The Haiku of Finance for 08/22/09

Bigger deficit
Bond blowout will choke us all
We're in for it now

China Has Had Enough Of U.S. Debt

The tipping point in Uncle Sam's debt binge is finally here. It came in bits and pieces but the overall outline is no longer in doubt:

China reduced its holdings of US government debt by the largest margin in nearly nine years in June, according to data from the US Treasury.

China holds more US government debt than any other country and cut its holdings of US securities by more that 3% in June, said the BBC's Chris Hogg.

The handwriting is on the wall but many Americans are illiterate. One by one, the U.S.'s foreign creditors will decline to buy our Treasury bonds. One by one, they will choose to stimulate their own economies and not ours. One by one, they will pursue autarkic programs and leave the U.S. to its fate. There is no need for another Smoot-Hawley tariff this time around to drive global trade through the floorboards. The eventual collapse of the dollar will accomplish that all by itself.

Nota bene: Anthony J. Alfidi is long FXI with a short straddle.

The Haiku of Finance for 08/19/09

Markets catch a cold
Chinese sneeze blows down world stocks
Cash gets some bed rest

China Closes Down, Spooks U.S.

It used to be that when U.S. markets sneezed, Asian markets caught a cold. Now it's the other way around:

World stocks sank Wednesday, with European indexes spooked by a 5 percent drop in China that strengthened fears stocks have become overpriced after this year's powerful rally.
(snip)

China's benchmark index has lost nearly 20 percent since Aug. 4 on worries about corporate profits, the strength of China's recovery and possible changes in Beijing's easy credit policy that has helped to fuel the bull run in Chinese stocks this year.

Dow and S&P 500 futures were down too; I expect Aug. 19 to be a down day for U.S. markets. This is the kind of news that illustrates how the world is changing, with China supplanting the U.S. as the nation to which the rest of the world turns for leadership. I look past the fact that China's stocks are down from their peak. That's why I'm holding FXI for a very long time.

Allied Nevada Finds Gold And Raises Capital

I continue to be proud of the only single stock holding in my portfolio, a junior gold producer named Allied Nevada Gold Corp. They have recently reported good results from exploratory drilling at their Hycroft property:

Successful drilling in 2008 suggests that a large blanket of sulfide mineralization, associated with veining and brecciation, exists directly below the oxide mineralization at the Vortex. An inferred resource of 62.0 million tonnes grading 0.78 g/t gold and 48.1 million tonnes grading 68.14 g/t silver, for inferred resources of 1.5 million ounces of gold and 105.3 million ounces of silver was released for the zone in March 2008.

Suffice it to say that this is a very positive result. If the Vortex zone's mineral grades remain higher than those of the overall Hycroft property, it may very well become the "bonanza zone" of that property.

Results like this are the reason Allied Nevada is successful at raising more cash to fund further operations:

Allied Nevada Gold Corp said it would raise about C$100.4 million ($92.45 million) by selling 11.2 million common shares to a syndicate of underwriters co-led by GMP Securities LP and Genuity Capital Markets.

The underwriters have enough confidence to subscribe to the entire issue up front. Good for them. I felt the same way when I first met Carl Pescio, one of Allied Nevada's largest shareholders, before he helped create the company.

Nota bene: Anthony J. Alfidi is long ANV, with the intention to continue selling OTM puts under its market price.

Top Of The Mark(et)

This is the Top Of The Mark:

It's a storied bar on the top floor of the Mark Hopkins, one of the most renowned hotels on Nob Hill, one of the highest places in San Francisco. Many people spend a lot of money there on food, drink, and dates in pursuit of the good life. It's one of those places that makes me glad to be a San Franciscan.

This is the top of the market - the stock market, that is:

It's a storied place where the DJIA and other indicators reach the highest possible valuation given current fundamentals. Many people spend a lot of money there on growth stocks, can't-miss plays, and great sell-side ideas in pursuit of the good life. It's one of those places that makes me glad to be a contrarian investor.

I'm calling the peak of this sputtering bull market right about now. It may not be obvious for a few more weeks, but hey, I'll go out on a limb.

The Limerick of Finance for 08/15/09

Confidence of consumers still wanes
People can't spend if wallets stir pains
Their accounts are dried out
Nothing left in the spout
They'd save cash if they had any brains

The Haiku of Finance for 08/14/09

Consumers lose it
Confidence, that is to say
They don't want to spend

Consumer Confidence Falls In Aug. '09

Looking for hope that consumers will power their 70% of GDP back into healthy territory? Stop looking right here:

Confidence among U.S. consumers unexpectedly fell in August as concern over jobs and wages grew.

Today’s figures, including an unchanged reading in the cost of living, underscore the damage that the biggest drop in gross domestic product in any recession since the 1930s has had on households and retailers. With little sign that $1 trillion of injections into the banking system is feeding through to inflation, Federal Reserve policy makers are forecast to sustain their efforts until a recovery is secured.

I'm tempted to be modest and say that I couldn't have phrased that last paragraph any better myself. I'm not that modest. "Any recession since the 1930s" is a happy way of avoiding the admission that we're living through Great Depression 2.0. The drop in GDP has created a positive feedback cycle, with job cuts depressing consumer spending, which hits corporate earnings, which will force more job cuts, etc.

Will America rise to the challenge and retool for the industries of the future? Will spending on nanotech and renewable energy take priority over an unnecessary (IMHO) overhaul of health care? Time will tell. I won't predict the results of any future stimulus.

I will stay short my uncovered calls on SPY and IWM.

The Haiku of Finance for 08/13/09

Surprised by data?
Not me, not by a long shot
There's no bottom yet

Disappointing but Expected (To Me, Anyway)

Is this really so unexpected? Only people who bought into the bullish hype will be surprised at this:

Retail sales disappointed in July and the number of newly laid-off workers filing claims for unemployment benefits rose unexpectedly last week. The latest government reports reinforced concerns about how quickly consumers will be able to contribute to a broad economic recovery.

I've been saying for several months that the economy is not in recovery mode. I expect these figures to be revised downward in the months ahead. Meanwhile, rising mortgage rates will prevent home prices from recovering:

U.S. mortgage rates rose in the latest week as Treasury yields climbed, according to a survey released on Thursday, a move that may dampen home loan demand.

This what happens when you flood the bond market with Treasuries to pay for wildly unsustainable federal spending. They crowd out every other form of fixed income investment and force issuers to ramp up yields to make their paper attractive. Banks facing higher debt costs are then forced to raise mortgage rates to cover the cost of that debt.

I do not see a bottom in this recession.

The Haiku of Finance for 08/12/09

Madoff money man
Goes to jail, bankers stay free
Where is the justice?

Crime Doesn't Pay . . . For Some People

Note to fraudsters: You can't always get away with ripping off your clients:

After months of secretly working with the FBI, Bernard Madoff's right-hand man emerged in federal court on Tuesday and pleaded guilty to conspiracy and other charges, contradicting claims by the disgraced financier that he acted alone.

Now if only we can jail the bankers being paid to fraudulently hide junk assets on their balance sheets. Nah, forget that, regulators would rather just ask them to be more discreet when cashing their chaecks:

Bonuses are already set to rise next year, according to New York-based pay consultant Johnson Associates Inc. The incentive compensation for employees in fixed-income divisions of banks may jump 40 percent to 50 percent from last year, the New York- based firm said. Bonuses at asset management firms may fall as much as 35 percent, the report showed.

Last time I checked, mortgages are considered to be fixed-income instruments. That's how they're rated, packaged, and marketed to CMBS buyers. The co-conspirators (banks' fixed-income credit analysts) in hiding the banks' fictionally performing mortgage assets are thus planning to pay themselves even more next year.

What are the crooks rewarding themselves for? Cooking their books, of course. Analysts and auditors who falsely portray non-performing mortgage loans as high-quality assets succceed in delaying inevitable home foreclosures. That gives a whole bunch of unemployed homeowners the impression that the economy isn't getting worse. Does it feel like a bottom? A lot of people are fooling themselves into thinking so:

Optimism on U.S. equities climbed the most since April, according to the Bloomberg Professional Confidence Survey. Investors expect equities to rise during the next six months in a record seven countries, with indexes in Brazil, Italy, the U.K., France, Mexico, Japan and Switzerland forecast to advance.

Good luck, folks. I'm not one for self-delusion. There is no economic recovery. Commercial real estate harbors the next set of defaults to hit the economy. When those hit, we'll be right back in a credit crunch.

I'm staying short.

China Ready To Rise, U.S. Banks Ready To Sink

China may very well be able to power at least some parts of the world out of Great Depression 2.0:

China's exports, retail sales and factory output improved in July, the government said Tuesday, adding to spreading signs the global economy might be recovering from its worst downturn since the 1930s.

Closer to home, banks are still plagued with problem assets just waiting to blow up:

In its latest assessment of the $700 billion financial system bailout, the Congressional Oversight Panel warns that banks still hold many risky loans of uncertain value. If unemployment rises sharply or the commercial real estate market collapses -- as many economists fear -- the banking system could again lose its footing, the panel says in a report to be released Tuesday.

Wall Street's odd rally of late is beginning to peter out precisely because news like this keeps leaking out.

It should be clear by comparison of macroeconomic news why I'm long FXI and short calls on SPY.

Daisy-Chained Bankruptcies For Those With Eyes To See

Gang, things aren't getting rosier. Need proof? More bankruptcies are coming:

More than 126,000 consumers filed for bankruptcy in the U.S. last month, 34 percent more than in July 2008, the ABI said in its latest report on Aug. 4. The increase came after a 36.5 percent rise in personal bankruptcies nationwide in the first six months, to 675,351, according to the ABI research group, which interprets data collected by the National Bankruptcy Research Center.

More bankrupt consumers means fewer shoppers at your local mall. That means retail bankruptcies, then commercial property bankruptcies. More bankrupt homeowners means fewer home mortgages get paid off. That means more bankrupt banks.

Corporate treasurers see the warning signs of a future cash crunch. They're being proactive. By contrast, the Fed is reluctantly preparing to launch its Plan C after problems in commercial real estate have become obvious. They're being reactive. Why is it that measures of market volatility can anticipate the trouble ahead but policymakers can't? I'll answer my own question. It's not that they can't anticipate trouble; they simply won't because it would be an admission that stimulus measures have failed. Mr. Market can't be fooled for long.

Nota bene: Anthony J. Alfidi is short uncovered calls on SPY and IWM.