What started out as a huge bull run today floundered big time by the end of the day which is a sign of something big to come, in my opinion. At first I actually thought that the Fed might tighten by .25%, why not rates are at .13% at it would merely be a ceremonial move, but most thought I was nuts as it was a black swan event. Not only that, but any rate increase would mean the Fed would actually be interested in defending the dollar and we know that will never happen. However, I was wrong, but I knew one thing was going to happen, the market was not going to like what it heard no matter what.
I was not 100% sure I was going to be right so it is not as if I doubled down or anything, but initially I was right and the market sank. That turned and reversed course, for whatever reason, only to have the most spectacular close in a long time and a close that should make anyone long a little nervous. To have a reversal of that magnitude on news that would keep the reflation trade going is not good news. In fact, the dollar sank and stocks reversed this also happened yesterday as well. Yesterday the dollar had some strength, somewhat at least, but stocks reversed higher by the end of the day, for the most part.
First, I believe we are at the point were too much of a good thing is just that. We all like candy, but if you eat too much you are going to get sick and I think this is the markets issue with just stupid low interest rates and reckless monetary policy. I also believe we are diverging from the weak dollar, strong stock trade which is really all the bulls had, besides mildly better economic data, anemic data at best. This could prove disastrous for the markets as it will end the carry trade, possibly, simply because of this divergence.
Second, the transports had zero follow through today which is not good. Sure, the index was saved by Mr. Buffet’s bold buying spree yesterday, but Con-Way quickly brought reality back to that index, the economy stinks. The theory is as goes the transports goes the rest of the markets and guess what happened today? The transports spent most of the day negative and the markets followed by the end of the day. Tech stocks are also struggling as the NASDAQ closed negative, that was the bulls leadership, but Cisco released good earnings, I am sure most of the positive growth was from Asia, but somehow that is a US green shoot.
Third, the technicals look pretty terrible, to me at least, with the S&P 500 rejected at 1061, multiple times, it eventually rejected 1052 and even 1047. That is not good news at all for the bulls, baring any really good news of course, as it looks like the S&P 500 will test 1021 soon, but only time will tell. Of course, the NASDAQ looks terrible as do the transports, so pick your poison as to what will weigh down the market. What really caught my eye today was Goldman, it got clobbered today which caused further bleeding in the financials, SKF did very well actually. I am not sure what caused them to decline almost 2 points, but that is another leader gone, for now.
The market looks and is acting toppy and failed to hold a rally on, presumably, good news. If that is not a warning sign than I do not know what is, but it could reverse with a good initial claims report tomorrow, doubtful though. I also fully expect the employment report, depending what kind of magic the BLS works into it, will be higher than expected, perhaps +210K for October with a revision up for September, which is far above estimates. Watch for Goldman’s last minute employment revision tomorrow, they blew it with the GDP, but they are great with the employment report. If they up their estimates, I would run for the hills because that will push the market lower, in my opinion.
The bottom line is that today was as bearish as you can get there is no other way to describe it. That was a huge reversal in 22 minutes I might add which is reminiscent of how things traded last year, but I guess last year never happened. Perhaps it was the FHA news in the WSJ that has people concerned or the fact the WFC is turning a ton of upside down loans into interest only loans for 10 years, smart move guys! Who knows what the reason is, but the one thing that is for sure is that this reversal plays into the bears favor and, although it was a whacky call, I was kind of right, even though I had no real conviction.
Disclaimer: I own various puts on the S&P 500, SDS and SKF.
Looking through the company’s earnings I see nothing that makes me think the crisis has really ended or that credit is even close to expanding or delinquencies are subsiding. They have a very complex balance sheet so picking it a part is not an easy task and who knows what they have in off balance sheet items, I am sure it is pretty ugly whatever is sitting in La-La land in the Caymans.
Here is what I see, lending is down across the board, except for foreign lending. Total commercial lending is $318,886 vs. $333,484 which is clearly down, but not horrible but not good either. On the consumer side it is not much better as we see $450,784 vs. $458,036 which, again, is down and shows the direction of lending. The number is much better than the YoY number, but that is not surprising. However, are these numbers indicative of the rapid recovery that we keep hearing about on CNBC? Not a chance.
The other side of the credit story is the build is reserves for credit losses which look not so bad in WFC’s case of only an additional $1B. This is on top of billions already and the firm has a total of $24B in total loan loss reserves, not a good side. Remember the Pick-a-pay loan? That is the reverse amortization loan Wachovia screwed people over with? Yeah, they are modifying those like crazy, some 900,000+ and counting, but we know those modifications fail within 90 days so look for more defaults in the near future.
Not only that, but total nonperforming assets for 3Q equaled $23.45B for WFC, and CNBC can’t figure out why the stock down ticked on the earnings. Not only that, but those damn Pick-a-pay loans keep coming up and there was a negative change in the balance on these garbage loans, a negative adjustment in the value of $18B in fact. Of course, this did not impact the earnings of WFC because Congress and the FASB allow the company to lie to you. There is also a section in the report where it shows another $18B in loans that are 90 days late, whether this is the same item or not is unclear, but it is likely that it is. Either way, this confirms that the credit quality of all banks across the country is deteriorating.
Would I own WFC? Not a freaking chance, not even with your money. They have $57B in reverse amortization mortgages on the books that they are working like mad to modify, but we know the modifying these things still fail. Not only is the firm keeping $57B in the loans on the books, but the average LTV is 105% and the actual total carrying value out of that $57B is $37B, unreal. We are also seeing WFC take $6.5B in commercial real estate losses, yup that other shoe that is dropping or that we are told is not dropping, but it is dropping. Now, the PCI or nonaccrual PCI data in the WFC earnings do not impact the earnings, but the negative adjustments show what is to come.
Like I said, the WFC balance sheet is incredibly complex and we do not know what is held off balance sheet. However, what is on there, IMHO, is not pretty and even though much has already been written down, it does not look like it is getting much better. In fact, much of the problem assets seem to be getting worse, from what I can see. Piecing together from what other big and small banks have reported, credit is extremely tight and getting tighter and the quality is deteriorating which means more losses to come.
I have been saying that we have to watch the regional banks to get a feel for what is going on in the real local American Economy. So far, I have been right and it has been ugly. Of course, I have seen some great accounting as well, I need to track down some of these firms as I think they can save me a bunch of money.
Anyhow, we have seen heavy credit losses and more money being set aside for further credit deterioration. Not only that, but all this talk about a recovery and banks are lending is simply not true. I have yet to see a real expansion in any lending to consumers, and barely any to business, in any of the balance sheets I have looked at. Clearly, Goldman Sachs is not really a bank, they are a hedge fund, so they do not lend money out and their earnings are irrelevant, but a Zions, Hudson City, Regions, Key Corp, or Wells Fargo they are relevant to the economy as they, kind of, produce things.
As I said, there is little loan growth in these banks and no loan or credit growth means trouble for the economy. Take that credit away and government giveaways and we have an economy is very serious trouble and a stock market severely overbought. It’s no secret that that I am a bear, hey a 60% run with zero fundamentals just doesn’t do it for me, sorry, but if you take away government transfers then we have an economy that is -5.5% GDP or so. Positive stocks do not represent a healthy economy and government spending has a negative multiplier effect as the money has to be repaid, with interest, through taxes at some point.
We would have had far better returns by cutting taxes, but hey why rely on history when we have the myth of the New Deal on our side. Let’s not forget the last government report admitting that it cost us $70K plus to save 30K jobs thanks to the stimulus. I know, the stimulus will not kick in until 2010, that is a load of BS as most of the stimulus is pork barrel projects such as the monorail between So. California and Vegas along with other corrupt political endeavors. If the stimulus was working we would not have lost 53K government jobs last month, end of story and argument.
Not to mention that the primary goal of all of this, stimulus and Fed efforts, was to get banks to lend again and consumers to spend, both efforts failed because neither want to lend nor do they want to spend. This explains why banks bought some $1T in treasuries and why consumers are shedding records amount of debt. Sure banks are lending to each other again, great, but not to people who actually need the money which is the problem.
This might explain why regional banks are not loaning any money to consumers, but it does not explain why small business, who are desperate for capital, are not getting loans. This is a serious problem that needs to be addressed sooner rather than latter because if small businesses fail at any faster of a rate than they are failing now unemployment will climb faster than this bear predicts. If the regional’s keep coming in with weak earnings like we have seen you would be nuts to commit new money to this market. Actually, you would be nuts not to take money out of the market.
By the time we have a 60% rally, according to Dave Rosenberg, we are in year 3 of economic expansion and creating jobs, not losing some 2 million jobs. Never in the history of any recession have we ever had a 60% rally from the lows in 6 months while still losing jobs and experiencing poor economic numbers, never. The market has priced in perfection in GDP growth, some 5% positive growth, and $83 per share on the S&P. I highly doubt that is going to happen, if you think that is going to happen, then go nuts on the long side. In fact, maybe you should lever up on the 2x ultra bull ETF’s. I will take the other side of that trade as history is on my side and there is no new paradigm and every time someone makes the claim that there is a new paradigm, new economy, or new global liquidity it has always blown up in that certain someone’s face and the old timer, i.e. me, walks away right. The only variable is how much time there is before my prediction comes to fruition.
P.S. – I am currently Long SPY March 2010 90 puts, June 2010 puts and am opening a SDS long position.
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