply sustaining high prices for their securities. When you really look at their actions though, their balance sheet may show an apparent high level of cash…in reality they have a very high level of debt collateralized by their stock. IF stock prices fall, these companies will not be able to repay these borrowings. It is the case, that our society has used leverage for exactly the wrong objectives…to manipulate prices rather than to capitalize on opportunity.

Jamie Dimon, suggests that, with the exception of one or two U.S. banks…american banks are in great shape. I beg to differ with his myopic and self-reinforcing point of view. Globally banks are VERY weak and have continued to increase the risk of their practices with more and more aggressive accounting and book marking activity. Sure, if you want to accept those marks and assumptions - things look a hell of a lot better than they are and possibly just hunky dory. But our next MF Global is waiting and it may well be Goldman Tax or JP MOREgan. Jamie Dimon also suggests that his bank could lose 5 billion to problems in Europe…how much would you like to bet that the number is many orders of magnitude bigger than that even using JPM’s persistent accounting manipulation techniques? The charade is on but at some point soon people will be unmasked.

One, Warren Buffett has been buying one crappy security after the next and continuing telling people not to own treasuries…somehow people accept his analysis without looking at the real results…and now he is recently presented as the “wise optimist peering into the future with control of everything over which he presides". Warren’s activities over the last 8 years have been far from insightful and I find his analysis has been deliberately obfuscatory as well as misguided. May I suggest that the derivatives exposure and other complex insurance machinations driving a large amount of Berkshire’s performance are not going to play out as desired.

I previously wrote a post, “Insurance, Scam of the Ages”. Again, we stand on the precipice where people’s balance sheets are propped up with derivatives that make them look solvent - but were it for counter-party risk and exogenous events such as the recent large blowups in Greek bonds not being counted as a default and rendering the CDS useless. How did the insurance work there? if you owned the bonds and insured them - assuredly you would be telling your investors not to worry. However, now you are sitting on bonds down 80% and CDS that is relatively useless all because some bureaucracy decided that the insurance was not going to be triggered. That sounds kinds of like a complete wipeout loss to me that was supposed to be completely manageable. I stand by my previous post, Insurance, and its very expensive costs and complacency enforcing qualities are EXACTLY the same things that caused many other blowups throughout history.  The entire structured products game is one big betting parlor based on the rationalization that its really insurance. I find it hard to call these products insurance. What they really are is money amplification tools and THAT is exactly the cause of most our woes.

How I see it is that the debt downgrades in Europe will accelerate as the agencies try to keep up with the pledges that will be coming back to bite its members. They will accelerate as their highly leveraged banks implode under the weight of increasingly devaluing asset prices. The foundations for this are all layed and visible in the action of the markets. These institutions are unwinding their balance sheets and are in the process of trying to sell the assets that are of most value to raise cash…we are about to see the turn into a waterfall of indiscriminate selling and revaluation exacerbated by the huge shortage of non-debt based cash/fiat money.

Friday, January 13, 2012

Deleveraging continues...

Today, as evidenced by the action in the Dollar, the markets continued their deleveraging. Ironically, as is par the course these days - equities complied and then rebounded. I want to pay some attention to this action because I have on these pages, been explaining why this is occurring. That reason, of course, is DELEVERAGING.

With the breakout to new highs in the dollar and with the various new stresses being announced to the markets - not the least of which is the continuation of downright unethical and fraudulent reporting by big US commercial banks like JP Morgan - over leveraged market participants  have been forced to pair down positions. When ever this happens one need only look at the biggest markets and watch the smaller ones for effects.

So, we are finding many large and stressed market participants who hold size positions in many other instruments and larger markets than equities. For these participants it is a common practice to attempt to hedge this exposure with short positions equities or equity indexes. Specifically, in the current case, the new stresses in the markets are causing large sales of assets that most people are not watching or seeing requiring their corresponding equity short hedges to be covered. This is why whenever we see action that would usually indicate that there should be downside in equities - such as a dollar breakout or treasury breakout - that the result is that any equity weakness is often bought to close short positions as longs in corresponding and usually much larger markets are being closed. What is absolutely amazing is that despite a lot of selling activity, treasuries are constantly bid. The other thing I think people need to get over is the idea that equities are a barometer for anything fundamentally changed or bullish in our current market conditions. What we have to remember is equities are a relatively small market/asset class compared to the ones being accessed to raise cash by bankrupt or stressed institutions.

So, while the deleveraging is in play, I would expect the weird and seemingly uncorrelated behavior of the various markets to remain in play. However, if and more importantly when the deleveraging activity is   reduced the equity markets are prone and very likely of closing the aberration in rather abrupt fashion. That moment is coming soon.

Thursday, January 12, 2012

Dollar gut check…

Right now…the pattern in the dollar ideally requires a new high to finish the first major rally off the lows of 2011. Hence, I am expecting the resistance in the charts below to be broken to the upside and continuation that could be rather powerful before the cycle pattern is complete for the dollar. 

As another element to the already aberrant markets, short interest and bearishness are a extremely low levels and additionally to that, people are now dismissing recent dollar strength and EURO weakness related to equities as a permanent decoupling. The reality is the above observations serve one main function - complacency. There have been several times in the last few years where people also were permanently glued to the “Buy the F**in Dip” or other some such assumption as if it was not mantra and a foregone conclusion. In all cases, the complacency has not been rewarded.

Commodities - rejected at resistance

The internal strain in the markets is increasing...

Wednesday, January 11, 2012

Critical Mass approaches as financial system begins to dissolve from within...

The markets are dissolving…they are TOTALLY disconnecting due to the stresses caused by deleveraging…IT IS NOT PRETTY and it is totally the result of central economic planning…what a mess. A major disconnection around these corners awaits.

For more information regarding what the EURODOLLAR contract is: click here

Tuesday, January 10, 2012


Ron Paul predicts…and he does so extremely well…his 90% hit rate is almost as good as my main trading systems' win rate for swing trades…just like the win rate for my systems theoretically is impossible - but actually happens, Ron Paul is unelectable but stands a very real chance of being elected…ESPECIALLY if the markets do what seems to be written on the charts I have shown and in the trades my systems are currently in.

Capitulation and deleveraging exemplified…the resolution awaits

The Markets and Fukushima Official Data…both in a similar state

TEPCO Believes Mission Accomplished & Regulators Allow Radioactive Dumping in Tokyo Bay from Fairewinds Energy Education on Vimeo.

Game on…n…n…n…n...

Game Over-er-er-er-er-er

Deleveraging is a nasty business. I am totally impressed with just how nasty it is…capital allocation is more based on forced liquidations than planned choices…this action in the market demonstrates that. In addition there is a high degree of complacency and continued and clear weakness in the EURO, Gold and Silver…important reversals seem set to spring their traps in these areas and will likely fuel many months of dissapointment for risk assets. Most important feature that hints at the suspect foundations of the moves in risk assets is the HUGE relative strength of the Dollar index which is only about 50 cents off its recent highs.

We are also in the symmetrical pattern target for the S&P500 that I posted in this post: Develveraging is not a very orderly process… and as you can see below, the VIX is not confirming the equity market highs thus far.

New bull markets in risk assets are NOT built on flimisy foundations like these.

Sunday, January 8, 2012

Game Over...

Everyone and their brother expects follow through to the upside…the market has disconnected..but that does not matter anymore. Tyler Durden at Zerohedge will surely be trying to prop up his increasingly wrong and frail case for Gold and Silver by looking for any hint that could be positive for the EURO. It does appear that even that has already started. Traditionally any EURO call out of Goldman Tax is WRONG…however, the way I see it, Thomas STOMPer occasionally gets the 10th out of the 10th call right…just enough so clients can make just enough of the money back that the lost while Goldman traded against them, that they can afford to stay clients. I think that this is one of those times…I think a fairly fast move to 1.20 sounds like a very reasonable interpretation to me. Still, the COT “commercials open interest data” are a quite popular theme currently for getting people looking for any excuse to hold gold or silver and who are in desperate need of help some optimism...or those who are intent on getting long the EURO. Overall, using "Commericals" as a basis for going long the EURO is a ridiculous argument when you really look at the way the data works. People spouting it do not understand how to read the data. 

On another note, if these setups play out as anticipated then Ron Paul will likely be getting a lot more attention…as I have indicated previously was likely in earlier posts.
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