Tuesday, August 04, 2009

Trading the Recovery Bubble


Complete broadcast.

How Wall Street Is Generating Trading Profits

The more alert blogs have finally figured out how Goldman Sachs, et. al. are creating enormous trading profits, especially at a time when trading volumns in most securities have seriously declined. These Wall Street firms are buying toxic, illiquid garbage which institutional investors (read: your pension fund or insurance company) have marked at low levels (yet still not low enough) and selling these securities into the Fed at the Fed's inflated bid levels. This is one way in which the Fed is injecting liquidity into the big banks - at the taxpayers' and pension investors' expense. It is also a primary reason the Fed refuses to disclose what it its paying for these toxic assets and why the Fed is spending millions in lobbying to prevent an audit.

Here's the mechanics, and it's a trading ruse that was being used when I was trading junk bonds back in the 1990's: Naive pension fund has toxic crap asset marked down to 20 cents. Snake Wall Street firm has bid from the Fed at 50 cents. Pension fund trader has no idea who the buyer is and what the general bid is in the market, because this asset hasn't traded in over a year. The 20 cent mark is based on Markit's "guesstimate." Snake Trader tells Pension Trader "look, I can pay you 10 cents for this asset, it's the only bid in the market and I'm not even sure where I'll re-trade this thing, but I'm willing to take some risk at .10. Pension Trader, in somewhat panic and somewhat gratitude sells the asset to Snake Trader. Snake Trader turns around sells it to the Fed for 50 cents. A 40 cent spread on a bond with $10 million face is $4 million dollars. WE know the Fed is eventually investing over $1 trillion to buy this toxic crap. If firms like Goldman and B of A (Merrill) and JP Morgan can average a 20 cent spread on $1 trillion, that will eventually be $200 billion injected into the banks at the expense of everyone else.

Is a 20 cent spread, on average, unrealistic? I know for a fact that it is not because we averaged 10-20 cent spreads in trading junk bonds out of the RTC and into investors back in the 1990's. Given that these toxic asset-backed bonds are even more toxic and less liquid than junk bonds were, I'd say an average of a 20 cent spread overall may actually be conservative.

Think about how this works the next time you look at your pension or 401k statement and then you see Goldman et. al. reporting massive trading profits. Those profits are nothing more than these Wall Street firms ripping off the whole system. And one more point, some of the blogs reporting this activity are speculating that the Fed does not know how much mark-up is being taken by Wall Street on these trades. I beg to differ and would suggest that Bernanke and his cohorts have a very good idea how much is being made on this trade.

Here is the link to the Financial Times article which originally reported what is going on:


Written by Dave in Denver

Housing Numbers Err on the Bright Side

By Bill Bonner


08/04/09 Ouzilly, France

Is it time to buy a house?


If you need a place to live and want to own a house, why not? Prices in some areas are fairly reasonable. But if you’re speculating, our guess is that you’ll get a better deal if you wait.

Why? For the many reasons we have given you in these Daily Reckonings. House prices may be firming in some areas – that’s what the Case-Shiller numbers seem to show. But nationwide, they are probably headed down for quite a while longer.

Herewith, four reasons why:

First, as you know, this is a depression. It will probably be long. And deep. You wouldn’t know it from looking at the stock market or reading the news. The Dow went up another 114 points yesterday. Oil rose to $71. And the dollar – anticipating inflation – fell to $1.44 per euro.

But that’s what bounces are supposed to look like. They look good enough so that people mistake them for the real thing…and get suckered into more losses.

This is a depression. Depressions drag down asset prices. Typically, prices become much more reasonable. And then they reach UNREASONABLE levels. House prices have become reasonable. Now they will become unreasonably cheap…

Second, waves of resets and foreclosures are still washing over the housing market. As Barry Ritholz told us in Vancouver, we’re only half way through the foreclosure process. There are more than 18 million empty…Read more…

The Call of the Century

Making market calls, or "predictions", is a common practice. Timing is always the hardest part. If your sole source of income is derived from the success of these calls or predictions, it is advantageous to attach a timing that is far enough out that it allows for new information to surface that can be used to mitigate any damage done to your reputation should that call be wrong.

Normal market calls usually state that for fundamental or technical reasons, a trend line is due to change directions. But in the short run, where market calls normally reside, fundamental forces often take a back seat to momentum. It has always been this way, which makes fundamental-based timing more difficult. But now more than ever, it seems that fundamentals have taken a seat all the way at the back of the bus.

Generally, the purpose of market predictions is short term profits. For this reason, the business of calling markets has shifted over the last year, far away from fundamentals. I am not saying that no one is making fundamental calls, only that many newsletter writers who make their living doing this are saying two very different things out of two sides of their mouths. (more)

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