The Market Ticker - Strategies

Watch That Thesis! (FOMC Announcement)

nospam@example.com (Karl Denninger) — Wed, 23 Sep 2009 15:26:00 -0400

All investment and trading decisions beyond an hour need a thesis.

Today's FOMC announcement ought to result in the realignment of yours:

Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased.

We have monetized a scad of debt and that cash has wound up in equity markets. They have risen in response to the dynamic of supply and demand. Speaking of activity in the housing sector we're referring to the rocket-shot defaults on FHA mortgages.

Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.

Neither business or consumer activity supports stock prices or provides us with any sort of indication that credit demand growth is going to return any time soon.

Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

We believe in the Easter Bunny and Santa Claus too, as shown by the clear contradiction with our previous paragraph.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

Prices are deflating, but we never use that word.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

We told you there was no credit demand and that neither consumer or business conditions warranted any sort of real optimism, but since you're hard-headed we'll say it again.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009.

The flood of monetization that powered the market from 666 to 1070 is ending. We're going to taper this program down, mostly because we're rapidly becoming the entire market, and that's bad news (never mind that we might wind up with ALL of the credit risk, especially in the MBS market, which is substantial! That would suck.)

The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

We're sitting on a metric ton of used dog-food and are having trouble sleeping at night.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

We all hold hands now as we head for the cliff.... Wheeeeeee!

The only important sentence in the entire announcement is in bold.

Ignore it at your peril.

Nice shelf to get short at; take it down if we break materially over 1080. Either economic fundamentals assert themselves as deserving of these valuations or we're a solid 2,000 DOW points (and 200 SPX points) or more above where we should be. As a trade the risk:reward looks better than it has in months; you're risking ~10-20 handles on the SPX to potentially capture 200!

Federal Reserve Recognized Trash

nospam@example.com (Karl Denninger) — Wed, 19 Aug 2009 15:20:58 -0400

How long before our regulators force the banks to?

Notice the changes - and that this was as of 4/27 of this year.

Home equity lines are now worth (for collateral purposes) half of their face value. Consumer loans, 60% (credit cards, student loans, etc.) Commercial Real Estate, 65% (!!!) and normal commercial and agricultural (C&I) loans 65%.

Maybe someone can explain to this guy why our regulators allow banks to carry these things on their balnace sheets at values that are in fact above the previous "lendable value" when our very own Federal Reserve is uncomfortable with the possibility of a loss at any collateral valuation above the new value?

The answer, of course, is that there's no justification at all for allowing such "valuations"; they're a (bad) joke. Yet even the so-called "restatements" in the comment sections of 10Qs posted recently by financial institutions show alleged "values" that are awfully close to 100 cents on the dollar.

If its not good enough for The Fed, how come that passes muster with our so-called "banking regulators"?

Might they be fully bought-and-paid for?

Now you know where the losses are coming from when the FDIC seizes banks - the actual loss rates are awfully close to these haircut values, aren't they?

There's your market validation of The Fed's haircut numbers as valid and appropriate valuation levels, and further evidence that we have massive, systemic, pernicious and pervasive accounting and control fraud throughout our banking system.

STOP THE LOOTING AND START PROSECUTING!

Citi: SQUEEEEEZE!

nospam@example.com (Karl Denninger) — Thu, 19 Mar 2009 08:07:00 -0400

Hahahahaha.....

Hedge funds rushed in to buy preferred shares of Citigroup after the New York bank announced last month that it would convert preferred shares into common stock. The fast-money crowd hoped to scoop up a quick profit based on the attractive conversion terms being offered by Citigroup to preferred shareholders, including the government.

....

"There are a lot of hedge funds looking for free money, and a lot of people were betting against Citi," says Jonathon Trugman, who runs Pendulum Capital Management, a stock-picking hedge fund in New York. Hedge funds lost money on Citigroup because "not every patient who goes into coronary arrest fails to come out of it."

The hedge funds' pain from Citigroup looks like the government's gain, at least for the moment, since preferred holders would be converting each share of preferred stock into common stock that has risen mightily in value. As of Wednesday afternoon, the difference between the preferred and common shares was $8.45, based on the conversion rate of 7.31.

Free money. Yeah.

Sold to you guys. The market is never that simple, but you "wizards" should have known that.

This is starting to get a lot of play in the blogosphere along with the "real press", which may fuel further moon shots in the stock.

There is something ironic about so-called "hedge funds" that don't hedge, and when their strategies go bad "it all goes boom."

Anyone remember VW - another "sure thing bet" that blew up in people's faces?

The lesson is time-worn but nonetheless true - there is no such thing as a "sure thing" in the markets, nor any such thing as a "risk free" trade.

Further, when trades get crowded (and by some estimates more than 1/4 of the public float of Citi was being shorted by people playing this strategy!) it is a near-certainty that whatever that trade is, it will blow up in your face.