Winter (Economic & Market) Watch

The banks are going to be on line for refinancing a significant quantity of maturing bonds. A recent new issue from American Express, who is considered a higher quality financial sector name highlights the fragile state of the financial system. This debt sold at a junk bond spread of 425 basis points over Treasuries. Bank bonds are T+400, and B rated corporate spreads have blown out to T+870. Houston, we have a problem.
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My plans now are to go to a subscriber model for my efforts. It appears I have some devoted readers, but incredibly despite my track record of reporting the unfolding of this Bust, readership is slipping and has hardly grown for a year. I suppose you either get my language and approach or you don’t. Whatever is the case, I should be writing primarily for those who do get it, and throw in the towel on the others. I am ready for something different. Incidentally as soon as we get the subscription box up and ready, any one who has contributed in the past to the tip jar for over $20, can e mail me (see right column) and we will credit you back a one quarter subscription gratis.  You will need to subscribe first, then alert me.
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The pace of foreclosures continues a pace. With the subprime situation starting to ripen and mature, perhaps this suggests that the Alt A and Pay Option wall of the hurricane is coming ashore. This is real delayed time fuse explosive material too. By this I suggest that the recoveries will be even worse than for subprime, because of the degree of the collapse in housing prices by the time this recasts and resets hit, plus the additions to the mortgage balance from negative amortization. In other words these are “o maximo” in impact.

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A new Radio Free Wall Street podcast is now available. At 36:00 I go into my current game theories, and some actionable trading.
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I am now trying to apply some game theory to the energy market. This involves several issues, first is demand destruction from high prices, second is substitution, and the third is national security and dependence. The later has a huge price tag or externality attached as the United States overextends itself militarily, and gets involved in hotbed regions and with all sorts of dubious characters in a hopeless attempt to secure and supposedly to protect oil supplies. The US currency is weakened as enormous sums are sucked abroad. Some of this is used to fund aims directly counter to American security. Saying that this is a deeply flawed national strategy is hardly a big revelation or at all controversial.

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The crash of China’s stock market is now pretty much along the lines seen in the 1929-1932 US crash, the Japanese 1989-1992 crash and the NASDAQ bust. Last night it fell another 5.2% to 2,470. I recall the hook last year on this one: “the Chinese authorities would hold it all together until after the Olympics”. Talk about a misplaced bet on the Wizard of Oz.

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“Clearly, something is amiss in the markets that few in our strategy, if anyone, have experienced before.” — Letter to Black Mesa investors

The casino Berserkers have met the enemy and to quote Pogo, “he is us”. More evidence is rife that big Berserker hedge funds are in liquidation mode. Repeating again, it is likely that the big long running anti-USD and commodity bulls are also undoing some big leveraged bets. This should in turn undo some affiliated broker-dealer, who are also incorporating “take this dice from my cold dead heads” approaches to try and offset the damage from their previous Bubble gambling. I would have to say that about the stupidest, most laughable thinking about the various Bubbles over the last decade is that “speculators matter little”, or its not “really speculation”. The reality is quite the opposite, speculation has been nourished and is completely out of control, and this in turn has been overlaid with considerable justification mythology.
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One pill makes you larger. And one pill makes you small. And the ones that mother gives you. Don’t do anything at all. Go ask Alice When she’s ten feet tall- White Rabbit - Jefferson Airplane

New podcast is available. Just when it seemed that the majority of fantasy down the rabbit hole thinking was in full retreat comes a national survey from Zillow showing that 40 percent of U.S. homeowners think their house is worth more than it was a year ago. And 22 percent more believe their home price is unchanged. Of course in reality, the real estate web site folks estimate, more than 75 percent of U.S. homeowners have seen their values decline since last year – whether they are willing to admit it or not. Three-quarters of them said they expect their home values to rise or at least stay the same between now and early 2009. Strangely, 42 percent said they expect overall values in their local market to drop. Incense and Peppermint?

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One of the Bully wannabes icons is (was?) Whole Foods, who bombed on their earnings report after the close. The stock came down another 20% and it is not exactly like this was still a high flyer beforehand. Given that I feel grocers in general are good market plays now I decided to pay a trip to my local Whole Paycheck.

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The demand destruction part if the commodity equation is finally getting some attention, as almost all indicators are pointing to a significant economic contraction. On the so called decoupling front, exports from China are declining, and at last a big break in oil has occurred. The Mad Maxed out sectors are coming up for a little air, and this also serves to significantly reduce the trade imbalances and thus Dollar recycling.

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