Lets all party like its 1999

by Stephen Tetreault, T-Waves | May 7, 2009

The top of this recent euphoric relief rally in a Bear Market is close at hand

And lets make sure our iPods are playing a loop of “Don’t worry be happy” as happy days are here again, and I’m looking for Fonzie to give me the thumbs up! We better enjoy them while they last…as “Optimism builds” was a recent headline in the Financial Times. As I had predicted, the markets are enjoying a very nice bounce {and I must admit its rocketed upward much further than I thought it would}. Now so called experts who had no idea there was anything wrong with the world financial system two years ago, now say the problem is fixed and we are off to the races in a new bull market. And we should bow to and acknowledge that the very people who saw no contagions and had no idea what was wrong with it, are the architects of the greatest financial recover ever-seen.

Now guess what, how did they address the contagions and fix the deteriorating credit markets…they once again printed endless supplies of fiat-money and they issued mountains of debt the same main element thing that caused the problem they didn’t see last time around….now I just do not get it, we issue more debt to 3-5 times more than before to help take care of the toxic debt.

Now is the bullish sentiment really justified….on the housing front…U.S. houses are down 30% from their highs; while the Case-Shiller index of housing prices has fallen for 30 months in a row, so it must be the bottom right? Maybe, though the latest data showed an uptick in sales of new, as well as existing houses. And there are more housing starts too just by a smidgeon. But in the former bubble-states California, Nevada and Florida, Mexico, Massachusetts about 50-55% of the sales were on foreclosed properties. These properties are being swept up at bargain prices; while pulling down the value of the entire housing sectors they reside in. And there are more houses being foreclosed on then there are sales a dismal trend. So don’t expect any major turnaround in prices. If prices have hit bottom which I do not yet believe they have the gains are likely to be very small…and they will move upward albeit very slowly.

When the housing crisis began, I estimated that prices needed to come down about 40-47% in order to make the average house affordable by the average person as the bubble had taken on a Hindenburg proportion. But that was before the average person’s income started to drop like a stone. If the deep recession continues, as I think it will, house prices should come down another 15% to 20%.

Now the bulls like Cramer and Kudlow my favorites pair, are stating that the world is not entering a major downturn, it was just a case of mass hysteria…a panic, like the Y2K bug…or the panic that set in after 911(terrorism)…or swine flu. And that people are now getting over it…and getting back to business, just like they did before its business as usual.

Consumers are feeling much better as consumer confidence measures are about 20-25% below the baseline; but that’s a huge improvement (green shoots and mustard seeds) as they had been nearly 40% below the baseline. There is some evidence that consumers are returning to their pervious bad habits, as well I must confess as consumer spending is picking up at least, that’s what recent numbers from the discount stores show.
What I found very interesting that it was the emerging markets that took off this year like a rocket as a few months ago, it looked as though China would be not be able to decouple from the developed world, and then bang they miraculously catapulted out of the cesspool, and amazingly they were headed towards recession just like everyone else and they somehow reversed course overnight. But then those clever Chinese seem to always have a solution. And we saw that China seems to have (at least on the surface) pulled off a huge “V-shaped recovery” China’s figures (if we can really trust them) show it expanding at more than 8-10% rate. It seems very unlikely to me that China could have recovered so quickly and missed out entirely on suffering the wrath of the recession.

After a massive rocket-ride of a relief ride the SPX has rallied 36% from its March lows, the SPX turned semi positive for 2009 yesterday, an then it was sitting on a whopping 0.4% gain. But before you break out the party hats consider this; this massive relief rally in the SPX is primarily being driven by only three sectors: Consumer discretionary, materials, and technology….a very narrow and thinly traded group. It’s hard to believe in a new stellar bull market’ when 60-65% of the sectors are in the red (as of Tuesday)

Maybe it’s was only hiccup for China; though it would seem more believable that they are lying about their so called growth but then again other developing economies are reporting the same scenarios increases in exports after a catastrophic collapse at the end of the last year…and we can measure the collapse easily just by looking at the Baltic Dry Index which keeps track of bulk shipping rates; as it plunged by more than 90% last year, now from its low, it’s doubled up 100%., but its still down 80% from a year ago.

We have seen that the stock markets in emerging market countries show similar increases. Brazil’s stock market is up almost 90% from its low. South Korean stocks are up 70%. And Chinese stocks those listed on the Shanghai exchange have gained 58%. Apparently, many think the worst is over. Maybe they are right.
Instead of a healthy new bull market I believe we are seeing that the world is enjoying the deteriorating echo of the old one we are trying to unwind. Governments, led by our manipulative Federal Reserve and Treasury are attempting to reinflate the mega bubble with taxpayer guarantees and taxpayer giveaways equal to an entire year’s annual GDP or more.

And since every penny of this money is borrowed against future generations, it makes sense that every penny will have to be withdrawn from the world economy at some point; to me at least. In fact, I am already looking ahead to the moment when deflation fears give way to mega inflation fears. We will then be called “The Hyper Inflation Nation” where we could see a repeat of those dreadful inflation years during the 1970’s. Under B-52 Bernanke, I believe that this time, the inflationary party is likely to get way out of control, happy days could last a bit longer and then some very sad days for Americans when the proverbial punch bowel is eventually withdrawn!

The clouds seem to be parting over Wall Street (as we are entering the eye of the force 5-hurricane, its worth noting that the fieriest part of a hurricane is the trailing ½). The media’s turning their rhetoric back to familiar stories of Asian ascension and commodity supply deficits; while the indexes are up about 29-40% depending on the one under the microscope and trends seem to be taking a huge turn towards excessive risk-taking and the return to ways of old and we have shifted so in just 2+/- months.

So if we assume that this is (was depending on your immediate perception) a bear market driven by massive credit destruction and asset bubble deflation; on a scale like nothing we have ever seen since the 1929 Great Depression…then it stands to reason we should look back to the bear market rallies of that time for our frame of reference.. But the most salient point of the chart to the left…is that we only seem to be approaching the average in both percent change and duration of past bear market rally for this kind of market scenario.

So when we hear the so called “experts” being pranced about on the various bubblevision networks {the very same people who were dumbfounded when the indexes imploded 50% decry a new bull market…it make me sick as I can’t help but feel a little skeptical, as they on average are historically wrong. If we add another 20% and we will see a comparable first relief rally of the Great Depression and it was the strongest relief rally of them all until the bottom was in place in 1932. Hell we only need another 65-75% gain to jet us back to 2007’s heady highs.

Has the onslaught of Global Deflation disappeared? I do not think so! The same forces that started this crisis are still at work; as foreclosures keep rising, homes keep getting cheaper and cheaper; and our economy that is acting like a credit-junkie is still feasting on and salivating for easy money to fuel their consumption.

With the help of our tax money, politicians have managed to obscure the solvency of our financial institutions. Thanks to that, we won’t see a systemic collapse due to the global network of Credit Default Swaps and other disastrous derivatives in the near-term but I do not believe that all the King’s men will be able to put this Humpty Dumpty back together again for the long-run.

Real wages are falling…stock market wealth (not to mention pensions and 401k’s) and housing wealth have been crushed…debts growing and are making American households very queasy…and if anything, the “green shoots” represent the American consumer settling into a far lower level of consumption, at best. I must stress that these are economic factors; not financial. So in my humble opinion they can’t be fixed by piling funny-money into the lecherous Wall Street banking balance sheets.

The seeds for debt deflation a particularly wicked type of economic phenomena have already been sown. By the time it’s all said and done, this could end up looking like the biggest economic debacle in living memory.

This relief “bear-market” rally has been what could be called a risk rally {as funds run into high-beta risky stocks} as these growth funds tend to be more aggressive, and that's what's been working of late. We have seen that Mid-cap growth funds this year have increased 7.3% through April, while small-cap growth funds are up 3.9% and large-cap growth has returned 4.9%, according to investment researcher Morningstar. By contrast, large-cap value funds are down 3.9%, mid-cap value funds are up 1.2% and small-cap value funds have lost 1.4%.

Much of the out performance by growth funds has been powered by the technology sector. Technology funds are up 17% this year, according to Morningstar, and the sector is typically a popular one for growth funds. The second-best performing sector, communications, is up 11% in 2009 and is another favorite of high-beta chasers.

While the SPX rocketed 9.4% in April, its biggest one-month gain since March 2000 (the market bubble top), I still have some hesitancy to call this uptick a bull market. This is the type of rally you see after a big downturn, but it's still an open question about whether it's long-lasting or we make new lows.

I have had my suspicions about the current stock rally for the past 3-weeks and have missed all the upside during this time (and who the players were that orchestrated it) and their fingerprints are all over the place if you look carefully. The rally started when we saw so called leaked memos by Citigroup, Bank of America, JP Morgan Chase and Wells Fargo announcing their so called return to real profitability (then we find it was smoke and mirrors profitability).

From my vantage point there has always been something strangely unique and what I like to refer to as staged managed about relief this rally, which sent the bloody and wounded SPX rocketing up about 33% from its 3/6/09 lows. First, the ‘leaked’ memos… then the earnings report press releases… then the bogus earnings reports themselves filled with and littered with huge one-time expense items, then the mysterious FASB accounting hocus-pocus and missing months for MS, and GS….it appears to be well to scripted like a dance.

Ever the massive increase in program trading (computer trading of large baskets of stocks) by Goldman (see Goldman section below) adds an even stranger dimension and flavor of mystery. GS has fed the rally with a massive 5-7 times increase in its principal program trading at a time when other quant funds and program traders have been quickly and professionally deleveraging their positions. One to 1.5-billion shares principal traded is becoming the weekly norm for Goldman and this is a massive expansion for this Washington insider group.

There’s a neat quid pro quo here, if you care to look for it. The government bails out AIG using taxpayer’s money; the idea supposedly being to provide enough liquidity for AIG to allow it to make credit-default-swap settlements to counterparties at significant haircuts to avoid “systematic risk” but low and behold these trades were settled at a whopping 100% handing massive profits to the lecherous counterparty banks (C, BAC, MS, JPM and Goldman was the big winner). As it was the bank in receipt of the biggest AIG settlement, Goldman Sachs, then uses these funds (or part thereof) to feed this recent rally with massive leveraged in stocks via its massive principal program trading operation, thus relieving pressure on the Obama administration as it completes its significant 100 days in office milestone (but then this purely be a coincidence).

So in retrospect if we look under the proverbial hood of this rally we can conclude to some extent that this was a massive taxpayer-financed bear-market-relief rally orchestrated by the banks and their government sponsored cronies that they have strategically placed in positions of power. First, the AIG conduit: the counterparty CDS unwinds were definitely taxpayer financed as was the PPIP program, which proposed using taxpayer dollars as leverage for private funds (great deal if you can get it) who want to buy the toxic assets from banks at a great discount with no risk. These same banks have also been raising money via government-backed debt issuances and it’s something very few mainstream investors understand or even know about.

The results of the government's stress tests (if we can even call them that) on their favorite sons/banks, to be released in a few days, will not mark the beginning of the end of the financial crisis; and if you believe so, I have a bridge to sell you (the bridge to no-where).

The International Monetary Fund has just released a study of estimated losses on U.S. loans and securities. It was very bleak $2.7 trillion, double the estimated losses of six months ago. My estimates are even higher, at $3.2-3.4 trillion, implying that the financial system is currently near insolvency in the aggregate (but this is a nasty presumption and not a very popular view). With the U.S. banks and broker-dealers accounting for more than half these losses there is a huge disconnect between these estimated losses and the regulators' conclusions; as there likely should be, as those conducting the stress tests have to many conflicts and to many vested interests in developing the tests to infer positive results.

The hope is that the stress tests would be the start of a cleansing process of the financial system. But using a market-based scenario in the stress tests would have provided worse results than the adverse scenario chosen by the regulators (now how could that be). For example, the first quarter's unemployment rate of 8.1% is higher than the regulator’s“worst case” scenario of 7.9% for this same period (this is strange voodoo). At the rate of job losses in the our country, we will surpass a 10.3% unemployment rate this year and this is the stress test's worst possible scenario for all of 2010 (I really pray and hope they are right). I fear that we will be returning to taxpayer bailout purgatory, for lack of a better term (not hell yet).

GOLDMAN SACHS the POWER-HOUSE
Goldman Sachs has infected our government.......Call me a conspiracy-theorist if you wish but I believe contrary to the prevailing popular hype on the various bubblevision networks that the Obama and Bush administration insistence on protecting banks and lenders not to mention GS & MS at the expense of the taxpayer is the result of a Machiavellian effort by Goldman Sachs and other major banks to wield their enormous influence over U.S. economic policy by infiltrating the corridors of power in Washington. [Goldman Sachs has just hired former Barney Frank staffer Michael Paese to be their top Washington lobbyist, no conflict here huh. This position was formerly held by Mark Patterson, the current chief of staff at the Treasury.] Pease and Patterson are not the only ones to pass through the revolving door between Washington and Goldman Sachs.

Bush’s Treasury secretary, Hank “The Hammer” Paulson is a former Goldman CEO. And his replacement, Tim Geithner, was mentored by Gerald Corrigan, a former New York Fed president and current partner and managing director of the Office of the Chairman of Goldman Sachs (who how deep does this go?). Ed Liddy, who the government appointed as CEO of AIG was Goldman’s vice chairman. World Bank president Robert Zoellick was a managing director. Neel Kashkari (an appropriate surname for a government bagman if ever there was one), the 35-year-old overseer of the TARP program was a vice president at Goldman. And Geithner’s replacement as president of the New York Fed, William C. Dudley, is also a former Goldman employee. Oh… and Robert Rubin was Treasury secretary under President Clinton. And former Goldman senior partner Stephen Friedman headed Bush’s National Economic Council in the first term. And Josh Bolton, another former Goldman golden boy, served as White House chief of staff under Bush. And let’s not forget that the former CEO of the NYSE, John Thain, is also a Goldman alumnus. And his replacement, Duncan Niederauer, spent 22 years of his career at the bank (I believe I have painted the picture I wanted)!

Of course, these high-level appointments are probably just coincidental right; just as it was probably just a pure coincidence that on 9/15/2008, then NY Fed president now the T-man Tim Geithner pressed for AIG’s biggest counterparty, Goldman Sachs, to help the insurer raise capital after it became clear that AIG was at risk of going bankrupt. And that on the same day Goldman’s current CEO, Lloyd Blankfein, was at the New York Fed. And that Goldman ended up in receipt of about $12.9 billion in taxpayers dollars thanks to AIG’s wholesale credit-default swap unwind after the bailed out concluded.

Goldman’s close ties with Washington are important pieced of the puzzle because during the recent “junk-stock rally” where the biggest POS stocks (high-beta with poor earnings and guidance but are highly shorted and then who mysteriously appeared HTB), couple this with the remarkable rocket ride in the value of bank stocks, and the subsequent pressure relief taken off a beleaguered White House, its not surprising that we have seen a parade of well orchestrated rhetoric and various program-announcements.
Goldman has been by far the biggest program trader by volume on the NYSE (where former Goldman boy Niederauer is CEO). And when I say by far the biggest, I mean the biggest. As you can see from the chart, below Goldman Sachs traded for their principal account (i.e. using the bank’s own funds, provided by the taxpayer through AIG) more than the next 14 largest institutions in the world combined! Goldman traded 1,028,100,000 shares versus 953,000,000 for all other reporting institutions.

It was released today that Goldman Sachs Group reaped more than $100 million in trading revenue on a record number of 34 separate days during the first three months of 2009 (on their insider-knowledge), up from the previous peak of 28 in last year’s first quarter. They said today in a filing with the U.S. Securities and Exchange Commission. The first- quarter number was almost double the total for all of 2005. Goldman Sachs, which took $10 billion from the U.S. Treasury’s taxpayer bank-rescue program in October, reported a record $6.56 billion in revenue from trading fixed-income, currencies and commodities in the first quarter. David Viniar, the company’s chief financial officer, said on April 14 that the trading success was due to “favorable competitive dynamics” wider margins and higher volatility (this is code for we knew what was going to happen before it did as we were in a controlling position). [The firm had 90 days in which traders made more than $100 million in fiscal 2008, compared with 88 in 2007; while in fiscal 2006, the figure was 49 days, and this was up from 18 in 2005 and 14 in 2004] Do we see a pattern here as the more intertwined in our government the bigger the pay days?

Is Goldman really a bank as trading and principal investments accounted for 62% of the bank’s revenue in the first quarter of 2009, up from 59% in the first quarter of 2008; and net interest income, the difference between the interest the firm pays and what it charges, doubled from the first quarter of 2008 as the company’s interest expense dropped 76%, the filing showed.

Another reason for their success is that Banks such as Goldman are benefiting historic lower borrowing costs after the Federal Deposit Insurance Corp. in October started guaranteeing these bank debt issues that mature within three years. Goldman Sachs has issued about $22-billion of debt that’s guaranteed by the FDIC; while today’s filing showed the weighted average interest rate paid by Goldman Sachs on its unsecured short-term borrowings dropped to 2.1% in March from 3.38% in November (nice way to make money at these rates!

I’m outraged and I’m surprised that many have overlooked the outright manipulation….the fact that the chairman of the New York Federal Reserve Bank (with Goldman ties) made millions off his secret purchase of Goldman Sachs stock, “in violation of Federal Reserve policy,” at a time when the N.Y. Fed was ostensibly overseeing the antics of the same Wall Street firm, has barely registered a blip of outrage.

When N.Y. Fed Chairman Stephen Friedman bought stock in the firm that he once headed, and where he still serves as a director, and when he did so he was already in violation of Federal Reserve policy and was hoping for a waiver to permit him to hold his existing multi-million-dollar stock stash and to remain on the Goldman board…guess what the waiver was requested last October by Timothy Geithner (his buddy), then the president of the N.Y. Fed and now Treasury secretary. But, without having received that waiver, Friedman went ahead anyway due to insider information in December and purchased 37,300 additional shares (with margined money). With shares he added in January, after the waiver was granted, he ended up with 98,600 shares in Goldman Sachs, now worth almost $14-million.

The significance of this conflict of interest was summarized by a WSJ story: “The Federal Reserve Bank of New York shaped Washington’s response to the financial crisis late last year”, which buoyed Goldman Sachs Group. and other Wall Street firms. Goldman received speedy insider approval to become a bank holding company in September and a $10 billion capital injection soon after.

In addition to that capital injection, which at least carries some expectation of being repaid, Goldman received an additional $8.1 billion that will not have to be returned to taxpayers. This is a result of the bailout engineered by then-N.Y. Fed president Geithner of AIG, which listed Goldman as its top insured credit-swap customer.
A
ll of which calls into question the massive power of Goldman Sachs over our government, as described in another important, article from The New York Times last October headlined “The Guys From ‘Government Sachs” Their power is vast, no matter which party controls the White House. Under Paulson, the bailout of Wall Street was dominated by Goldman Sachs alums, and as the Times noted, “Indeed, Goldman’s presence in the (Treasury) department and around the federal response to the financial bailout!

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Stephen Tetreault | Southern Maine, USA | Email | Website